Q20E - Horngren'S Financial And Managerial Accounting

Question

00Question: Mason Fender is a competitor of Matthews Fender from Exercise E23­19. Mason Fender also uses a standard cost system and provides the following information: 

Static budget variable overhead \( 2,300 

Static budget fixed overhead \) 23,000 

Static budget direct labor hours 575 hours 

Static budget number of units 23,000 units 

Standard direct labor hours 0.025 hours per fender 

Mason Fender allocates manufacturing overhead to production based on standard direct labor hours. Mason Fender reported the following actual results for 2018: actual number of fenders produced, 20,000; actual variable overhead, \(5,350; actual fixed overhead, \)26,000; actual direct labor hours, 460. 

Requirements 

1. Compute the overhead variances for the year: variable overhead cost variance, variable overhead efficiency variance, fixed overhead cost variance, and fixed overhead volume variance. 

2. Explain why the variances are favorable or unfavorable.

Step-by-Step Solution

Answer

Answer

The VOH cost variance is $3,510 U, VOH efficiency variance is $160 F, and FOH cost variance is $3,000 U, and FOH volume variance is $3,000 U.

In part 2, it is stated that variable overhead variance is unfavorable as the actual cost was not under the standard costs, the overhead efficiency variance is favorable as actual usage was under the standards and fixed cost variance is unfavorable as it was not kept under budget

Step 1 Computation of the allocation rate

$$\begin{gathered} \mathbf{StandardVOHallocationrate}\mathbf{=}\frac{\mathbf{BudgetedVOH}}{\mathbf{Budgetedallocationbase}} \\ \mathbf{=}\frac{\mathbf{2}\mathbf{,}\mathbf{300}}{\mathbf{575}} \\ \mathbf{=}\mathbf{\$}\mathbf{4} \\ \mathbf{StandardFOHallocationrate}\mathbf{=}\frac{\mathbf{BudgetedFOH}}{\mathbf{Budgetedallocationbase}} \\ \mathbf{=}\frac{\mathbf{23}\mathbf{,}\mathbf{000}}{\mathbf{575}} \\ \mathbf{=}\mathbf{\$}\mathbf{40} \end{gathered}$$

Step 2 Computation of the Variable Overhead Variance

$$\begin{gathered} \mathbf{VOHcostvariance}\mathbf{=}\mathbf{ActualVOH}\mathbf{-}\left(\mathbf{SC}\mathbf{-}\mathbf{AQ}\right) \\ \mathbf{=}\mathbf{5}\mathbf{,}\mathbf{350}\mathbf{-}\left(\mathbf{4}\mathbf{\times }\mathbf{460}\right) \\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{510}\mathbf{U} \\ \mathbf{VOHefficiencyvariance}\mathbf{=}\left(\mathrm{AQ}-\mathrm{SQ}\right)\mathbf{\times }\mathbf{SC} \\ \mathbf{=}\left(460-500\right)\mathbf{\times }\mathbf{4} \\ \mathbf{=}\mathbf{\$}\mathbf{160}\mathbf{F} \end{gathered}$$

Step 3 Computation of the Fixed overhead Variance

$$\begin{gathered} \mathbf{FixedCostVariance}\mathbf{=}\mathbf{ActualFOH}\mathbf{-}\mathbf{BudgetedFOH} \\ \mathbf{=}\mathbf{26}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{23}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{U} \\ \mathbf{FOHvolumeVariance}\mathbf{=}\mathbf{BudgetedFOH}\mathbf{-}\mathbf{AllocatedFOH} \\ \mathbf{=}\mathbf{23}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{20}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000} \end{gathered}$$

Step 4 Explanation of favorable or unfavorable variances

The unfavorable variable overhead cost variance indicates that the actual variable overhead cost per direct labor was not kept within the cost standards.

The favorable overhead efficiency variance shows that the actual usage of direct labor hours was kept within the standard.

The variance of fixed overhead costs was unfavorable because the actual total cost was not kept within the budget.

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