Able Control Company, which manufactures electrical switches, uses a standard co

Question

Able Control Company, which manufactures electrical switches, uses a standard cost system and carries all

inventory at standard cost. The standard factory overhead cost per switch is based on DLHs.

Problem Information

Variable overhead 5 hours at $8.00 /hour $40.00

Fixed overhead* 5 hours at $12.00 /hour $60.00

Total standard overhead cost per unit produced $100.00

* Based on a practical capacity of 300,000 DLHs per month.

The following information is for the month of October:

Actual units produced 56,000

Practical capacity (in units) 60,000

Actual DLHs worked 275,000

Actual DL cost incurred $2,550,000

Actual variable overhead costs incurred $2,340,000

Actual fixed overhead costs incurred $3,750,000

The production manager argued during the last performance review that the company should use a more up-to-date base

for charging factory overhead costs to production. She commented that her factory had been highly automated in the last

two years and, as a result, now has hardly any labor. The factory hires only highly skilled workers to set up production runs

and to do periodic adjustments of machinery whenever the need arises.

Requirements

1. Compute the following for Able Control Company:

a. The fixed overhead spending variance for October.

b. The factory overhead production-volume variance for October.

c. The variable overhead spending variance for October.

d. The variable overhead efficiency variance for October.

2. Comment on the implications of the variances and suggest any action that the firm should take to improve

its operations.

Explanation / Answer

Hi,

Please find the answers as follows:

Part 1:

Part A:

Fixed overhead spending variance = Actual Fixed Overhead - Budgeted Fixed Overhead = 3750000 - 300000*12 = 150000 (U)

Part B:

Factory overhead production-volume variance = (56000*5 - 300000)*12 = 240000 (F)

Part C:

Variable overhead spending variance = Actual Variable Overheads - Standard Variable Overheads = 2340000 - 275000*8 = 140000 (U)

Part D:

Variable overhead efficiency variance = Standard Rate*(Actual Hours - Standard Hours) = 8*(275000 - 5*56000) = 40000
(F)

Part 2:

As per the calculations above, it is quite evident that the company is not able to control its fixed and variable overheads. Both the overheads are higher than expected. The company should try to control the use of labor hours to control these overheads.

Thanks.

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