Problem:
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
(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?