Water Control, Inc. manufactures water pumps and uses a standard cost system. The standard factory overhead costs per water pump are based on direct labor hours and are shown below:
Variable overhead (4 hours at $8/hour) $ 32
Fixed overhead (4 hours at $5*/hour) 20
Total overhead cost per unit $ 52
*Based on a capacity of 100,000 direct labor hours per month.
The following additional information is available for the month of November.
•22,000 pumps were produced although 25,000 had been scheduled for production.
•94,000 direct labor hours were worked at a total cost of $940,000.
•The standard direct labor rate is $9 per hour.
•The standard direct labor time per unit is four hours.
•Variable overhead costs were $740,000.
•Fixed overhead costs were $540,000.
The fixed overhead spending variance for November was:
a. $70,000 unfavorable.
b. $240,000 unfavorable.
c. $40,000 unfavorable.
d. $15,000 favorable.
Explanation
Choice “c” is correct. $40,000 unfavorable overhead spending variance:
Actual fixed overhead $ 540,000
Budgeted fixed overhead (100,000 DL hrs. × $5/hr.) 500,000
Unfavorable variance $ 40,000
Choices “a”, “b”, and “d” are incorrect, based on the above explanation.
Why is the Standard Direct Labor Rate $9 when the information above it says $5/hour for FIxed OH and $8/hour for Variable OH… How do I know to use the $5/hour rate and not the $9/hour rate??
Thank you!
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