Question

Pear makes watches. The fixed overhead costs for 2015 total $648,000. The company uses direct labor-hours for fixed overhead allocation and anticipates 21,600 hours during the year for 540,000 units. An equal number of units are budgeted for each month. During October, 48,000 watches were produced and $52,000 was spent on fixed overhead.
Required:

a. Determine the fixed overhead rate for 2015 based on the units of input.

b. Determine the fixed overhead static-budget variance for October.

c. Determine the production-volume overhead variance for October.

Answer 1

Answer:

A. Fixed Overhead rate = $30 per labour hour and $1.2 per unit of input

B. Fixed Overhead Variance = $2,000 (favorable)

C. Production volume overhead variance = $3,600 (unfavorable)

Explanation:

Pear watches

A.

Budgeted Fixed Overhead in 2015 = $648,000

Planned Direct Labour Hours = 21,600 hours

Fixed overhead Allocation basis is per Direct labor hour

Allocation rate per Direct labour hour = $648,000 / 21,600 = $30 per direct labour hour

If 540,000 units is expected to be produced in 21,600 labour hours;

Units that will be produced In 1 labour hour = 540,000/21,600 = 25 units

Therefore if 1 labour hour costs the firm $30 and only 25 units can be produced in 1hour, one unit will cost:

$30 / 25 = $1.20

B.

If the business planned same volume each month = 540,000 divided by 12 = 45,000 units monthly

At the rate of $1.20 per unit.

Budgeted Fixed Overhead in October = $54,000

However the firm did 48,000 units in October and incurred actual Fixed Overhead of $52,000

Variance = Budgeted Fixed Overhead less Actual Fixed Overhead

= $54,000 - $52,000 = $2,000 (favorable)

C.

Production volume overhead variance = budgeted unit rate x (Budgeted Volume less Actual Volume)

= $1.2 x (45,000 - 48,000 units )

= $1.2 x -3,000

= -$3,600 (unfav)