Case Scenario:
Ed Widner 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 (1,000 units) Actual (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
Question a) Determine the overhead application rate.
Question b) Determine how much overhead was applied to production.
Question c) Calculate the total overhead variance, controllable variance, and volume variance.
Question d) Decide which overhead variances should be investigated.
Question e) Discuss causes of the overhead variances. What can management do to improve its performance next month?