Question

Adom Company uses a standard cost system for its production process and applies overhead based on direct labor hours. Here is the information for May:

Standard:
Direct labor hour per unit: 2.50
Variable overhead per direct labor hour: GH¢1.75
Fixed overhead per direct labor hour: GH¢3.10
Budgeted variable overhead: GH¢21,875
Budgeted fixed overhead: GH¢38,750
Actual:
Direct labor hours: 10,000
Variable overhead: GH¢26,250
Fixed overhead: GH¢38,000

Calculate the variances:
1) Total Variable Overhead Cost Variance
2) Total Fixed Overhead Cost Variance

Answer 1

For Adom Company, the total variable overhead cost variance is GH¢17,500 favorable, and the total fixed overhead cost variance is GH¢750 favorable, indicating that the company spent less than the expected standard costs in May.

Step-by-step explanation:

The Adom Company uses a standard cost system and applies overhead based on direct labor hours.

To calculate the total variable overhead cost variance and the total fixed overhead cost variance for May, we follow these steps:

• Calculate the standard variable overhead cost: Standard direct labor hour per unit (2.5 hours) × Variable overhead per direct labor hour (GH¢1.75) × Actual direct labor hours (10,000 hours) = GH¢43,750.
  
• Calculate the total variable overhead cost variance by subtracting the standard variable overhead cost from the actual variable overhead incurred (GH¢26,250): GH¢43,750 - GH¢26,250 = GH¢17,500 (Favorable).
  
• Calculate the total fixed overhead cost variance by comparing the budgeted fixed overhead (GH¢38,750) with the actual fixed overhead incurred (GH¢38,000): GH¢38,750 - GH¢38,000 = GH¢750 (Favorable).

The company has a favorable variance in both variable and fixed overheads, indicating it spent less than the standard costs it had set for its production process in May.