15- 58 Four Variance Analysis
Able Control Company which manufactures electrical switches uses a standard cost system and carries all inventories at the standard cost. The standard factory overhead cost per switch is based on direct labor hours:
Variable Overhead (5 hours at $8.00/hour) $ 40.00
Fixed Overhead (5 hours at $12.00/hour) $ 60.00
Total Standard overhead cost per unit produced $100.00
The following information is for the month of October:
Â· The company produced 56,000 switches, although 60,000 switches were schedule to be produced.
Â· The company worked 275,000 direct labor hours at a total cost of $2,550,000.
Â· Variable Overhead costs were $2,340.000.
Â· Fixed Overhead Costs were $3,750,000.
The production manager argued during the last performance review that the company should use a more up-to-date charging factory overhead cost to production. She commented that her factory had been automated in the last two years and as a result now has hardly any direct labor. The factory hires only highly skilled workers to set up production runs and to do periodic adjustments of machinery whenever the need arises.
1. Compute the following for Able Control Company:
a. The fixed overhead spending variance for October.
b. The production-volume variance for October.
c. The Variable overhead spending variance for October.
d. The variable overhead efficiency variance for October.
2. Comment on the implications of the variance and suggest any action that the company should take to improve its operations.