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    Important Information about Standard Costs

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    Ed Widner and Associates is a medium-sized company located near a large metropolitan area in the Midwest. 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 such non-custom model is called Luxury Base Frame. Normal production is 1,000 units. Each unit has a direct labor hour standard of 5 hours. Overhead is applied to production based on standard direct labor hours. During the most recent month, only 900 units were produced; 4,500 direct labor hours were allowed for standard production, but only 4,000 hours were used. Standard and actual overhead costs were as follows.

    Standard (1,000 units)
    Actual (900 units)

    Indirect materials
    $ 12,000
    $ 12,300

    Indirect labor
    43,000
    51,000

    (Fixed) Manufacturing supervisors salaries
    22,000
    22,000

    (Fixed) Manufacturing office employees salaries
    13,000
    11,500

    (Fixed) Engineering costs
    27,000
    25,000

    Computer costs
    10,000
    10,000

    Electricity
    2,500
    2,500

    (Fixed) Manufacturing building depreciation
    8,000
    8,000

    (Fixed) Machinery depreciation
    3,000
    3,000

    (Fixed) Trucks and forklift depreciation
    1,500
    1,500

    Small tools
    700
    1,400

    (Fixed) Insurance
    500
    500

    (Fixed) Property taxes
    300
    300

    Total
    $143,500
    $149,000

    (a) Determine the overhead application rate.

    (b) Determine how much overhead was applied to production.

    (c) Calculate the controllable overhead variance and the overhead volume variance.

    (d) Decide which overhead variances should be investigated.

    (e) Discuss causes of the overhead variances. What can management do to improve its performance next month?

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    Solution Preview

    For part (a), (b), and (c), please see the attached excel sheet.

    (d) For variable overhead costs, the actual spending (at 900 units) should be less than the standard budget (at 1000 units). Therefore, the cost of indirect materials, ...

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