Question

Patel and Sons Incorporated uses a standard cost system to apply factory overhead costs to units produced. Practical capacity for the plant is defined as 50,000 machine hours per year, which represents 25,000 units of output. Annual budgeted fixed factory overhead costs are $250,000 and the budgeted variable factory overhead cost rate is $4 per unit. Factory overhead costs are applied on the basis of standard machine hours allowed for units produced. Budgeted and actual output for the year was 20,000 units, which took 41,000 machine hours. Actual fixed factory overhead costs for the year amounted to $245,000, while the actual variable overhead cost per unit was $3.90.

Answer 1

Using the given information, we can calculate the following:

Calculate the standard fixed overhead rate per unit:

Standard fixed overhead rate per unit = Budgeted fixed factory overhead costs / Practical capacity in units

= $250,000 / 25,000 units

= $10 per unit

Calculate the total standard overhead cost per unit:

Total standard overhead cost per unit = Fixed overhead cost per unit + Variable overhead cost per unit

= $10 + $4

= $14 per unit

Calculate the total actual overhead cost per unit:

Total actual overhead cost per unit = Actual fixed overhead cost per unit + Actual variable overhead cost per unit

= ($245,000 / 20,000 units) + $3.90

= $12.25 + $3.90

= $16.15 per unit

Calculate the overhead variance:

Total overhead variance = Actual overhead cost - Standard overhead cost

= (Actual fixed overhead cost + Actual variable overhead cost) - (Standard fixed overhead cost + Standard variable overhead cost)

= ($245,000 + (20,000 x $3.90)) - ((20,000 x $10) + (20,000 x $4))

= $330,000 - $240,000

= $90,000 unfavorable variance

Therefore, the overhead variance for the year is $90,000 unfavorable. This indicates that the actual overhead cost per unit was higher than the standard overhead cost per unit, which could be due to various factors such as increased machine hours, higher variable overhead costs, or inefficient use of fixed overhead costs.

Hope this helps!