Montoursville Control Company, which manufactures electrical switches, uses a st

Question

Montoursville Control Company, which manufactures electrical switches, uses a standard-costing system. The standard production overhead costs per switch are based on direct-labor hours and are as follows: Variable overhead (5 direct-labor hours $12.00 per hour) Fixed overhead (5 direct-labor hours $24.00 per hour) s 60 120 $180 Total overhead Based on capacity of 306,000 direct-labor hours per month. The following information is available for the month of October. Variable overhead costs were $4,980,000 Fixed overhead costs were $7,425,000 58,200 switches were produced, although 61,200 switches were scheduled to be produced. 287,000 direct-labor hours were worked at a total cost of $5,025,000 Required: Compute the variable-overhead spending and efficiency variances and the fixed-overhead budget and volume variances for October. (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "O" for no effect (i.e., zero variance).) Variable-overhead spending variance Variable-overhead efficiency variance Fixed-overhead budget variance Fixed-overhead volume variance

Explanation / Answer

1. Variable Overhead Spending Variance = Actual hours worked x (Actual overhead rate - Standard overhead rate)

= 287,000 x (4,980,000 / 287,000 - 12)

= 287,000 x (17.35 - 12)

= 1,536,000 U

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

= 12 x (287,000 - 58,200 x 5)

= 12 x (287,000 -291,000)

= 48,000 F

3. Fixed Overhead Budget Variance = Actual Fixed Overhead - Budgeted Fixed Overhead*

= 7,425,000 - 61,200 x 120

= 7,425,000 - 7,344,000

= 81,000 U

*For calculation of budgeted fixed overeheads, budgeted volumes are used.

4. Fixed overhead volume variance = Budgeted fixed overhead – Fixed overhead applied to work in process

= 7,344,000 - 58,200 x 120

= 7,344,000 - 6,984,000

= 360,000 U

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