Question

Sedona Company set the following standard costs for one unit of its product for 2017.

Direct material (20 Ibs. @ \(2.50 per Ib.) \) 50

Direct labor (10 hrs. @ \(22.00 per hr.) 220

Factory variable overhead (10 hrs. @ \)4.00 per hr.) 40

Factory fixed overhead (10 hrs. @ \(1.60 per hr.) 16

Standard cost \)326

The \(5.60 (\)4.00 + \(1.60) total overhead rate per direct labor hour is based on an expected operating level equal to 75% of the factory’s capacity of 50,000 units per month. The following monthly flexible budget information is also available.

A	B	C	D
	Operating Levels (% of capacity)
Flexible Budget	70%	75%	80%
Budgeted output (units)	35,000	37,500	40,000
Budgeted labor (standard hours)	350,000	375,000	400,000
Budgeted overhead (dollars)
Variable overhead	\)1,400,000	\(1,500,000	\)1,600,000
Fixed overhead	600,000	600,000	600,000
Total overhead	\(2,000,000	\)2,100,000	\(2,200,000

During the current month, the company operated at 70% of capacity, employees worked 340,000 hours, and the following actual overhead costs were incurred.

Variable overhead costs \)1,375,000

Fixed overhead costs 628,600

Total overhead costs $2,003,600

1. Show how the company computed its predetermined overhead application rate per hour for total overhead, variable overhead, and fixed overhead.

2. Compute the total variable and total fixed overhead variances and classify each as favorable or unfavorable.

Short answer

Total variable overhead cost variance isfavorable.

Total fixed overhead variance is unfavorable.

Step-by-step solution

Meaning of Unfavorable Variance

Variance refers to the difference between actual and desired results. In comparison, a variance is said to be unfavorablewhen actual costs exceed the budgeted costestimated by the administration.

Overhead application presentation

Actual variable overhead cost	Variable overhead (Budgeted)	Standard cost
Actual hours*actual rate	Actual hours*standard rate	Standard hours*standard rate
340,000*$4.04= $1,375,000	340,000*$4= $1,360,000	350,000*$4= $1,400,000

Actual fixed overhead cost	Fixed overhead (Budgeted)	Standard cost
$628,600	$600,000	Standard hours*budgeted rate
$628,600	$600,000	350,000*$1.60= $560,000

Computation of variances

$\begin{array}{rcl}\mathbf{\text{Variableoverheadratevariance}}& \mathbf{=}& \left(\text{Actualhours}\times \text{Actualrate}\right)\mathbf{-}\left(\text{Actualhours}\times \text{Standardhours}\right)\\ & \mathbf{=}& \left(340,000\times \$4.04\right)\mathbf{-}\left(340,000\times \$4\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{375}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{360}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{000}\left(\text{Unfavourable}\right)\end{array}$

$\begin{array}{rcl}\mathbf{\text{Variableoverheadefficiencyvariance}}& \mathbf{=}& \mathbf{(}\mathbf{\text{Standardhours}}\mathbf{\times }\mathbf{\text{Actualrate}}\mathbf{)}\mathbf{-}\mathbf{(}\mathbf{\text{Actualhours}}\mathbf{\times }\mathbf{\text{Standardrate}}\mathbf{)}\\ & \mathbf{=}& \mathbf{(}\mathbf{350}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{4}\mathbf{)}\mathbf{-}\mathbf{(}\mathbf{340}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{4}\mathbf{)}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{400}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{360}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{40}\mathbf{,}\mathbf{000}\mathbf{\left(}\mathbf{\text{Favourable}}\mathbf{\right)}\end{array}$

$\begin{array}{rcl}\mathbf{\text{Variableoverheadcostvariance}}& \mathbf{=}& \mathbf{\text{Variableoverheadratevariance}}\mathbf{+}\mathbf{\text{Variableoverheadefficiencyvariance}}\\ & \mathbf{=}& \mathbf{-}\mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{40}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{25}\mathbf{,}\mathbf{000}\left(\text{Favourable}\right)\end{array}$

$\begin{array}{rcl}\mathbf{\text{Fixedoverheadbudgetvariance}}& \mathbf{=}& \mathbf{\text{Actualfixedoverheadcost}}\mathbf{-}\mathbf{\text{Budgetedfixedoverhead}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{628}\mathbf{,}\mathbf{600}\mathbf{-}\mathbf{\$}\mathbf{600}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{28}\mathbf{,}\mathbf{600}\left(\text{Unfavourable}\right)\end{array}$

$\begin{array}{rcl}\mathbf{\text{Fixedoverheadvolumevariance}}& \mathbf{=}& \left(\text{Standardhour}\times \text{Budgetedrate}\right)\mathbf{-}\mathbf{\text{Budgetedfixedoverhead}}\\ & \mathbf{=}& \left(350,000\times \$1.60\right)\mathbf{-}\mathbf{\$}\mathbf{600}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{40}\mathbf{,}\mathbf{000}\left(\text{Unfavourable}\right)\end{array}$

$\begin{array}{rcl}\mathbf{\text{Totalfixedoverheadvariance}}& \mathbf{=}& \mathbf{\text{Fixedoverheadbudgetvariance}}\mathbf{+}\mathbf{\text{Fixedoverheadvolumevariance}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{28}\mathbf{,}\mathbf{600}\mathbf{+}\mathbf{\$}\mathbf{40}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{68}\mathbf{,}\mathbf{600}\left(\text{Unfavourable}\right)\\ & & \end{array}$