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Variance Analysis at Savannah Machine Tool Company

The Savannah Machine Tool Company has an automated production process, and production activity is quantified in terms of machine hours. It uses a standard-costing system. The annual static budget for 20x6 called for 6,000 units to be produced, requiring 30,000 machine hours. The standard-overhead rate for the year was computed using this planned level of production. The 20x6 manufacturing cost report follows.
The company produced a total of 6,200 units during 20x6, requiring 32,000 machine hours. The preceding manufacturing cost report compares the company's actual cost for the year with the static budget and the flexible budget for two different activity levels.

Compute the following amounts. For variances, indicate favorable or unfavorable where appropriate. Answers should be rounded to two decimal places when necessary.

a. The standard number of machine hours allowed to produce one unit of product.

b. The variable-overhead spending variance. (Assume that management has determined that the actual fixed overhead cost in 20x6 amounted to $324,000.)

c. The cost of material that should be processed per machine hour.

d. The standard direct-labor cost for each unit produced.

e. The variable-overhead rate per machine hour in a flexible-budget formula. (Hint: Use the high-low method to estimate cost behavior. In the high-low method of cost estimation, the difference between the cost levels at the high and low activity levels is divided by the difference between the high and low activity levels. This quotient provides a simple estimate of the variable cost rate per unit of activity.)

f. The total budgeted manufacturing cost (in thousands of dollars) for an output of 6,050 units. (Hint: Use the flexible-budget formula.)

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Solution Summary

The attached response contains a step-by-step solution to variance analysis. The problem involves production/manufacturing cost report of Savannah Machine Tool Company and an analysis of the report. The solution attached gives a detailed look at how to analyze production/manufacturing cost report and come out with variance analysis.

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