ES Qu. 158 Redtop Co. uses a standard cost system and ... Redtop Co. uses a stan

Question

ES Qu. 158 Redtop Co. uses a standard cost system and ... Redtop Co. uses a standard cost system and flexible budgets. The following flexible budget was prepared at the 80% operating level for the year:

Standard direct labor hours (DLHs) 28,800

Budgeted variable factory overhead cost $149,760

Total factory overhead rate per DLH $18.70

However, for purposes of calculating the fixed overhead application rate, the company defined the denominator volume as the 90% capacity level. The standard calls for four DLHs per unit manufactured. During the year, Redtop worked 33,600 DLHs to manufacture 8,500 units. The actual factory overhead cost incurred was $12,000 greater than the flexible-budget amount for the units produced, of which $5,000 was due to fixed factory overhead.

Required: Calculate (and provide supporting details for) each of the following variances:  

3. The total factory overhead spending variance.

4. The factory overhead production volume variance.

5. The variable overhead spending variance.

6. Provide a description for each of the variances you calculated in requirements 1 through 5.

Explanation / Answer

Ans. Total factory overhead spending variance= budgeted facotry overhead-actual overhead

                                                                         = 12000 (A)

4. Factory overhead production volume variance:

Actual hours for 8500 units is : 33600 hours

Standard variable o/h per hour: 149760/28800 = $5.2 per hour

Total budgeted overhead =149760+(18.70X28800)=$688320

Variable budgeted overhead = $149760

Fixed overhead = (688320-149760) =$538560

Denominatorc hours =$538560/18.70 = 28800hours

fixed overhead 80% capacity (28800/.90X.80)X18.70 = 25600

Fixed budgeted overhead @80% capacity = 25600X18.70 =$478720

Standard variable overhed applied in actual production = 5.2X33600 =$174720

Actual variable overhead (174720+7000) =$156760

factory overhead volume variance = (478720+174720)-(156720+478700+5000)

                                                      =653420-640420 = 13000(F)

4. Variable overhead spending variance = 7000(A)

5. Adverse variance = means actual spending more than budgeted overhead

Favourable variance= Menas actual spending less than budgeted

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