FUN Inc. has a fully automated production facility in which almost 97 percent of averhead costs are driven by machine hours. As the company's cost accountant, you have computed the following overhead variances for May:
- Variable overhead spending variance $34,000 F
- Variable overhead efficiency variance 41,200 F
- Fixed overhead spending variance 28,000 U
- Fixed overhead volume variance 20,000 U
The company's president in concerned about the variance amounts and has asked you to show her how the variances were computed and to answer several questions. Budgeted fixed averhead for the month is $1,000,000; the predetermined variable and fixed overhead rates are, respectively, $20 and $40 per machine hour. Bugdeted capacity is 20,000 units.
a. Using the four-variance approach, prepare an overhead analysis in as much detail as possible.
b. What is the standard number of machine hours allowed for each unit of output?
c. How many actual hours were worked in May?
d. What is the total spending variance?
e. What additional information about the manufacturing overhead variances is gained by inserting detailed computations into the variable and fixed manufacturing overhead variance analysis?
f. How would the overhead variances be closed if the three-variance approach were used and the variances are considered insignificant?