Accounting for Decision Making and Control 8th Edition by Jerold Zimmerman

Exercise 15

Beanie Babies
The Ogden plant makes Beanie Babies, small stuffed toys in a variety of animal shapes. The toys are so popular that they have become collectors' items. The plant uses a flexible budget and predetermined overhead rates to assign overhead costs to the different Beanie Babies produced. Overhead costs are assigned using direct labor hours. Fixed overhead is budgeted at $2.3 million for the next year and variable overhead is predicted to be $3.50 per direct labor hour.
The plant was designed two years ago for 180 production employees (direct labor), each working 2,000 hours per year. With the high demand for Beanie Babies, 240 production workers are projected for next year, each expected to work 2,200 hours per year. At the end of the year, based on the actual number of Beanie Babies produced, standard volume was 480,000 direct labor hours.
Required:
a. Calculate overhead rates using expected and normal volume. Round the overhead rates to two significant digits.
b. Calculate the volume variance for the year assuming expected volume is used in setting the overhead rate.
c. Calculate the volume variance for the year assuming normal volume is used in setting the overhead rate.
d. Write a short memo that non-accounting senior managers can understand interpreting why the volume variance in part ( b ) differs from the volume variance in part ( c ). In other words, why do the numbers in parts ( b ) and ( c ) differ and why is this difference relevant tothe managers?