Question:
(Variances and conversion cost category) Baltimore Brake makes brake rotors. Until recently, the company used a standard cost system and applied overhead to production based on direct labor hours. The company automated its facilities in March 2001 and revamped its accounting system so that there are only two cost categories: direct material and conversion. Estimated variable conversion costs for April 2001 were $170,000, and estimated fixed conversion costs were $76,000; machine hours were estimated at 10,000 for April. Expected output for April was 5,000 rotors. In April, the firm actually used 9,000 machine hours to make 4,800 rotors. The firm incurred conversion costs totaling $230,000; $150,000 of this amount was variable cost.
a. Using the four-variance approach, compute the variances for conversion costs in April.
b. Evaluate the effectiveness of the firm in controlling costs in April.