Broome Instruments Company manufactures a control valve used in air-conditioning systems. The firm uses a standard costing system for product costing. The manufacturing overhead rate is based on a normal annual activity level of 600 000 machine hours. The company planned to produce 25 000 units each month during the current year. The budgeted manufacturing overhead for the current year is as follows:
Variable ………………………………….. $3 600 000
Fixed ………………………………………. 3 000 000
Total …………………………………….. $6 600 000
During November, the company produced 26 000 units and used 83 Boo machine hours. Actual manufacturing overhead for the month was $260 000 fixed and $320 000 variable. The total manufacturing overhead applied during November was $572 000.
The standard cost of a control valve is as follows:
Direct material ……………………………………….. $14.50
Direct labour (2 hours @ $25) …………………………. 50.00
Manufacturing overhead (2 hours @ $11) ……………. 22.00
Total standard cost ………………………………….. $86.50
Required:
1. Calculate the following variances for November, indicating whether each variance is favourable or unfavourable:
(a) Variable overhead spending variance.
(b) Variable overhead efficiency variance.
(c) Fixed overhead budget variance.
(d) Fixed overhead volume variance.
2. Prepare journal entries to add manufacturing overhead to work in process inventory, and record variances and actual overhead costs?
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