Question:Mills, Inc. is a competitor of Murry, Inc. from Exercise E23­18. Mills also uses a standard cost system and provides the following information:

Static budget variable overhead \( 1,200

Static budget fixed overhead \) 1,600

Static budget direct labor hours 800 hours

Static budget number of units 400 units

Standard direct labor hours 2 hours per unit

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, 1,000; actual variable overhead, \(4,000; actual fixed overhead, \)3,100; actual direct labor hours, 1,600.

Requirements

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

2. Explain why the variances are favorable or unfavorable

Step by step solution

01

Computation of the allocation rate

$$\begin{gathered} \mathbf{StandardVOHallocationrate}\mathbf{=}\frac{\mathbf{BudgetedVOH}}{\mathbf{Budgetedallocationbase}} \\ \mathbf{=}\frac{\mathbf{1}\mathbf{,}\mathbf{200}}{\mathbf{800}} \\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{5} \\ \mathit{S}\mathit{t}\mathit{a}\mathit{n}\mathit{d}\mathit{a}\mathit{r}\mathit{d}\mathit{F}\mathit{O}\mathit{H}\mathit{a}\mathit{l}\mathit{l}\mathit{o}\mathit{c}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathit{r}\mathit{a}\mathit{t}\mathit{e}\mathbf{=}\frac{\mathbf{BudgetedFOH}}{\mathbf{Budgetedallocationbase}} \\ \mathbf{=}\frac{\mathbf{1}\mathbf{,}\mathbf{600}}{\mathbf{800}} \\ \mathbf{=}\mathbf{\$}\mathbf{2} \end{gathered}$$

02

Computation of the Variable Overhead Variance

$$\begin{gathered} \mathbf{VOHcostvariance}\mathbf{=}\mathbf{ActualVOH}\mathbf{-}\left(\mathbf{SC}\mathbf{-}\mathbf{AQ}\right) \\ \mathbf{=}\mathbf{4}\mathbf{,}\mathbf{000}\mathbf{-}\left(\mathbf{1}\mathbf{.}\mathbf{5}\mathbf{\times }\mathbf{1}\mathbf{,}\mathbf{600}\right) \\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{600}\mathbf{U} \\ \mathbf{VOHefficiencyvariance}\mathbf{=}\left(\mathbf{AQ}\mathbf{-}\mathbf{SQ}\right)\mathbf{\times }\mathbf{SC} \\ \mathbf{=}\left(\mathbf{1}\mathbf{,}\mathbf{600}\mathbf{-}\mathbf{2}\mathbf{,}\mathbf{000}\right)\mathbf{\times }\mathbf{1}\mathbf{.}\mathbf{5} \\ \mathbf{=}\mathbf{\$}\mathbf{600}\mathbf{F} \end{gathered}$$

03

Computation of the Fixed overhead Variance

$$\begin{gathered} \mathbf{FixedCostVariance}\mathbf{=}\mathbf{ActualFOH}\mathbf{-}\mathbf{BudgetedFOH} \\ \mathbf{=}\mathbf{3}\mathbf{,}\mathbf{100}\mathbf{-}\mathbf{1}\mathbf{,}\mathbf{600} \\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500}\mathbf{U} \\ \mathbf{FOHvolumeVariance}\mathbf{=}\mathbf{BudgetedFOH}\mathbf{-}\mathbf{AllocatedFOH} \\ \mathbf{=}\mathbf{1}\mathbf{,}\mathbf{600}\mathbf{-}\mathbf{4}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{400}\mathbf{F} \end{gathered}$$

04

Explanation of favorable or unfavorable variances

The unfavorable variable overhead cost variance indicates that the actual variable overhead cost per direct labor was not kept within the cost standards.

The favorable overhead efficiency variance shows that the actual usage of direct labor hours was kept within the standard.

The fixed overhead cost variance was favorable because the total cost was kept within the budget.

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