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

Essay

Shum Company manufactures special electrical equipment and parts. Shum 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.
$\begin{array}{llllr}\text { Direct materials: }\\\text { Iron } & 5 \text { sheets } & @ & \$ 2.00 & \$ 10.00 \\\text { Copper } & 3 \text { spools } & @ & \$ 3.00 & 9.00 \\\text { Direct labor } & 4 \text { hours } & @ & \$ 7.00 & 28.00 \\\text { Variable overhead } & 4 \text { hours } & @ & \$ 3.00 & 12.00 \\\text { Fixed overhead } & 4 \text { hours } & @ & \$ 2.00 &\underline{ 8.00} \\\text { Total } & & & &\underline{ \$ 67.00}\end{array}$
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 data pertain to October's operations:
$\begin{array}{c}\begin{array}{|l|}\hline \text {Direct materials:}\\\hline \text {Iron:}\\\hline \\\hline \text {Copper:}\\\hline \\\hline \text {Direct labor:}\\\hline\\\hline \end{array}\begin{array}{l|}\hline \\\hline \text {purchased 5,000 sheets@\$2.00/sheet }\\\hline \text {Used: 3,900 sheets}\\\hline \text {purchased2,200spools@\$3.10}\\ \hline \text {Used: 2,600 spools}\\\hline \text { 3,400 hours}\\\hline \text {Total payroll: \( \$ 24,080 \)}\\\hline\end{array}\end{array}$

$\begin{array}{lrr} \text {Overhead: } &\\ \text { Variable} &\$10,000\\ \text { Fixed} &\$8,800\\\end{array}$

Required:
Compute each of the following variances, showing all your work. Be sure to indicate whether the variances are favorable or unfavorable.
a. Variable overhead spending variance.
b. Variable overhead efficiency variance.
c. Fixed overhead spending (budget) variance.
d. Production volume variance.