Problem:
Al Finney and Associates is a medium-sized company located near a large metropolitan area in the Midwest. The company manufactures cabinets of mahogany, oak, and other fine woods for use in expensive homes, restaurants, and hotels. Although some of the work is custom, many of the cabinets are a standard size. One such non-custom model is called Luxury Base Frame. Normal production is 1,000 units. Each unit has a direct 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 produced; 4,500 direct labor hours were allowed for standard production, but only 4,000 hours were used. Standard and actual overhead costs were as follows.
|
Standard
|
Actual
|
|
(1,000 units)
|
(900 units)
|
|
Indirect materials
|
$12,000
|
$12,300
|
|
Indirect labor
|
43,000
|
51,000
|
|
(Fixed) Manufacturing supervisors salaries
|
22,000
|
22,000
|
|
(Fixed) Manufacturing office employees salaries
|
13,000
|
11,500
|
|
(Fixed) Engineering costs
|
27,000
|
25,000
|
|
Computer costs
|
10,000
|
10,000
|
|
Electricity
|
2,500
|
2,500
|
|
(Fixed) Manufacturing building depreciation
|
8,000
|
8,000
|
|
(Fixed) Machinery depreciation
|
3,000
|
3,000
|
|
(Fixed) Trucks and forklift depreciation
|
1,500
|
1,500
|
|
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 total overhead variance, controllable variance, and 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?