Question

AAA Life Insurance Company’s (ALIC) most popular life insurance policy is P20A—a permanent, 20-year life annuity policy. This policy sells in $10,000 increments depending on the policyholder’s needs and age. ALIC devotes an entire department to supporting and marketing the P20A policy. Because both the support staff and the salespersons contribute to each P20A policy, ALIC categorizes them as direct labor for purposes of variance analysis, cost control, and performance evaluation. For unit costing, each $10,000 increment is considered one unit; thus, a $90,000 policy is counted as nine units. Standard unit cost information for January is as follows.
Direct labor:
Policy support staff (3 hours at $12.00 per hour) ......... $ 36.00
Policy salespersons (8.5 hours at $14.20 per hour) ........ 120.70
Operating overhead:
Variable operating overhead (11.5 hours at $26.00 per hour) .... 299.00
Fixed operating overhead (11.5 hours at $18.00 per hour) ...... 207.00
Standard unit cost ...................... $662.70
Actual costs incurred for the 265 units sold during January were as follows.
Direct labor:
Policy support staff (848 hours at $12.50 per hour) ....... $10,600
Policy salespersons (2,252.5 hours at $14.00 per hour) ...... 31,535
Operating overhead:
Variable operating overhead ................. 78,440
Fixed operating overhead ................. 53,400
Normal monthly capacity is 260 units, and the budgeted fixed operating overhead for
January was $53,820.
1. Compute the standard hours allowed in January for policy support staff and policy salespersons.
2. What should the total standard costs for January have been? What were the total actual costs that the company incurred in January? Compute the total cost variance for the month.
3. Compute the direct labor rate and efficiency variances for policy support staff and policy salespersons.
4. Compute the variable and fixed operating overhead variances for January.
5. Identify possible causes for each variance and suggest possible solutions.



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  • CreatedMarch 26, 2014
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