The Lubbock plant of Morril’s Small Motor Division produces a major subassembly for a 6.0 horsepower motor for lawn mowers. The plant uses a standard costing system for production costing and control. The standard cost sheet for the subassembly follows:
Direct materials (6.0 lbs. @ $5.00) ………………. $30.00
Direct labor (1.6 hrs. @ $12.00) …………………. 19.20
Variable overhead (1.6 hrs. @ $10.00) ………….. 16.00
Fixed overhead (1.6 hrs. @ $6.00) ………………. 9.60
Standard unit cost ……………….………………. $74.80
During the year, the Lubbock plant had the following actual production activity:
a. Production of motors totaled 50,000 units.
b. The company used 82,000 direct labor hours at a total cost of $1,066,000.
c. Actual fixed overhead totaled $556,000.
d. Actual variable overhead totaled $860,000. The Lubbock plant’s practical activity is 60,000 units per year. Standard overhead rates are computed based on practical activity measured in standard direct labor hours.
Required:
1. Compute the variable overhead spending and efficiency variances.
2. Compute the fixed overhead spending and volume variances. Interpret the volume variance. What can be done to reduce this variance?