Problem 17 - Accounting

Question

Perma Weave Textiles Corporation began January with a budget for 30,000 hours of production in the Weaving Department. The department has a full capacity of 40,000 hours under normal business conditions. The budgeted overhead at the planned volumes at the beginning of January was as follows: \begin{tabular}{lr} Variable overhead & \(\$ 75,000\) \\ Fixed overhead & 52,000 \\ \hline Total & \(\$ 127,000\) \\ \hline \end{tabular} The actual factory overhead was \(\$ 128,500\) for January. The actual fixed factory overhead was as budgeted. During January, the Weaving Department had standard hours at actual production volume of 31,000 hours. a. Determine the variable factory overhead controllable variance. b. Determine the fixed factory overhead volume variance.

Step-by-Step Solution

Answer

a. -\$1,000 (favorable); b. \$1,630 (unfavorable)

Step 1: Calculate Variable Overhead Rate

First, you need to calculate the variable overhead rate per hour. The budgeted variable overhead is given as \\(75,000 for 30,000 hours. Thus, the rate is calculated as follows: \[ \text{Variable Overhead Rate} = \frac{\\)75,000}{30,000 \text{ hours}} = \$2.50 \text{ per hour} \]

Step 2: Calculate Standard Variable Overhead for Actual Hours

Next, calculate the standard variable overhead for the actual hours worked. The actual production utilized 31,000 hours, so: \[ \text{Standard Variable Overhead} = 31,000 \text{ hours} \times \\(2.50 \text{ per hour} = \\)77,500 \]

Step 3: Determine Actual Variable Overhead Cost

As the fixed overhead is as budgeted, subtract it from the total actual overhead to find the actual variable overhead. \[ \text{Actual Variable Overhead} = \\(128,500 - \\)52,000 = \$76,500 \]

Step 4: Calculate Variable Factory Overhead Controllable Variance

The controllable variance is the difference between actual and standard variable overhead. \[ \text{Variable Overhead Controllable Variance} = \\(76,500 - \\)77,500 = -\$1,000 \] (Favorable)

Step 5: Calculate Budgeted Fixed Overhead Per Hour

Calculate the fixed overhead rate per hour using the budgeted hours. The fixed overhead is \\(52,000 for 30,000 hours as per the budget. \[ \text{Fixed Overhead Rate} = \frac{\\)52,000}{30,000 \text{ hours}} = \$1.73 \text{ per hour} \]

Step 6: Calculate Fixed Factory Overhead Volume Variance

The volume variance is calculated as the difference between the budgeted fixed overhead applied at standard hours and the fixed overhead budgeted for the budgeted hours. For 31,000 hours, this is: \[ \text{Budgeted Fixed Overhead for Actual Hours} = 31,000 \times \\(1.73 = \\)53,630 \] \[ \text{Fixed Overhead Volume Variance} = \\(53,630 - \\)52,000 = \$1,630 \] (Unfavorable)

Key Concepts

Variable Overhead Rate

Variable overhead rate is key in calculating and controlling variable costs in manufacturing operations. Essentially, it refers to the expense tied to production activities that may vary monthly due to changes in production levels.
The variable overhead rate is calculated by dividing the total budgeted variable overhead costs by the expected number of production hours. This provides a cost per hour amount that can be used to estimate expenses. In our given problem, the rate is \(\\(2.50\) per hour based on a budget of \(\\)75,000\) for 30,000 production hours.

• This rate helps companies forecast costs and serves as a benchmark for comparing actual costs.
• It is crucial for identifying discrepancies in variable overhead costs.

Understanding the variable overhead rate allows businesses to better manage costs by spotting variations that might suggest inefficiency or unexpected changes in production.

Fixed Overhead

Fixed overhead refers to factory expenses that remain constant regardless of the level of production, such as rent and insurance. These costs do not fluctuate with production changes, which provides stability in budgeting.
This specific exercise lists the fixed overhead at \(\$52,000\) for the given budgeted production hours. It remains unchanged whether the production exceeds or falls short of expectations.

• This stability helps in predictability and budget setting.
• Fixed overhead should be efficiently controlled as it affects the total production cost.

In essence, understanding fixed overhead allows for more accurate financial planning and enhances operational efficiency.

Controllable Variance

Controllable variance represents the difference between actual costs and the costs that should have been incurred given the activity level. This concept is vital to identify how well management is controlling costs directly under their influence.
In this problem, the controllable variance is calculated as the difference between the actual variable overhead and the standard variable overhead. Specifically, it shows whether the company spent more or less on variable overhead than planned.

• A negative figure, like \(\$1,000\) in the example, indicates a favorable variance, meaning less was spent than estimated.
• Conversely, a positive variance would indicate more spending and potentially indicate inefficiency.

Tracking controllable variance enables companies to identify cost-saving opportunities and ensures better management of resources.

Volume Variance

Volume variance examines the impact of differing production volumes on fixed costs, specifically how much these affect the applied overhead.
Volume variance arises when the actual production level differs from what was planned. It is calculated by comparing the fixed overhead applied at the actual production hours against the budgeted fixed overhead.
In this scenario, the unfavorable variance of \(\$1,630\) results from the production volume exceeding the budgeted hours. This indicates that even though fixed costs themselves do not change, their allocation per unit fluctuates with production volume.

• Unfavorable variance is often a concern as it suggests underutilization of capacity or inefficient operation scale.
• Recognizing volume variances can guide management in making operational decisions to optimize resources.

Understanding volume variance aids in analyzing production efficiency and capacity utilization, providing insights for strategic planning.