Problem
The Renteria Company uses standard costing in its manufacturing plant for auto parts. The standard cost of a particular auto part, based on a denominator level of 3900 output units per? year, included 5 ?machine-hours of variable manufacturing overhead at $9 per hour and 5 ?machine-hours of fixed manufacturing overhead at $16 per hour. Actual output produced was 4,400 units. Variable manufacturing overhead incurred was $260,000 Fixed manufacturing overhead incurred was $385,000 Actual machine-hours were 26,500.
Requirement 1. Prepare an analysis of all variable manufacturing overhead and fixed manufacturing overhead? variances, using the? 4-variance analysis. Begin by calculating the following amounts for the variable overhead.
Requirement 2. Prepare journal entries using the 4-variance analysis.
Record the actual variable manufacturing overhead incurred.
Record the variable manufacturing overhead allocated.
Record the variable manufacturing overhead variances for the period.
Record the actual fixed overhead costs incurred.
Record the fixed overhead costs allocated.
Record the fixed overhead variances for the period.
Requirement 3. Describe how individual fixed manufacturing overhead items are controlled from day to day.
Individual fixed manufacturing overhead items are not usually affected very much by? day-to-day control. They are controlled periodically through planning decisions and budgeting procedures.
Requirement 4. Discuss possible causes of the fixed manufacturing overhead variances.
The fixed overhead efficiency variance is caused by the actual realization of fixed costs differing from the budgeted amounts. In this? example, the production-volume variance is favorable, so actual FOH is greater than the budgeted amount of FOH.
The fixed overhead production-volume variance is caused by production being over or under expected capacity. You may be under capacity when demand variance is caused by production being over or under expected capacity. You may be under capacity when demand increases
from expected? levels, or if there are problems with production. Over capacity is usually driven by favorable demand shocks or a desire to increase inventories.
The fact that there is a favorable variance indicates that production did not exceed the expected level of output.