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Question
Mills Company uses standard costing for direct materials and direct labor. Management would like to use standard costing for variable and fixed overhead.
The following monthly cost functions were developed for overhead items:
Overhead Item Cost Function
Indirect materials $1.00 per DLH
Indirect labor $1.25 per DLH
Utilities $0.50 per DLH
Insurance $10,000
Depreciation $40,000
The cost functions are considered reliable within a relevant range of 20,000 to 40,000 direct labor hours. The company expects to operate at 25,000 direct labor hours per month.
Information for the month of June is as follows:
Actual overhead costs incurred:
Indirect materials $ 20,000
Indirect labor 30,000
Utilities 12,000
Insurance 11,000
Depreciation 40,000
Total $113,000
Actual direct labor hours worked: 24,000
Standard direct labor hours allowed for production achieved: 27,000
Required:
A. Calculate the following overhead rates based upon expected capacity:
1. Variable overhead
2. Fixed overhead rate
3. Total overhead rate
B. Calculate the following variances:
1. Variable overhead spending variance
2. Variable overhead efficiency variance
3. Fixed overhead spending variance
4. Fixed overhead volume variance
Answer
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A. Calculate the following standard overhead rates based upon expected capacity:
Variable overhead rate
Fixed overhead rate
Total overhead rate
B. Calculate the following variances:
Variable overhead spending variance
Variable overhead efficiency variance
Fixed overhead spending variance
Fixed overhead volume variance