Exercise 7-42 (Algorithmic)

Variances and conversion cost category

Auto Brakes Inc. manufactures brake rotors and has always applied overhead to production using direct labor hours. Recently, company facilities were automated, and the accounting system was revised to show only two cost categories: direct material and conversion. Estimated variable and fixed conversion costs for the current month were $212,000 and $81,620, respectively. Expected output for the current month was 5,300 rotors, and the estimated number of machine hours was 10,600. During July 2013, the firm actually used 9,400 machine hours to make 5,000 rotors while incurring $268,420 of conversion costs. Of this amount, $184,400 was variable cost.

a. Using the four-variance approach, compute the variances for conversion costs.

Fixed Conversion Variances

Spending Variance $___________ unfavorable

Volume Variance $___________ unfavorable

Total Fixed Conv. Variance $___________ unfavorable

Variable Conversion Variances

Spending Variance $___________ favorable

Efficiency Variance $___________ favorable

Total Var. Conv. Variance $___________ favorable

b. Evaluate the effectiveness of the firm in controlling the current month's costs.

The input in the box below will not be graded, but may be reviewed and considered by your instructor.

a.

Variable conversion rate = estimated variable conversion costs/estimated machine hours. Fixed conversion rate = estimated fixed conversion costs/estimated machine hours. Standard hours per unit = estimated machine hours/units expected produced. Standard hours production = actual units x standard hours per unit.

Variable OH Variances: VOH Spending Variance = actual VOH - (VOH Rate x actual hours). VOH Efficiency Variance = (VOH Rate x actual hours) - applied VOH. Total VOH Variance = actual VOH - applied VOH.

Fixed OH Variances: FOH Spending Variance = actual FOH - budgeted FOH. Volume Variance = budgeted FOH - applied FOH. Total FOH Variance = actual FOH - applied FOH.

b. Examine the results for the month.