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

Essay

Ole Company manufactures special electrical equipment and parts. Ole 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 $57.00 as shown below.
$\begin{array}{lllllr}\text { Direct materials: } \\\text { Copper } & \text { 3spools } & @ & \$ 3.00& \$ 9.00\\\text { Direct labor }& 4 \text { hours } & @ & \$ 7.00 & 28.00 \\\text { Variable overhead } & 4 \text { hours } & @ & \$ 3.00 & 12.00 \\\text { Fixed overhead } & 4 \text { hours } & @ & \$ 2.00 & \underline{8.00} \\\text { Total }& & & & \underline{ \$ 57.00}\end{array}$
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, 900 transformers were produced. This was below expectations because a work stoppage occurred during contract negotiations with the labor force. Once the contract was settled, the wage rate was increased to $7.25/hour and overtime was scheduled in an attempt to catch up to expected production levels.
The following costs were incurred in October:
$$\begin{array} { |l | l |} \hline \text { Direct materials: } & \\\hline \text { Copper: } & \text { purchased 2,600 spools } @ \$ 3.08 / \text {spool} \\\hline & \text { Used: 2,600 spools } \\\hline \text { Direct labor: } & \\\hline \text { Repular tirne } & \text { 2,000hours } @ \$ 7.00 \\\hline \text { Overtime } & 1,400 \text { hours } @ \$ 7.25 \\\hline\end{array}$$
600 of the 1,400 hours were subject to overtime premium. The total overtime premium is included in variable overhead in accordance with company accounting practices.
$\begin{array}{lrr} \text {Overhead: } &\\ \text { Variable} &\$16,670\\ \text { Fixed} &\$8,800\\\end{array}$
Required:
Compute each of the following variances, showing all your work. Be sure to indicate whether the variances are favorable or unfavorable.
a. Direct materials price variance.
b. Direct material efficiency (quantity) variance.
c. Direct labor rate variance.
d. Direct labor efficiency variance.
e. Variable overhead spending variance.
f. Variable overhead efficiency variance.
g. Fixed overhead spending (budget) variance.
h. Production volume variance.