Question

The Lopez Company uses standard costing in its
manufacturing plant for auto parts. The standard cost of a particular auto part, based on a denominator
level of 4,000 output units per year, included 6 machine-hours of variable manufacturing overhead at $8
per hour and 6 machine-hours of fixed manufacturing overhead at $15 per hour. Actual output produced
was 4,400 units. Variable manufacturing overhead incurred was $245,000. Fixed manufacturing overhead
incurred was $373,000. Actual machine-hours were 28,400.

1. Prepare an analysis of all variable manufacturing overhead and fixed manufacturing overhead vari-
ances, using the 4-variance analysis in Exhibit 8-4 (page 304).

2. Prepare journal entries using the 4-variance analysis.
3. Describe how individual fixed manufacturing overhead items are controlled from day to day.
4. Discuss possible causes of the fixed manufacturing overhead variances.

Answer 1

Actual Variable Overhead = $245,000 Actual authut = 4400 units [fo] Actual hrs = 28400 hrs [Ar] Standard chers = 4400 units X 6hrs = 26400 hrs Standard Von rate = $8 her hr [SRS [SHT Variable Overhead Lost Varianel Absorbed Variable Overhead- Actual VoH = (SHXSR) - Actual NOH - (26400 x8 - 245000 = 211200 - 245000 = 33800(A) VOH ropenditure Varienel (SRXAH)- Actual vor (ex 28400) - 245.000 - 227200 - 245000 - 17800 (1) von reoriency Var. (SHXSR) - (AH x SR) 26400xd)- (28400 x8] 3) 211200 - 227200 = 16000 (A)

Budgeted Hours = 4000 units x ochrs = 24000 hrs Standard To I rate = $15 her hour Fixed Overhead Sapacity Varianel For defficiency thrine - Budgeted Hors - Actual. Hrs) x + (Standard hers - Actual vere) For absorption rate X For absorption date - (24000 -28400)x15 > 26100 - 28400) x15 - 66000 (A) 30 000

2. Journal entry to record variable overhead variance

WIP (Absorbed Variable overhead) Dr. 211200

Variable overhead expenditure variance Dr. 17800

Variable overhead efficiency variance Dr. 16000

To Variable Overhead Expenses 245000

3. The control of overhead items requires the identification of cost drivers for various items which affect the fixed costs of an entity. Control often involves monitoring non-financial measures. The most appropriate method to control individual fixed manufacturing overhead items is to discover why overhead performance did not agree with the budget, investigate possible causes.

4. Possible causes of fixed manufacturing overhead variances are

(a) The business plan carried out during the period was not planned at the time of setting budgets

(b) Increase in one or more overhead expenses during the period

(c) Wastage and inefficiencies in the management of fixed overhead