Problem:
Mo Vaughn and Associates is a medium-sized company located near a large metropoliatan area in the Midwest. The company manufactures cabinets of mahogany, oak, and other fine woods for use in expensive home, resturants, and hotels. Although some of the work is custom, many of the cabinets are a standard size.
One such non-custom model is clled Luxury Base Frame. Standard production is 1,000 units. Each unit has a dictct labor hour standard of 5 hours. Overhead is applied to production based on standard direct labor hours. During the most recent month, only 900 units were producted; 4,500 direct labor hours were allowed for standard production, bur only 4,000 hours were used. Standard and actual overhead costs were as follows.
| |
|
|
|
|
Standard (1,000 units) |
Actual (900 units) |
| Indirect materials |
|
|
|
$ 12,000 |
|
$ 12,300 |
| Indirect labor |
|
|
|
43,000 |
|
51,000 |
| (Fixed) Manufacturing |
|
|
|
22,000 |
|
22,000 |
| superfisors salaries |
|
|
|
|
|
|
| (Fixed) Manufacturing office |
|
|
|
13,000 |
|
11,500 |
| employees salarees |
|
|
|
|
|
|
| (Fixed) Engineering costs |
|
|
|
27,000 |
|
25,000 |
| Computer costs |
|
|
|
10,000 |
|
10,000 |
| Electricity |
|
|
|
2,500 |
|
2,500 |
| (Fixed) Manufacturing building |
|
|
|
8,000 |
|
8,000 |
| depreciation |
|
|
|
|
|
|
| (Fixed) Machinery depreciation |
|
|
|
3,000 |
|
3,000 |
| (Fixed) Trucks and forklift |
|
|
|
1,500 |
|
1,500 |
| depreciation |
|
|
|
|
|
|
| Small tools |
|
|
|
700 |
|
1,400 |
| (Fixed) Insurance |
|
|
|
500 |
|
500 |
| (Fixed) Property taxes |
|
|
|
300 |
|
300 |
| Total |
|
|
|
$ 143,500 |
|
$149,000 |
Instructions:
a. Determine the overhead application rate.
b. Determine how much overhead was applied to production.
c. Calculate the controllable overhead variance and the overhead volume variance.
d. Decide which overhead variances should be investigated.
e. Discuss causes of the overhead variances. What can management do to improve its performance next month?