Question

Use the following data for questions 25 thru 31:

Cox Engineering performs cement core tests in its laboratory. The following standards have been set for each core test performed based on planned activity of 1,800 core tests:

(Standard Hours or Quantity = SH/Q, Standard Price or Rate = SP/R, Price Per Unit = PP/U).

Direct Materials: SH/Q = 3 pounds, SP/R = $0.75 per pound, PP/U = $2.25
Direct Labor: SH/Q = 0.4 hours, SP/R = $12 per hour, PP/U = $4.80
Variable Manufacturing Overhead: SH/Q = 0.4 hours, SP/R = $9 per hour, PP/U = $3.60
Fixed Manufacturing Overhead: SP/R = $6,800

During March, the laboratory performed 2,000 core tests. On March 1 no direct materials (sand) were on hand. Variable manufacturing overhead is assigned to core tests on the basis of standard direct labor-hours. The following events occurred during March:

• 7,200 pounds of sand were purchased at a cost of $6,120.
• 7,200 pounds of sand were used for core tests.
• 840 actual direct labor-hours were worked at a cost of $8,610.
• Actual variable manufacturing overhead incurred was $7,240.
• Actual fixed manufacturing overhead incurred was $6,500.

The materials quantity variance for March is:
A. $900 favorable
B. $1,950 favorable
C. $1,950 unfavorable
D. $900 unfavorable

Answer 1

Fixed costs, or overhead, spread over the number of units produced, results in a hyperbolic average fixed cost curve, which illustrates the concept of spreading the overhead. As production increases, the fixed cost per unit decreases.

Step-by-step explanation:

The subject of this question revolves around fixed costs and allocation in a production setting. When discussing fixed costs, which are also known as overhead, an important concept is the calculation of average fixed cost, which is achieved by dividing the total fixed costs by the quantity of output produced. As production increases, the allocation of fixed costs over each unit (spreading the overhead) causes the average fixed cost to decrease. This results in a hyperbolic shaped curve which reflects that, with every additional unit produced, the overhead per unit becomes smaller.

To explain "spreading the overhead", take a hypothetical fixed cost of $1,000. If only one unit is produced, the average fixed cost is $1,000 per unit. However, if 10 units are produced, the average fixed cost drops to $100 per unit. This demonstrates that as more units are produced, the fixed cost is spread over a larger number of units, thus lowering the cost assigned to each individual unit. The average fixed cost curve will look like a hyperbola, starting at a very high point when the quantity is low and approaching zero as quantity increases.