Q21E - Horngren'S Financial And Managerial Accounting

Question

Question: Mills, Inc. is a competitor of Murry, Inc. from Exercise E23­18. Mills also uses a standard cost system and provides the following information: 

Static budget variable overhead \( 1,200 

Static budget fixed overhead \) 1,600 

Static budget direct labor hours 800 hours 

Static budget number of units 400 units 

Standard direct labor hours 2 hours per unit 

Mills allocates manufacturing overhead to production based on standard direct labor hours. Mills reported the following actual results for 2018: actual number of units produced, 1,000; actual variable overhead, \(4,000; actual fixed overhead, \)3,100; actual direct labor hours, 1,600.

Requirements 

1. Compute the variable overhead cost and efficiency variances and fixed overhead cost and volume variances. 

2. Explain why the variances are favorable or unfavorable

Step-by-Step Solution

Answer

Answer

The answer for part 1 is computed as VOH cost variance is $1,600 U, VOH efficiency variance is $600 F, FOH cost variance is $1,500 U, and FOH volume variance is $2,400 F.

 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 favorable as it was kept under budget.

Step 1 Computation of the allocation rate

$$\begin{gathered} \mathbf{StandardVOHallocationrate}\mathbf{=}\frac{\mathbf{BudgetedVOH}}{\mathbf{Budgetedallocationbase}} \\ \mathbf{=}\frac{\mathbf{1}\mathbf{,}\mathbf{200}}{\mathbf{800}} \\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{5} \\ \mathit{S}\mathit{t}\mathit{a}\mathit{n}\mathit{d}\mathit{a}\mathit{r}\mathit{d}\mathit{F}\mathit{O}\mathit{H}\mathit{a}\mathit{l}\mathit{l}\mathit{o}\mathit{c}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathit{r}\mathit{a}\mathit{t}\mathit{e}\mathbf{=}\frac{\mathbf{BudgetedFOH}}{\mathbf{Budgetedallocationbase}} \\ \mathbf{=}\frac{\mathbf{1}\mathbf{,}\mathbf{600}}{\mathbf{800}} \\ \mathbf{=}\mathbf{\$}\mathbf{2} \end{gathered}$$

Step 2 Computation of the Variable Overhead Variance

$$\begin{gathered} \mathbf{VOHcostvariance}\mathbf{=}\mathbf{ActualVOH}\mathbf{-}\left(\mathbf{SC}\mathbf{-}\mathbf{AQ}\right) \\ \mathbf{=}\mathbf{4}\mathbf{,}\mathbf{000}\mathbf{-}\left(\mathbf{1}\mathbf{.}\mathbf{5}\mathbf{\times }\mathbf{1}\mathbf{,}\mathbf{600}\right) \\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{600}\mathbf{U} \\ \mathbf{VOHefficiencyvariance}\mathbf{=}\left(\mathbf{AQ}\mathbf{-}\mathbf{SQ}\right)\mathbf{\times }\mathbf{SC} \\ \mathbf{=}\left(\mathbf{1}\mathbf{,}\mathbf{600}\mathbf{-}\mathbf{2}\mathbf{,}\mathbf{000}\right)\mathbf{\times }\mathbf{1}\mathbf{.}\mathbf{5} \\ \mathbf{=}\mathbf{\$}\mathbf{600}\mathbf{F} \end{gathered}$$

Step 3 Computation of the Fixed overhead Variance

$$\begin{gathered} \mathbf{FixedCostVariance}\mathbf{=}\mathbf{ActualFOH}\mathbf{-}\mathbf{BudgetedFOH} \\ \mathbf{=}\mathbf{3}\mathbf{,}\mathbf{100}\mathbf{-}\mathbf{1}\mathbf{,}\mathbf{600} \\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500}\mathbf{U} \\ \mathbf{FOHvolumeVariance}\mathbf{=}\mathbf{BudgetedFOH}\mathbf{-}\mathbf{AllocatedFOH} \\ \mathbf{=}\mathbf{1}\mathbf{,}\mathbf{600}\mathbf{-}\mathbf{4}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{400}\mathbf{F} \end{gathered}$$

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 fixed overhead cost variance was favorable because the total cost was kept within the budget.