Optimum Company Uses Standard Costing for Direct Materials and Direct

Essay

Optimum 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 manufacturing overhead items: $\begin{array}{lr}\text { Overhead Item } & \text { Cost Function } \\\text { Indirect materials } & \$ 1.00 \text { per DLH } \\\text { Indirect labour } & \$ 1.25 \text { per DLH } \\\text { Utilities } & \$ 0.50 \text { per DLH } \\\text { Insurance } & \$ 10,000 \\\text { Depreciation } & \$ 40,000\end{array}$ The cost functions are considered reliable within a relevant range of 20,000 to 40,000 direct labour hours.The company expects to operate at 25,000 direct labour hours per month.
Information for the month of June is as follows: $\begin{array}{lr}\text { Actual overhead costs incurred: } & \\\text { Indirect materials } & \$ 20,000 \\\text { Indirect labour } & 30,000 \\\text { Utilities } & 12,000 \\\text { Insurance } & 11,000 \\\text { Depreciation } & 40,000\\\text { Total }&\$113,000\\\\\text { Actual direct labour hours worked: }&24,000\\\text { Standard direct labour hours allowed for production achieved: }&27,000\end{array}$ Required: A. Calculate the following standard manufacturing overhead rates based upon expected capacity:
1. Variable manufacturing overhead
2. Fixed manufacturing overhead rate
3. Total manufacturing overhead rate

B. Calculate the following variances:
1. Variable overhead spending variance
2. Variable overhead efficiency variance
3. Fixed overhead spending variance
4. Fixed overhead volume variance