Sedona Company set the following standard costs for one unit of its product for 2017.
| Direct material (15 Ibs. @ $3.80 per Ib.) | $ | 57.00 | ||
| Direct labor (10 hrs. @ $9.40 per hr.) | 94.00 | |||
| Factory variable overhead (10 hrs. @ $4.20 per hr.) | 42.00 | |||
| Factory fixed overhead (10 hrs. @ $2.50 per hr.) | 25.00 | |||
| Standard cost | $ | 218.00 | ||
The $6.70 ($4.20 + $2.50) total overhead rate per direct labor hour is based on an expected operating level equal to 60% of the factory's capacity of 64,000 units per month. The following monthly flexible budget information is also available.
| Operating Levels (% of capacity) | ||||||||||||
| Flexible Budget | 55% | 60% | 65% | |||||||||
| Budgeted output (units) | 35,200 | 38,400 | 41,600 | |||||||||
| Budgeted labor (standard hours) | 352,000 | 384,000 | 416,000 | |||||||||
| Budgeted overhead (dollars) | ||||||||||||
| Variable overhead | $ | 1,478,400 | $ | 1,612,800 | $ | 1,747,200 | ||||||
| Fixed overhead | 960,000 | 960,000 | 960,000 | |||||||||
| Total overhead | $ | 2,438,400 | $ | 2,572,800 | $ | 2,707,200 | ||||||
During the current month, the company operated at 55% of capacity, employees worked 334,000 hours, and the following actual overhead costs were incurred.
| Variable overhead costs | $ | 1,421,000 | ||
| Fixed overhead costs | 1,024,000 | |||
| Total overhead costs | $ | 2,445,000 | ||
AH = Actual Hours
SH = Standard Hours
AVR = Actual Variable Rate
SVR = Standard Variable Rate
SFR = Standard Fixed Rate
Explanation
(1)
Predetermined overhead rate computations
Predetermined overhead rate computations
| Expected volume | 60 | % | |
| Expected total overhead | $ | 2,572,800 | |
| Expected hours | 384,000 | hrs. | |
| Variable cost per hour ($1,612,800 / 384,000) | $ | 4.20 | |
| Fixed cost per hour ($960,000 / 384,000) | $ | 2.50 | |
| Total cost per hour ($2,572,800 / 384,000) | $ | 6.70 | |
(2)
Variable overhead cost variance
Variable overhead cost variance
| Variable overhead cost incurred [given] | $ | 1,421,000 | |
| Variable overhead cost applied [352,000 hrs. @ $4.20] | 1,478,400 | ||
| Variable overhead cost variance | $ | 57,400 | F |
Fixed overhead cost variance
| Fixed overhead cost incurred [given] | $ | 1,024,000 | |
| Fixed overhead cost applied [352,000 hrs. @ $2] | 880,000 | ||
| Fixed overhead cost variance | $ | 144,000 | U |
Explanation
1.
| Variable Overhead Spending and Efficiency Variances | ||||||
| Actual Overhead AH × AVR | AH × SVR | Applied Overhead SH × SVR | ||||
| (Given) | 334,000 × $4 | 352,000 × $4.20 | ||||
| hours per hour | hours per hour | |||||
| $1,421,000 | $1,402,800 | $1,478,400 | ||||
 | | |||||
| $18,200 U | $75,600 F | |||||
| (Spending variance) | (Efficiency variance) | |||||
| ||||||
| $57,400 F (Total variable overhead variance) | ||||||
2.
| Fixed Overhead Spending and Volume Variances | ||||||
| Actual Overhead | Budgeted Overhead | Applied Overhead | ||||
| (Given) | (Given) | 352,000 × $2 | ||||
| hours per hour | ||||||
| $1,024,000 | $960,000 | $880,000 | ||||
| | |||||
| $64,000 U | $80,000 U | |||||
| (Spending variance) | (Volume variance) | |||||
| ||||||
| $144,000 U (Total fixed overhead variance) | ||||||
