Mo Coughlin and Associates is a medium-sized company located near a large metropolitan area in the Prairies. The company manufactures cabinets of mahogany, oak, and other fine woods for use in expensive homes, restaurants, and hotels. Although some of the work is custom, many of the cabinets are a standard size.
One non-custom model is called the Luxury Base Frame. Normal production is 1,000 units per month. Each unit has a direct labour hour standard of five hours. Overhead is applied to production based on standard direct labour hours. During the most recent month, only 900 units were produced; 4,500 direct labour hours were allowed for standard production, but only 4,000 hours were used. Standard and actual overhead costs were as follows:

Instructions
(a) Determine the overhead application rate.
(b) Determine how much overhead was applied to production.
(c) Calculate the budget overhead variance and the overhead volume variance.
(d) Decide which overhead variances should be investigated.
(e) Discuss the causes of the overhead variances. What can management do to improve its performance next month?

Transcribed Image Text:

Standard (1,000 units Actual (900 units Indirect materials Indirect labour Manufacturing supervisors, salaries (fixed) Manufacturing office employees, salaries (fixed) Engineering costs (fixed) Computer costs Electricity Manufacturing building depreciation (fixed) Machinery depreciation (fixed) Trucks and forklift depreciation (fixed) Small tools Insurance (fixed) Property taxes (fixed) Total $ 12,000 43,000 22,500 13,000 27,000 10,000 2,500 8,000 3,000 1,500 700 500 300 $144,000 $ 12,300 51,000 22,000 12,500 25,000 10,000 2,500 8,000 3,000 1,500 1,400 500 300 $150,000