Question

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

Direct materials (4 .5 lbs. @ \(6 per lb.)	\)27
Direct labor (1 .5 hrs. @ \(12 per hr.)	18
Overhead (1 .5 hrs. @ \)16 per hr.)	24
Total standard cost.	\(69

The predetermined overhead rate (\)16.00 per direct labor hour) is based on an expected volume of 75% of the factory’s capacity of 20,000 units per month. Following are the company’s budgeted overhead costs per month at the 75% capacity level.

Overhead Budget (75% Capacity)
Variable overhead costs
Indirect materials \(22,500
Indirect labor 90,000
Power 22,500
Repairs and maintenance 45,000
Total variable overhead costs	\)180,000
Fixed overhead costs
Depreciation—Building 24,000
Depreciation—Machinery 72,000
Taxes and insurance 18,000
Supervision 66,000
Total fixed overhead costs.	180,000
Total overhead costs	\(360,000

The company incurred the following actual costs when it operated at 75% of capacity in December.

Direct materials (69,000 lbs. @ \)6 .10 per lb.)	\( 420,900
Direct labor (22,800 hrs. @ \)12 .30 per hr.)
Overhead costs
Indirect materials \(21,600
Indirect labor 82,260
Power 23,100
Repairs and maintenance 46,800
Depreciation—Building 24,000
Depreciation—Machinery 75,000
Taxes and insurance 16,500
Supervision 66,000	355,260
Total costs	\)1,056,600

Required

1. Examine the monthly overhead budget to

(a) determine the costs per unit for each variable overhead item and its total per unit costs and (b) identify the total fixed costs per month.

2. Prepare flexible overhead budgets (as in Exhibit 21.12) for December showing the amounts of each variable and fixed cost at the 65%, 75%, and 85% capacity levels.

3. Compute the direct materials cost variance, including its price and quantity variances.

4. Compute the direct labor cost variance, including its rate and efficiency variances.

5.Prepare a detailed overhead variance report (as in Exhibit 21.16) that shows the variances for individual items of overhead.

Short answer

1.a) Total variable overhead cost per unit is $12.00.

b) Total fixed cost per month is $180,000.

2.Total fixed cost = $180,000.

3.Direct materials cost variance = $15,900 (unfavorable).

4.Direct labor costs variance = $10,440 (unfavorable).

5. Total overhead costs arefavorable.

Step-by-step solution

Meaning of Fixed Cost

Fixed costs refer to the cost or expense of a business entity that does not change with a change in the activity level.

(1a) Determining the variable cost per unit

Variable overhead cost item	Total cost ($)	Expected production volume	Cost per unit ($)
Indirect materials	22,500	15,000	1.50
Indirect labor	90,000	15,000	6.00
Power	22,500	15,000	1.50
Repairs and maintenance	45,000	15,000	3.00
Total variable overhead cost per unit			12.00

(1b) Determining the total fixed costs per month

Fixed overhead cost item	Amount ($)
Depreciation building	24,000
Depreciation machinery	72,000
Taxes and insurance	18,000
Supervision	66,000
Total	180,000

(2) Preparing flexible overhead budgets

Suncoast Company
Flexible overhead budgets
For the month ended October 31
Particulars
	Variable cost per unit ($)	Total fixed cost ($)	Budget for unit sales of 13,000	Budget for unit sales of 15,000	Budget for unit sales of 17,000
Variable overhead costs
Indirect materials	1.50		19,500	22,500	25,500
Indirect labor	6.00		78,000	90,000	102,000
Power	1.50		19,500	22,500	25,500
Repairs and maintenance	3.00		39,000	45,000	51,000
Total variable cost	12.00		156,000	180,000	204,000
Fixed overhead costs
Depreciation building		24,000	24,000	24,000	24,000
Depreciation Machinery		72,000	72,000	72,000	72,000
Taxes and insurance		18,000	18,000	18,000	18,000
Supervision		66,000	66,000	66,000	66,000
Total fixed cost		180,000	180,000	180,000	180,000
Total overheads			336,000	360,000	384,000

(3) Computing direct material cost variance

Given,

The actual material used is 69,000 lbs.

The standard quantity of materials for actual production is 67,500 lbs., i.e.$\mathbf{(}\mathbf{15}\mathbf{,}\mathbf{000}\mathbf{units}\mathbf{\times }\mathbf{4}\mathbf{.}\mathbf{5}\mathbf{)}$

The actual price is $6.10 per lb.

The standard price is $6.00 per lb.

Calculation of direct material cost variance:

Particulars	Amount ($)
Actual unit at actual cost $\mathbf{(}\mathbf{69}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{6}\mathbf{.}\mathbf{10}\mathbf{)}$	420,900
Standard units at standard cost $\mathbf{(}\mathbf{67}\mathbf{,}\mathbf{500}\mathbf{\times }\mathbf{\$}\mathbf{6}\mathbf{.}\mathbf{00}\mathbf{)}$	405,000
Direct materials cost variance	15,900 (unfavorable)

The direct material cost variance is $15,900 (unfavorable)

Calculation of direct material price variance:

$\begin{array}{c}\mathbf{Direct}\mathbf{material}\mathbf{}\mathbf{price}\mathbf{variance}\mathbf{=}\mathbf{(}\mathbf{Actual}\mathbf{quantity}\mathbf{\times }\mathbf{(}\mathbf{Actual}\mathbf{price}\mathbf{-}\mathbf{Standard}\mathbf{price}\mathbf{)}\mathbf{)}\\ \mathbf{=}\mathbf{69}\mathbf{,}\mathbf{000}\mathbf{lb}\mathbf{\times }\mathbf{(}\mathbf{\$}\mathbf{6}\mathbf{.}\mathbf{10}\mathbf{per}\mathbf{lb}\mathbf{-}\mathbf{\$}\mathbf{6}\mathbf{.}\mathbf{00}\mathbf{per}\mathbf{lb}\mathbf{)}\\ \mathbf{=}\mathbf{69}\mathbf{,}\mathbf{000}\mathbf{lb}\mathbf{\times }\mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{10}\mathbf{per}\mathbf{lb}\\ \mathbf{=}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{900}\mathbf{U}\end{array}$

The direct material price variance is $6,900 (unfavorable).

Calculation of direct material quantity variance.

$\begin{array}{c}\mathbf{Direct}\mathbf{}\mathbf{material}\mathbf{}\mathbf{quantity}\mathbf{}\mathbf{variance}\mathbf{=}\mathbf{(}\mathbf{Actual}\mathbf{quantity}\mathbf{-}\mathbf{Standard}\mathbf{quantity}\mathbf{)}\mathbf{\times }\mathbf{Standard}\mathbf{price}\\ \mathbf{=}\mathbf{(}\mathbf{69}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{67}\mathbf{,}\mathbf{500}\mathbf{)}\mathbf{lb}\mathbf{\times }\mathbf{\$}\mathbf{6}\mathbf{per}\mathbf{lb}\\ \mathbf{=}\mathbf{1}\mathbf{,}\mathbf{500}\mathbf{lb}\mathbf{\times }\mathbf{\$}\mathbf{6}\mathbf{.}\mathbf{00}\mathbf{per}\mathbf{lb}\mathbf{.}\\ \mathbf{=}\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{000}\mathbf{U}\end{array}$

The direct material quantity variance is $9,000 (unfavorable).

(4) Computing the direct labor cost variance

Given,

The actual hours used is 22,800 hours.

The standard hours for actual production are 22,500 hours, i.e.$\mathbf{(}\mathbf{15}\mathbf{,}\mathbf{000}\mathbf{units}\mathbf{\times }\mathbf{1}\mathbf{.}\mathbf{5}\mathbf{)}$

The actual rate is $12.30 per hour.

The standard rate is $12.00 per hour.

Calculation of direct labor cost variance

Particulars	Amount ($)
Actual hours at actual cost $\mathbf{(}\mathbf{22}\mathbf{,}\mathbf{800}\mathbf{hours}\mathbf{\times }\mathbf{\$}\mathbf{12}\mathbf{.}\mathbf{30}\mathbf{)}$	280,440
Standard hours at standard cost $\mathbf{(}\mathbf{22}\mathbf{,}\mathbf{500}\mathbf{\times }\mathbf{\$}\mathbf{12}\mathbf{.}\mathbf{00}\mathbf{)}$	270,000
Direct labor costs variance	10,440 (unfavorable)

The direct labor cost variance is $10,440 (unfavorable).

Computation of direct labor rate variance:

$\begin{array}{c}\mathbf{Direct}\mathbf{}\mathbf{labor}\mathbf{variance}\mathbf{=}\mathbf{(}\mathbf{Actual}\mathbf{hours}\mathbf{\times }\mathbf{(}\mathbf{Actual}\mathbf{}\mathbf{rate}\mathbf{-}\mathbf{Standard}\mathbf{}\mathbf{rate}\mathbf{)}\mathbf{)}\\ \mathbf{=}\mathbf{22}\mathbf{,}\mathbf{800}\mathbf{hours}\mathbf{\times }\mathbf{(}\mathbf{\$}\mathbf{12}\mathbf{.}\mathbf{30}\mathbf{per}\mathbf{lb}\mathbf{-}\mathbf{\$}\mathbf{12}\mathbf{.}\mathbf{00}\mathbf{per}\mathbf{lb}\mathbf{)}\\ \mathbf{=}\mathbf{30}\mathbf{,}\mathbf{5010}\mathbf{hours}\mathbf{\times }\mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{30}\mathbf{per}\mathbf{lb}\\ \mathbf{=}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{840}\mathbf{U}\end{array}$

The direct labor rate variance is $6,840 (unfavorable)

Calculation of direct labor efficiency variance:

$\begin{array}{c}\mathbf{Direct}\mathbf{}\mathbf{labor}\mathbf{}\mathbf{effiency}\mathbf{}\mathbf{variance}\mathbf{=}\mathbf{(}\mathbf{Actual}\mathbf{}\mathbf{hours}\mathbf{-}\mathbf{Standard}\mathbf{}\mathbf{hours}\mathbf{)}\mathbf{\times }\mathbf{Standard}\mathbf{rate}\\ \mathbf{=}\mathbf{(}\mathbf{22}\mathbf{,}\mathbf{800}\mathbf{-}\mathbf{22}\mathbf{,}\mathbf{500}\mathbf{)}\mathbf{hours}\mathbf{\times }\mathbf{\$}\mathbf{12}\mathbf{per}\mathbf{hour}\\ \mathbf{=}\mathbf{300}\mathbf{hours}\mathbf{\times }\mathbf{\$}\mathbf{12}\mathbf{per}\mathbf{hour}\\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{600}\mathbf{U}\end{array}$

The direct labor efficiency variance is $3,600 (unfavorable).

(5) Preparing detailed oriented overhead variance

Suncoast Company
Overhead variance report
For the month ended October 31
Volume variance
Expected production level				75% of capacity
Production level achieved				75% of capacity
Volume variance				None
Controllable variance	Flexible	Actual	Variance	Favorable or Unfavorable
Variable overhead costs
Indirect materials	22,500	21,600	900	Favorable
Indirect labor	90,000	82,260	7,740	Favorable
Power	22,500	23,100	600	Unfavorable
Repairs and maintenance	45,000	46,800	1,800	Unfavorable
Total variable costs	180,000	173,760	6,240	Favorable
Fixed overhead costs
Depreciation building	24,000	24,000	0
Depreciation machinery	72,000	75,000	3,000	Unfavorable
Taxes and insurance	18,000	16,500	1,500	Favorable
Supervision	66,000	66,000	0
Total fixed costs	180,000	181,500	1,500	Unfavorable
Total overhead costs	360,000	355,260	4,740	Favorable