Posted: April 3rd, 2015

Computing Factory Overhead Costs and Variance

Computing Factory Overhead Costs and Variance
Application
Computing Factory Overhead Costs and Variance
The process of analyzing overall performance of a company often entails making comparisons between anticipated costs and actual costs for areas such as materials, labor, and factory overhead. To make such comparisons, managers use the principle of variance analysis to determine how well company operations are meeting expectations.

In this Application, you will analyze two scenarios using the information presented. You will apply your knowledge of variance analysis, flexible budgets, and overhead to draw conclusions about the following scenarios.

Part 1:

YumTown Frozen Foods is an emerging company in the market of high-end TV dinners. YumTown’s elevated takes on popular favorites such as steak and potatoes and macaroni and cheese have gained significant attention on cable food channels. However, as YumTown’s level of activity has risen, the company has struggled to make sense of its manufacturing costs. Representatives have asked you to analyze the company’s factory overhead costs and labor hours. YumTown accumulates the following data concerning a mixed cost by relating total factory overhead costs to direct labor hours.
Month    DLH    Factory Overhead
March    300    $2,400
April    400    $3,000
May    600    $3,600
June    790    $4,500
July    500    $3,200
August    800    $4,900
•    Compute these figures for the calculations in the figure below
1)    Overhead    DLH        2) Variable rate = Difference in Overhead/difference in DLH
Highest Pair
Lowest Pair                  Diff. in Overhead
Difference     $           –                      –           Diff. in DLH
Variable rate

3) Compute the fixed cost portion:

High    Low
Overhead
Variable expense
Var. rate x DLH
$           –        $           –

•    What is the flexible budget formula for factory overhead?

Part 2:
Honey Bear Confections is a small company dedicated to making bear-shaped sweets with honey as a sugar substitute. You have just been promoted to a position as manager of the production department at Honey Bear Confections when your boss shows you the following report. She tells you to “get it fixed” if you want to prove you are capable of being a manager. You suspect she is alluding to a problem with productivity and efficiency. After reviewing the following information and making the necessary calculations, what would you recommend?

HoneyBear Confections
Manufacturing Overhead Static Budget Report
For the Month Ended June 20XX

Budget    Actual    Variance (U of F)
Production in bags of candy    10,000    12,000    2,000F
Costs:
Indirect labor    $26,000    $31,200    $5,200U
Supplies    $25,000    $29,500    $4,500U
Utilities    $19,000    $22,500    $3,500U
$70,000    $83,200    $13,200U
Also compute figure below

Part 2 – Honey Bear Confections

Honey Bear Confections
Manufacturing Overhead Flexible Budget
For the Month Ended June 20XX

Budgeted Production         bags
Actual Production         bags

Flexible Budget Formula         Flexible Budget 12,000 bags    Actual 12,000 bags    *Variance        (U) or F
Indirect Labor             per bag               $                    –       –
Supplies             per bag                                     –       –
Utilities             per bag                                     –       –
$             –            $                    –        $                    –        $                    –       –
*U= Unfavorable F= Favorable

Part 3:

In a 2-paragraph essay respond to the following:
•    What is the purpose of variance analysis?
•    Should all variances be examined?