15 58 cost management
Able Control Company, which manufactures electrical switches, uses a standard cost system and carries all inventory at standard cost. The standard factory overhead cost per switch is based on direct labor hours:
Variable overhead 5 hours at $8.00 /hour $40.00
Fixed overhead* 5 hours at $12.00 /hour $60.00
Total standard overhead cost per unit produced $100.00
Based on a practical capacity of 300,000 direct labor hours per month.
The following information is for the month of October:
The company produced 56,000 switches although, 60,000 switches were scheduled to be produced
The company worked 275,000 direct labor hours at a total cost of $2,550,000
Variable overhead costs were $2,340,000
Fixed overhead costs were $3,750,000
The production manager argued during the last performance review that the company should use a more up-to-date base for charging factory overhead costs to production. She commented that her factory had been highly automated in the last two years and, as a result, now has hardly any labor. The factory hires only highly skilled workers to set up production runs and to do periodic adjustments of machinery whenever the need arises.
1. Compute the following for Able Control Company:
a) The fixed overhead spending variance for October
b) The production volume variance for October
c) The variable overhead spending variance for October
d) The variable over head efficiency variance for October
2. Comment on the implications of the variances and suggest any action that the company should take to improve its operations.