Mills Company Uses Standard Costing for Direct Materials and Direct

Essay

Mills Company uses standard costing for direct materials and direct labour. Management would like to use standard costing for variable and fixed overhead.
The following monthly cost functions were developed for overhead items: $\begin{array}{ll}\quad \text { Overhead Item } & \text { Cost Function } \\\text { Indirect materials } & £ 0.30 \text { per DLH } \\\text { Indirect labour } & £ 0.20 \text { per DLH } \\\text { Utilities } & £ 0.25 \text { per DLH } \\\text { Insurance } & £ 2,000 \\\text { Depreciation } & £ 10,000\end{array}$ The cost functions are considered reliable within a relevant range of 70,000 to 100,000 direct labour hours. The company expects to operate at 80,000 direct labour hours per month.
Information for the month of September is as follows: Actual overhead costs incurred:
$\begin{array}{lr}\text { Indirect materials } & £ 22,500 \\\text { Indirect labour } & 15,000 \\\text { Utilities } & 21,000 \\\text { Insurance } & 2,500 \\\text { Depreciation } & 10,000 \\\text { Total } & £ 71,000\\\\\text {Actual direct labour hours worked}&85,000\\\text {Standard direct labour hours}\\\text {allowed for production achieved}&82,000\end{array}$
a.Calculate the following standard overhead rates based upon expected capacity:Variable overhead rateFixed overhead rateTotal overhead rate
b.Calculate the following variances:Variable overhead spending varianceVariable overhead efficiency varianceFixed overhead spending varianceFixed overhead volume variance