The Renteria Company uses standard costing in its manufacturing plant for auto parts. The standard cost of a particular auto part, based on a denominator level of

3900 output units per year, included 5 machine-hours of variable manufacturing overhead at $9 per hour and 5 machine-hours of fixed manufacturing overhead at

$16 per hour. Actual output produced was 4,400 units. Variable manufacturing overhead incurred was $260,000 Fixed manufacturing overhead incurred was $385,000

Actual machine-hours were 26,500

Requirement 1. Prepare an analysis of all variable manufacturing overhead and fixed manufacturing overhead variances, using the 4-variance analysis. Begin by calculating the following amounts for the variable overhead.

Actual Input

Actual Costs

x

Flexible

Allocated

Incurred

Budgeted Rate

Budget

Overhead

Variable OH

Now complete the table below for the fixed manufacturing overhead.

Same Budgeted

Lump Sum

Actual Costs

Regardless of

Flexible

Allocated

Incurred

Output Level

Budget

Overhead

Fixed OH

Now complete the 4-variance analysis using the amounts you calculated above. (If no variance exists, leave the dollar value blank. Label the variance as favorable (F), unfavorable (U) or never a variance (N).)

4-Variance

Spending

Efficiency

Production-Volume

Analysis

Variance

Variance

Variance

Variable OH

Fixed OH

Requirement 2. Prepare journal entries using the 4-variance analysis. Record the actual variable manufacturing overhead incurred. (Record debits first, then credits. Exclude explanations from any journal entries.)

Journal Entry

Date

Accounts

Debit

Credit

Record the variable manufacturing overhead allocated.

Journal Entry

Date

Accounts

Debit

Credit

Record the variable manufacturing overhead variances for the period.

Journal Entry

Date

Accounts

Debit

Credit

Record the actual fixed overhead costs incurred.

Journal Entry

Date

Accounts

Debit

Credit

Record the fixed overhead costs allocated.

Journal Entry

Date

Accounts

Debit

Credit

Record the fixed overhead variances for the period.

Journal Entry

Date

Accounts

Debit

Credit

Requirement 3. Describe how individual fixed manufacturing overhead items are controlled from day to day.

Individual fixed manufacturing overhead items are not usually affected very much by day-to-day control. They are controlled

periodically through planning decisions and budgeting procedures.

Requirement 4. Discuss possible causes of the fixed manufacturing overhead variances.

The fixed overhead efficiency variance is caused by the actual realization of fixed costs differing from the budgeted amounts. In this example, the

production-volume variance is favorable, so actual FOH is greater than the budgeted amount of FOH.

The fixed overhead production-volume variance is caused by production being over or under expected capacity. You may be under capacity when demand

variance is caused by production being over or under expected capacity. You may be under capacity when demand increases

from expected levels, or if there are problems with production. Over capacity is usually driven by favorable demand shocks or a desire to increase inventories.

The fact that there is a favorable variance indicates that production did not exceed the expected level of output.