MSU Company manufactures special electrical equipment and parts. MSU employs a s
ID: 2381359 • Letter: M
Question
MSU Company manufactures special electrical equipment and parts. MSU employs a standard cost accounting system with separate standards established for each product.
A special transformer is manufactured in the Transformer Department. Production volume is measured by direct labor hours in this department and a flexible budget system is used to plan and control department overhead. Standard costs for the special transformer are determined annually in September for the coming year. The standard cost of a transformer was computed at $67.00 as shown below.
Direct materials:
Iron 5 sheets @ 2.00 10.00
Copper 3 spools @ 3.00 9.00
Direct labor 4 hours @ 7.00 28.00
Variable overhead 4 hours @ 3.00 12.00
Fixed overhead 4 hours @ 2.00 8.00
Total 67.00
Overhead rates were based upon normal and expected monthly capacity, both of which were 4,000 direct labor hours. Practical capacity for this department is 5,000 direct labor hours per month. Variable overhead costs are expected to vary with the number of direct labor hours actually used. During October, 800 transformers were produced. This was below expectations because a work stoppage occurred at the copper supplier and shipments were delayed.
Direct materials:
Iron: purchased 5,000 sheets @ $2.00/sheet- Used: 3,900 sheets
Copper: purchased 2,200 spools @ $3.10- Used: 2,600 spools
Direct labor: 3,400 hours- Total payroll: $24,080
Overhead:
Variable $10,000
Fixed $8,800
Required: Compute each of the following variances, showing all your work. Be sure to indicate whether the variances are favorable or unfavorable.
a. Variable overhead spending variance
b. Variable overhead efficiency variance
c. Fixed overhead spending (budget) variance
d. Production volume variance
Explanation / Answer
standard hours = 800 tranformers x 4 hours per transformer = 3200 hours
budgeted fixed overhead = 4000 hours x $2 per hour = $8,000
a. Variable overhead spending variance
= Actual - Actual hours x standard rate
= $10,000 - 3,400*$3
= -200
answer: $200 favorable
b. Variable overhead efficiency variance
= actual hours x standard rate - standard hours x standard rate
= 3,400*$3 - 3,200*$3
= $600
anwer: $600 unfavorable
c. Fixed overhead spending (budget) variance
= actual - budget
= 8800 - 8000
= $800
Answer: $800 unfavorable
d. Production volume variance
= budget - standard hours x standard rate
= 8000 - 3200*2
= 1600
answer: $1600 unfavorable
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