Question

MILLS ALLOCATES MANUFACTURING OVERHEAD TO PRODUCTION BASED ON STANDARD DIRECT LABOR HOURS. MILLS REPORTED THE FOLLOWING ACTUAL RESULTS FOR 2018:ACTUAL NUMBER OF UNITS PRODUCED: 1,000ACTUAL VARIABLE OVERHEAD: $4000ACTUAL FIXED OVERHEAD: $3,100ACTUAL DIRECT LABOR HOURS: 1,600Note: 1. VOH Coat Var. $1,600U(RE-POST EDIT) Info from E23-18 Murr, Inc. produced 1,000 units of the company's product in 2018, The standard quantity of direct materials was three yards of cloth per unit at a standard cost of $1.35 per yard. The accounting records showed that 2,500 yards of cloth were used and the company paid $1.40 per yard. Standard time was two direct labor hours per unit at a standard rate of$10.00 per direct labor hour. Employees worked 1,700 hours and were paid $9.50 per hourMills Inc. Is a competitor of murry, Inc. from exercise E23-18. Mills also uses a standard cost system and provides the following info.Static budget variable overhead $1,200Static budget fixed overhead $1,600Static budget direct labor hours 800 hoursStatic budget number of units 400 unitsStandard direct labor hours 2 hours per unitFigure out and analyze:1. Compute the variable overhead cost and efficiency variances and fixed overhead cost and volume variances.2. EXPLAIN (as best you can) why the variances are favorable or unfavorable. Based on cost and efficiency budget standards.

Answer 1

1. Compute the variable overhead cost and efficiency variances and fixed overhead cost and volume variances.

• variable overhead cost variance = $1,000 unfavorable
• variable efficiency variance = -$1,200 favorable
• fixed overhead costs = $1,500 unfavorable
• fixed overhead volume variance = -$100 favorable

2. EXPLAIN (as best you can) why the variances are favorable or unfavorable. Based on cost and efficiency budget standards.

• variable overhead cost variance is unfavorable because actual variable overhead costs per unit are higher than budgeted.
• variable efficiency variance is favorable because the company used less direct labor hours than budgeted to produce a higher amount of units (1,600 vs. 2,000).
• fixed overhead costs are unfavorable because total fixed overhead costs were much higher than budgeted, but most of this variance can be explained by higher output.
• fixed overhead volume variance are favorable because a higher volume was produced using less hours than budgeted.

Step-by-step explanation:

Static budget variable overhead $1,200

Actual variable overhead $4,000

Static budget fixed overhead $1,600

Actual fixed overhead $3,100

Static budget direct labor hours 800 hours

Actual direct labor hours 1,600

Static budget number of units 400 units

Actual units produced 1,000

Standard direct labor hours 2 hours per unit

Actual direct labor hours 1.6 per unit

standard variable rate = $1,200 / 400 units = $3 per unit

actual variable rate = $4,000 / 1,000 units = $4 per unit

standard fixed rate = $1,600 / 800 hours = $2 per hour

actual fixed rate = $3,100 / 1,600 hours = $1.9375 per hour

variable overhead cost variance = actual costs - (standard rate x actual units) = $4,000 - ($3 x 1,000) = $1,000 unfavorable

variable efficiency variance = (actual hours x standard rate) - (standard hours x standard rate) = (1,600 × $3) − (2,000 x $3) = $4,800 - $6,000 = -$1,200 favorable

fixed overhead costs = actual overhead costs - budgeted overhead costs = $3,100 - $1,600 = $1,500 unfavorable

fixed overhead volume variance = (actual fixed rate x actual hours) - (standard rate x actual hours) = ($1.9375 x 1,600) - ($ x 1,600) = $3,100 - $3,200 = -$100 favorable