Problem - Four-Variance Analysis
Background - Able Control Company, which manufactures electrical switches, uses a standard cost system and carries all inventory at standard cost. The standard factory overhead cost per switch is based on DLHs.
Problem Information
Variable overhead 5 hours at $8.00 /hour $40.00
Fixed overhead* 5 hours at $12.00 /hour $60.00
Total standard overhead cost per unit produced $100.00
Based on a practical capacity of 300,000 DLHs per month.
The following information is for the month of October:
Actual units produced 56,000
Practical capacity (in units) 60,000
Actual DLHs worked 275,000
Actual DL cost incurred $2,550,000
Actual variable overhead costs incurred $2,340,000
Actual fixed overhead costs incurred $3,750,000
The production manager argued during the last performance review that the company should use a more up-to-date base
for charging factory overhead costs to production. She commented that her factory had been highly automated in the last
two years and, as a result, now has hardly any labor. The factory hires only highly skilled workers to set up production runs
and to do periodic adjustments of machinery whenever the need arises.
Requirements
1. Compute the following for Able Control Company:
a. The fixed overhead spending variance for October.
b. The factory overhead production-volume variance for October.
c. The variable overhead spending variance for October.
d. The variable overhead efficiency variance for October.
2. Comment on the implications of the variances and suggest any action that the firm should take to improve its operations.