(Variances and variance responsibility) Hobby Horse, Inc., began operations in 2000. In 2001, the company manufactured only one product, a hand painted toy horse. The 2001 standard cost per unit is as follows:
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$ 2.00 |
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Material: one pound plastic at $2.00 |
6.40 |
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Direct labor: 1.6 hours at $4.00 |
3.00 |
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Variable overhead cost |
1.45 |
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Fixed overhead cost |
$12.85 |
The overhead cost per unit was calculated from the following annual overhead
cost budget for 60,000 units.
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Variable Overhead Cost: |
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Indirect labor—30,000 hours at $4.00 |
$120,000 |
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Supplies (oil)—60,000 gallons at $0.50 |
30,000 |
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Allocated variable service department costs |
30,000 |
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Total variable overhead cost |
$180,000 |
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Fixed Overhead Cost: |
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Supervision |
$ 27,000 |
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Depreciation |
45,000 |
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Other fixed costs |
15,000 |
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Total fixed overhead cost |
87,000 |
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Total budgeted overhead cost at 60,000 units |
$267,000 |
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following are the charges to the manufacturing department for November, when 5,000 units were produced:
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Material (5,300 pounds at $2.00) |
$10,600 |
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Direct labor (8,200 hours at $4.10) |
33,620 |
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Indirect labor (2,400 hours at $4.10) |
9,840 |
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Supplies (oil) (6,000 gallons at $0.55) |
3,300 |
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Allocated variable service department costs |
3,200 |
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Supervision |
2,475 |
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Depreciation |
3,750 |
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Other fixed costs |
1,250 |
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Total |
$68,035 |
The Purchasing Department normally buys about the same quantity as is used in production during a month. In November, 5,200 pounds of material were purchased at a price of $2.10 per pound.
a. Calculate the following variances from standard costs for the data given:
1. Material purchase price
2. Material quantity
3. Direct labor rate
4. Direct labor efficiency
5. Overhead budget
b. The company has divided its responsibilities so that the Purchasing Department is responsible for the price at which materials and supplies are purchased. The Manufacturing Department is responsible for the quantities of materials used. Does this division of responsibilities solve the conflict between price and quantity variances? Explain your answer.
c. Prepare a report detailing the overhead budget variance. The report, which will be given to the Manufacturing Department manager, should show only that part of the variance that is her responsibility and should highlight the information in ways that would be useful to her in evaluating departmental performance and when considering corrective action.
d. Assume that the departmental manager performs the timekeeping function for this manufacturing department. From time to time, analyses of overhead and direct labor variances have shown that the manager has deliberately misclassified labor hours (i.e., listed direct labor hours as indirect labor hours and vice versa) so that only one of the two labor variances is unfavorable. It is not feasible economically to hire a separate timekeeper. What should the company do, if anything, to resolve this problem?