paxter company manufactures 3 single product and uses a standard cof: system to
ID: 2518843 • Letter: P
Question
paxter company manufactures 3 single product and uses a standard cof: system to help in the control of costs. Overhead is applied to production on a the following over- basis'of machine-hours. According to the company's costs should be incurred at an activity level of 35,000 madhige-bours (the denomina ectivity level chosen for 201 Variable overhead costs....$ 87.500 Fixed overhead costs..210,000 Total overhead costs$297,500 During 2017, the following operating results were recorded Activiry: Actual machine-hours worked. Standard machine-bours allowed for output32,000 30,000 Cost Actual variable overhead cost incurred. . Actual fixed overhead 78,000 . . . . . . . 209.40 cost incurred A: the end of the year, the company's Manufacturing Overhead account contained the Mansfecturing Overhead 287,400 Applied following data: Actual 15,400 Management would like to determine the cause of the S15,400 underapplied overbead before closing the amount to cost of goods sold. 1. Compute the predetermined overbead rate that would have been used during 2017. Reqaired 2. Show how the $272,000 "Applied" figure in the Manufacturing Overhead account was 3. Analyze the $15,400 underapplied overhead figure in terms of the variable overhead Break the rate down into variable and fixed cost elements. computed. spending and efficiency variances and the fixed overhead budget and volume vari- ances. 4. Explain the meaning of each variance that you computed in (3) above, and indicate how each variance is controlled.Explanation / Answer
1. Predetermined overhead rate = Budgeted Overhead / Budgeted Hours
= 2,97,500 / 35,000
= $8.5 per hour
2. Applied Overheads = Standard Hours allowed for actual output x Budgeted overhead rate
= 32,000 x 8.5
= $272,000
3. Variable Overhead Spending Variance = Actual hours worked x (Actual overhead rate - Standard overhead rate)
= 30,000 x (78,000 / 30,000 - 2.50)
= 30,000 x (2.60 - 2.50)
= 3,000 Unfavourable Variance
Variable Overhead Efficiency Variance = Standard overhead rate x (Actual hours - Standard hours)
Standard overhead rate for variable oveheads = Budgeted Variable Overheads / Budgeted Hours
= 87,500 / 35,000
= $2.5 per hour
Therefore, Variable Overhead Efficiency Variance = 2.5 x (30,000 - 32,000)
= -5,000 of 5,000 Favourable Variance
Fixed Overhead Budget Variance = Actual Fixed Overhead - Budgeted Fixed Overhead
= 209,400 - 210,000
=-600 or 600 Favourable Variance
Fixed Overhead Volume Variance = (Budgeted hours – Standard hours of actual output) x Standard fixed overhead rate per hour
= (35,000 - 32,000) x (210,000 / 35,000)
= 3,000 x 6
= 18,000 Unfavourable Variance
4. Variable overhead spending variance is the difference between the actual and budgeted rates of spending on variable overhead. Variable overhead spending variance arises from the difference in the costs of indirect material compared to budgeted costs.These variances can be controlled by a number of measures like having economies of scale (e.g. increase in order size of indirect material leading to bulk discounts on purchase), negotiating better prices with suppliers etc.
Variable overhead efficiency variance is the difference between actual variable overhead based on the true time taken to manufacture a product, and standard variable overhead based on the time budgeted for it. It arises from variance in productive efficiency. Thus it can be controlled by improving the process efficiencies to avoid wastage of hours lost in unproductive activities.
Fixed overhead budget variance is the difference between total fixed overhead budgeted for a given period and actual fixed overheads incurred during the period. It can be controlled by a number of measures like business process re-engineering, optimization of production facilities or other improvement techniques which result in lowering actual fixed overhead
Fixed overhead volume variance is the difference between the amount of fixed overhead actually applied to produced goods based on production volume, and the amount that was budgeted to be applied to produced goods. These can be controlled by removing irregularities in production and implementing new efficiencies that reduce the actual number of direct labor hours used in production
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