The Lubbock plant of Morril’s Small Motor Division produces a major subassembly for a 6.0 horsepower motor for lawn mowers. The plant uses a standard costing system for production costing and control. The standard cost sheet for the subassembly follows:
Direct materials (6.0 lbs. @ $ 5.00) ....... $ 30.00
Direct labor (1.6 hrs. @ $ 12.00) ........ 19.20
VOH (1.6 hrs. @ $ 10.00) ........... 16.00
FOH (1.6 hrs. @ $ 6.00) ........... 9.60
Standard unit cost .............. $ 74.80
During the year, the Lubbock plant had the following actual production activity:
(a) Production of motors totaled 50,000 units;
(b) The company used 82,000 direct labor hours at a total cost of $ 1,066,000;
(c) Actual fixed overhead totaled $ 556,000;
(d) Actual variable overhead totaled $ 860,000. The Lubbock plant’s practical activity is 60,000 units per year. Standard overhead rates are computed based on practical activity measured in standard direct labor hours.
Required:
1. Compute the variable overhead spending and efficiency variances.
2. Compute the fixed overhead spending and volume variances. Interpret the volume variance. What can be done to reduce this variance?