Sunglass Guys produces two types of wraparound sunglasses on one assembly line. The monthly fixed overhead is estimated at $235,707, and the variable overhead is estimated at $8.15 per Regular Wrap and $12.32 per Deluxe Wrap.
The company set up a standard costing system and follows the common practice of basing the overhead rate on the total standard direct labor hours required to produce the estimated volume. The company uses only one overhead rate for fixed and variable overhead costs. Data concerning these two products appear here:

Last month, actual production volume was 4,500 units of the Regular Wraps and 1,300 units of the Deluxe Wraps. Actual variable overhead was $54,238, and actual fixed overhead was $237,859. The nine full-time employees who are classified as direct labor worked regular schedules for a total of 1,564 hours.

A. Compute the standard overhead rate per direct labor hour.
B. Explain why the company’s overhead cost variances would provide poor information for monitoring and controlling costs.
C. Using the information available to you in this problem, suggest a method of allocating overhead costs that would provide better variance information. Using this method, calculate relevant variances for monitoring and controlling overhead costs.
D. For bookkeeping purposes, Sunglass Guys needs to calculate a production volume variance and a variable overhead efficiency variance. Calculate these variances, assuming that overhead costs are allocated using the method in part (C).
E. Because employees work regular schedules, direct labor costs tend to be fixed. Also, variable overhead consists primarily of indirect materials and facility-level costs (such as building rent, assembly-line equipment, and utilities). These costs do not differ between Regular Wraps and Deluxe Wraps. Given this information, recommend a better cost allocation base for variable overhead. Explain yourchoice.

  • CreatedJanuary 26, 2015
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