Total overhead, 3-variance analysis. Ames Air Force Base has a ...

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Total overhead, 3-variance analysis.
 
  Ames Air Force Base has a bay that specializes in maintenance for aircraft engines. It uses standard costing and flexible budgets to account for this activity. For 2014, budgeted variable overhead at a level of 8,000 standard monthly direct labor-hours was 64,000; budgeted total overhead at 10,000 standard monthly direct labor-hours was 197,600. The standard cost allocated to repair output included a total overhead rate of 120 of standard direct labor costs.
   For February, Ames incurred total overhead of 249,000 and direct labor costs of 202,440. The direct labor price variance was 9,640 unfavorable. The direct labor flexible-budget variance was 14,440 unfavorable. The standard labor price was 16 per hour. The production-volume variance was 14,000 favorable.
 
  Required:
  1. Compute the direct labor efficiency variance.
  2. Compute the denominator level and the spending and efficiency variances for total overhead.
  3. Describe how individual variable overhead items are controlled from day to day. Also, describe how individual fixed overhead items are controlled.

Question 2

Newton Company purchases equipment on account. What are the effects on the fundamental accounting equation?
 a. Assets increase; liabilities, no effect; owner's equity increases.
  b. Assets increase; liabilities decrease; owner's equity increases.
  c. Assets increase; liabilities increase; owner's equity decreases.
  d. Assets increase; liabilities increase; owner's equity, no effect.
  e. Assets increase; liabilities decrease; owner's equity, no effect.

[djpooyouma]

Answer to Question 1

1. This problem has two major purposes: (a) to give experience with data allocated on a total overhead basis instead of on separate variable and fixed bases and (b) to reinforce distinctions between actual hours of input, budgeted (standard) hours allowed for actual output, and denominator level.
An analysis of direct manufacturing labor will provide the data for actual hours of input and standard hours allowed. One approach is to plug the known figures (designated by asterisks) into the analytical framework and solve for the unknowns. The direct manufacturing labor efficiency variance can be computed by subtracting 9,640 from 14,440. The complete picture is as follows:

Actual Costs
Incurred

Actual Input
 Budgeted Rate Flexible Budget:
Budgeted Input
Allowed for
Actual Output
 Budgeted Rate
(12,050 hrs.  16.80)
202,440 (12,050 hrs.  16.00)
192,800 (11,750 hrs.  16.00)
188,000

 Given

Direct Labor calculations
Actual input  Budgeted rate = Actual costs  Price variance
= 202,440  9,640 = 192,800
Actual input = 192,800  Budgeted rate = 192,800  16 = 12,050 hours
Budgeted input  Budgeted rate = 192,800  Efficiency variance
= 192,800  4,800 = 188,000
Budgeted input = 188,000  Budgeted rate = 188,000  16 = 11,750 hours
= 10,000  8.00 = 117,600

2. The calculations for total overhead are given below.

Repair Overhead

Variable overhead rate = 64,000  8,000 hrs. = 8.00 per standard labor-hour
Budgeted fixedoverhead costs = 197,600  10,000  (8.00) = 117,600

If total overhead is allocated at 120 of direct labor-cost, the single overhead rate must be 120 of 16.00, or 19.20 per hour. Therefore, the fixed overhead component of the rate must be 19.20  8.00, or 11.20 per direct labor-hour.

Let D = denominator level in input units

= Budgeted fixed overhead costsDenominator level in input units

11.20 =
D = 10,500 direct labor-hours

A summary 3-variance analysis for February follows:

Actual Costs
Incurred

Actual Inputs
 Budgeted Rate Flexible Budget:
Budgeted Input
Allowed for
Actual Output
 Budgeted Rate Allocated:
Budgeted Input
Allowed for
Actual Output
 Budgeted Rate

249,000 117,600 + (12,050  8.00) 214,000 117,600 + (8  11,750)
211,600 (11,750 hrs.  19.20)
225,600

 Known figure
An overview of the 3-variance analysis using the block format in the text is:

3-Variance
Analysis Spending
Variance Efficiency
Variance Production
Volume Variance
Total
Overhead
35,000 U
2,400 U

14,000 F

3. The control of variable manufacturing overhead requires the identification of the cost drivers for such items as energy, supplies, equipment, and maintenance. Control often entails monitoring nonfinancial measures that affect each cost item, one by one. Examples are kilowatts used, quantities of lubricants used, and equipment parts and hours used. The most convincing way to discover why overhead performance did not agree with a budget is to investigate possible causes, line item by line item.
Individual fixed manufacturing overhead items are not usually affected very much by day-to-day control. Instead, they are controlled periodically through planning decisions and budgeting that may sometimes have horizons covering six months or a year (for example, management salaries) and sometimes covering many years (for example, long-term leases and depreciation on plant and equipment).

Answer to Question 2

D

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