Chapter 21: Q6DQ (page 967)
What department is usually responsible for a direct labor rate variance? What department is usually responsible for a direct labor efficiency variance? Explain.
| Category | Responsible Department |
| Direct labor rate variance | Human resource department |
| Direct labor efficiency variance | Product department |
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World Company expects to operate at 80% of its productive capacity of 50,000 units per month. At this planned level, the company expects to use 25,000 standard hours of direct labor. Overhead is allocated to products using a predetermined standard rate of 0.625 direct labor hours per unit. At the 80% capacity level, the total budgeted cost includes \(50,000 fixed overhead cost and \)275,000 variable overhead cost. In the current month, the company incurred $305,000 actual overhead and 22,000 actual labor hours while producing 35,000 units.
1. Compute the predetermined standard overhead rate for total overhead.
2. Compute and interpret the total overhead variance.
Refer to the information from Exercise 21-17. Compute and interpret the following.
1. Variable overhead spending and efficiency variances.
2. Fixed overhead spending and volume variances.
3. Controllable variance.
Boss Company’s standard cost accounting system recorded this information from its December operations.
Standard direct materials cost | $100,000 |
Direct materials quantity variance (unfavorable) | 3,000 |
Direct materials price variance (favorable) | 500 |
Actual direct labor cost | 90,000 |
Direct labor efficiency variance (favorable) | 7,000 |
Direct labor rate variance (unfavorable) | 1,200 |
Actual overhead cost | 375,000 |
Volume variance (unfavorable) | 12,000 |
Controllable variance (unfavorable) | 9,000 |
Required
1.Prepare December 31 journal entries to record the company’s costs and variances for the month. (Do not prepare the journal entry to close the variances.)
Analysis Component
2.Identify the variances that would attract the attention of a manager who uses management by exception. Explain what action(s) the manager should consider.
For the current period, Kayenta Company’s manufacturing operations yield a \(4,000 unfavorable direct materials price variance. The actual price per pound of material is \)78; the standard price is $77.50 per pound. How many pounds of material were used in the current period?
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.
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