Fargo Company Manufactures Special Electrical Equipment and Parts Overhead Rates Were Based Upon Normal and Expected Monthly Capacity

Essay

Fargo Company manufactures special electrical equipment and parts. Eastern employs a standard cost accounting system with separate standards established for each product.
A special transformer is manufactured in the Transformer Department. Production volume is measured by direct labor hours in this department and a flexible budget system is used to plan and control department overhead. Standard costs for the special transformer are determined annually in September for the coming year. The standard cost of a transformer was computed at $67.00 as shown below.
$\begin{array}{llllr}\text { Drrect materials: }\\\text { Iron } & 5 \text { sheets } & @ & \$ 2.00 & \$ 10.00 \\\text { Copper } & 3 \text { spools } & @ & \$ 3.00 & 9.00 \\\text { Direct labor } & 4 \text { hours } & @ & \$ 7.00 & 28.00 \\\text { Variable overhead } & 4 \text { hours } & @ & \$ 3.00 & 12.00 \\\text { Fixed overhead } & 4 \text { hours } & @ & \$ 2.00 & \underline{ 8.00} \\\text { Total } & & & & \$ 67.00\end{array}$

Overhead rates were based upon normal and expected monthly capacity, both of which were 4,000 direct labor hours. Practical capacity for this department is 5,000 direct labor hours per month. Variable overhead costs are expected to vary with the number of direct labor hours actually used. During October, 800 transformers were produced. This was below expectations because a work stoppage occurred at the copper supplier and shipments were delayed.
The following costs were incurred in October:
$$\begin{array} {| l | l | } \hline \text { Direct materials: } & \\\hline \text { Iron: } & \text { purchased 4,200 sheets, total cost } \$ 8,750 \\\hline & \text { Used: } 4,200 \text { sheets } \\\hline \text { Copper: } & \text { purchased } 2,600 \text { spools, total cost } \$ 7,890 \\\hline & \text { Used: } 2,600 \text { spools } \\\hline \text { Direct labor: }& \text { 3,400 hours } \\\hline & \text { Total payroll: } \$ 24,080 \\\hline\end{array}$$
Required:
Compute each of the following variances, showing all your work. Be sure to indicate whether the variances are favorable or unfavorable.
a. Direct materials price variance for both iron and copper.
b. Direct material efficiency variance for both iron and copper
c. Direct labor rate variance.
d. Direct labor efficiency variance.