MANAGERIAL ACCOUNTING QUIZ 7 Score Name Section Problem (10 points) Smith Compan

Question

MANAGERIAL ACCOUNTING QUIZ 7 Score Name Section Problem (10 points) Smith Company has a standard manufacturing overhead rate of S5.00 per direct labor hour. The variable manufacturing overhead rate is S4.00 per direct labor hour and the fixed manufacturing overhead rate is $1.00 per direct labor hour. The fixed manufacturing overhead rate was calculated using a normal capacity of 20,000 direct labor hours During the month of November of the current ycar, the company had the following information concerning production and manufacturing overhead. SMITH COMPANY PRODUCTION INFORMATION RELATING TO MANUFACTURING OVERHEAD FOR MONTH OF NOVEMBER Standard Direct Labor Hours Allowed For Actual Output Actual Direct Labor Hours Used Actual Variable Manufacturing Overhead Cost Actual Fixed Actual Units Produced 18,000 17.500 73,500 20,000 4.500 Overhead Cost REQUIRED: Compute the following manufacturing cost variances for Smith Company for the month of November ( Variable Manufacturing Overhead Spending (Price) Variance. (2 Variable Manufacturing Overhead Efficiency (Quantity) Variance. (3) Fixed Manufacturing Overhcad Spending (Price) Variance. (4) Fixed Manufacturing Overhead Volume Variance

Explanation / Answer

Answer:-

1.

Variable Overhead Spending Variance Overview

The variable overhead spending variance is the difference between the actual and budgeted rates of spending on variable overhead. The variance is used to focus attention on those overhead costs that vary from expectations. The formula is:

Actual hours worked x (Actual overhead rate - standard overhead rate) = Variable overhead spending variance

Actual Hours worked = 17,500

Actual Overhead rate = Actual Variable Overhead cost / Actual Hours

= $73500 / 17500 = $ 4.20 Per Direct Labour Hours

Standard Hour Rate = $ 4.0 Per Direct Labour Hour

So the Variance will be calculated as :-

17500 X ( 4.2- 4.0 ) = 17500 X 0.20 = $3,500 ( An unfavorable variance )

As actual cost is more then standard cost of production.

2. Variable Manufacturing Overhead Efficency Variance :-

Variable Overhead Efficiency Variance Overview

The variable overhead efficiency variance is the difference between the actual and budgeted hours worked, which are then applied to the standard variable overhead rate per hour. The formula is:

Standard overhead rate x (Actual hours - Standard hours)  = Variable overhead efficiency variance

Standard Overhead Rate = $ 4.0 Given

Actual Hours = 17500

Standard Hours = 18000

So Effeciency Variance =

$ 4.0 X ( 17500 - 18000 ) = $ 4.0 X 500 = $ - 2,000 ( A favorable Variance as Actual hours worked is less than Standard hOurs of productions.

3. Fixed Overhead Spending Variance

Fixed Overhead Spending Variance Overview

The fixed overhead spending variance is the difference between the actual fixed overhead expense incurred and the budgeted fixed overhead expense. An unfavorable variance means that actual fixed overhead expenses were greater than anticipated.

The formula for this variance is:

Actual fixed overhead - Budgeted fixed overhead = Fixed overhead spending variance

Actual fixed Overhead = $ 20,000

Budgeted Fixed Overhead = 20,000 Direct Labour Hours X $ 1.0 = $ 20,000

Fixed Overhead Spending Variance = $ 20,000 - $ 20,000 = 0 ( Neutral )

4.Fixed Overhead Volume Variance

Fixed Overhead Volume Variance = Applied Fixed Overhead – Budgeted Fixed Overhead.

1. Applied Fixed Overhead = Standard Fixed Overhead Rate × Standard Hours Allowed.

Standard Fixed Overhead rate = $ 1.0

Standard Hours allowed = 18000 hours

Fixed Overhead Volume Variance = (18000 * $ 1.0 ) - $20,000 = 18000 - 2000 = $ - 2000 ( Unfavorable )

i.e. the budgeted fixed Manufacturing overhead is greater than the standard, it means that the company has under-utilized capacity. Hence, the variance is unfavorable.

and If the standard FMOH is higher, the company was able to exceed its capacity; hence a favorable variance.

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