Highland Shortbread of Scotland produces a single product and uses a standard cost system to help control costs. Manufacturing overhead is applied to production on the basis of standard machine hours. According to the co flexible budget, the following overhead costs should be incurred at an activity level of 18,000 machine hours (The denom level chosen for the year):
Variable manufacturing overhead cost 31,500
Fixed manufacturing overhead cost72,000
Total manufacturing overhead cost 103,500
During the year, the following operating results were recorded:
Actual machine hours worked15,000
Standard machine hours allowed 16,000
Actual Variable manufacturing overhead cost incurred 26,500
Actual fixed manufacturing overhead cost incurred 70,000
At end of year, the co manufacturing Overhead acct contained
Actual Cost6 96,500 applied cost 92,000
4,500
SUGGESTED ANSWER
1. Compute the predetermined overhead rate for the year. Break it down into variable and fixed cost elements.
Variable Man. OHD / Fixed Man. OHDBudgeted OHD Cost ($) / 31,500 / 72,000
Budgeted Activity Level (Machine Hour) / 18,000 / 18,000
OAR ($/MH)
Budgeted Cost / Budgeted Activity Level / $1.75/MH / $4/MH
2.Show how the 92,000 “Applied Costs” figure in the manufacturing overhead acct was computed.
Variable OHD / 16,000 / 1.75 / 28,000
Fixed OHD / 16,000 / 4.00 / 64,000
TOTAL / 92,000
3.Analyze the 4500 underapplied overhead figures in terms of the variable overhead spending and efficiency variances and the fixed overhead budget and volume variances
VARIABLE OHD
a) Spending Variance
(Actual Spending) ~ (Actual Hour X Std Rate)
(26,500) ~ (15,000 X 1.75)
=$250Adverse
a) Efficiency Variance
(Actual Hour X Std Rate) ~ (Std Hour X Std Rate)
(15,000 X 1.75) ~ (16,000 X 1.75)
=$1,750Favourible
FIXED OHD
b) Budget Variance
(Budgeted OHD) ~ (Actual OHD)
(72,000) ~ (70,000)
=$2,000Fovourible
a) Volume Variance
(Budgeted MH X Std Rate) ~ (Std MH X Std Rate)
(18,000 X 4) ~ (16,000 X 4)
=$8,000Adverse
Total = (250) + 1,750 + 2,000 + (8,000)
=$4,500Adverse (Under Applied)
4.Explain the meaning of each variance that you computed in (3) above.
VARIABLE OHD
a) Variable OHD spending incurred is $250 more than expected. This means, the company is spending more on overheads per machine hour than budgeted.
b) OHD Efficiency is $1,750 favorable. This means there is an increase in machine usage efficiency.
FIXED OHD
a) Total Fixed overhead incurred is $2,000 less than budgeted overhead. However, the company was running under capacity, i.e – they are not utilizing their capacity (18,000 MH) fully, hence the company suffered an adverse variance of $8,000 in capacity (volume) utilisation