Highland Shortbread, Ltd., of Aberdeen, Scotland, produces a single product and uses a standard cost system to help in the control of costs. Overhead is applied to production on a basis of machine-hours. Engineering standards specify that each unit of output should take two machine hours. According to the companys budget, the following overhead costs would be incurred at an activity level of 9,000 units of output:

Variable overhead costs.. $ 36,000

Fixed overhead costs . 72,000

Total estimated overhead costs 108,000

In addition, the following information is available:

Standard Standard

Quantity Price or Rate

Direct materials 1.5 pounds $6 per pound

Direct labor 0.6 hours $12 per hour

During the month, the following operating results were recorded:

Units of output produced 8,000

Actual machine-hours worked .. 15,000

Actual variable overhead cost incurred $38,000

Actual fixed overhead cost incurred $70,000

A total of 13,000 pounds of direct materials were purchased at a cost of $91,000. There was no beginning inventory of materials on hand to start the month; at the end of the month, 2,000 pounds of direct materials remained in the RM store unused.

The company employs 30 persons to work on the production. During the month, each worked an average of 155 hours at an average rate of $12.50 per hour.

At the end of the month, the companys Manufacturing Overhead account contained the following data:

Manufacturing Overhead

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108,000 | 96,000

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Management would like to examine the cause of the difference before closing the amount to cost of goods sold.

Required:

Compute the predetermined (standard) overhead rates for the month. Compute the variable overhead spending and efficiency variances. Compute the fixed overhead spending and volume variances. Explain the economic significance of each variance that you computed above

Show how the numbers in the Manufacturing Overhead account were computed. Show the relation between the balance in the overhead account and the variances in (a).

Compute the Price and Efficiency variances for DM and DL.