Accounting 225 Quiz Section #12

Chapter 10A Class Exercises Solution

1. Lincoln Company uses a standard cost system where manufacturing overhead expense is
applied on the basis of direct labor hours. Management is trying to determine if the company did
a good job controlling fixed overhead costs last month and the following information is
available. Actual unit production was 1,100 units and actual direct labor hours were 4,500 hours.
Standards state that it takes 4 direct labor hours to make one unit. The predetermined overhead
application rate for Lincoln is $15 per direct labor hour. Last month the production volume
variance (PVV) was $6,000 favorable and the total fixed overhead variance was $3,000
favorable.
a) How much fixed overhead cost was applied last month?
FOH applied = actual output x std. DLH per unit x PDOAR
1,100 actual units x 4 DLH per unit x $15 per DLH
FOH applied = $66,000
b) What was the planned level of unit output?
FOH applied
Less: favorable variance
Equals budgeted FOH

$66,000
($6,000)
$60,000

Denominator level of activity = 4,000 direct labor hours

c) How much was the actual fixed overhead expense and what was the spending variance?
$66,000 applied FOH minus $3,000 Total favorable variance = $63,000 actual FOH expense.
PVV + Spending Var = Total Variance
$6,000 F + ? = $3,000 F so the spending variance must equal $3,000 unfavorable.

d) Did management do a good job controlling cost?

Not really. The total variance was favorable by $3,000 but this was due to $6,000 of favorable
PVV. PVV arises solely due to changes in actual production from the planned level of
production and does not indicate any kind of cost control. However, the spending variance was
unfavorable by $3,000 indicating some concern that management may have done an inadequate
job managing FOH expenses last month.
Fixed Overhead variances:

P1
Applied

PVV

P2
Budget

Spending
Variance

P3
Actual

$66,000

$6,000 F

$60,000

$3,000 U

$63,000

Total FOH Var: $3,000 F

Accounting 225 Quiz Section #12

Chapter 10A Class Exercises Solution
2. Sucher Company uses a standard cost system in which manufacturing overhead costs are
applied to units of product on the basis of standard machine-hours. The company's standards are
based on variable manufacturing overhead of $3 per machine-hour and fixed manufacturing
overhead of $300,000 per year. The denominator level of activity is 30,000 machine-hours.
Standards call for 2.5 machine-hours per unit of output. Actual activity and manufacturing
overhead costs for the year are given below:

a) What are the standard hours allowed for the output?

12,800 units x 2.5 machine hours per unit = 32,000 machine hours

b) What was the variable overhead rate variance?

Rate variance = (AH x AR) - (AH x SR)
= ($96,000) - (31,600 x $3) = $1,200 U

c) What was the variable overhead efficiency variance?

Rate variance = (AH x SR) - (SH x SR)
= (31,600 x $3) - (32,000 x $3) = $1,200 F

d) What was the fixed manufacturing overhead budget variance?

Budget variance = Actual fixed manufacturing overhead - Budgeted Fixed overhead
= $297,000 - $300,000 = $3,000 F

e) What was the fixed manufacturing overhead volume variance?

Volume variance = Fixed portion of predetermined overhead rate x
(Denominator hours - Standard hours allowed)
= $10* x (30,000 - 32,000)
= $20,000 F
*$300,000

30,000 MH = $10 per MH