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.

a. 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 b. Compute the Price and Efficiency variances for DM and DL.