Dresser Company uses a standard cost system and sets predetermined overhead rates on the basis of direct labor-hours. The following data are taken from the company’s budget for the current year:
Denominator activity (direct labor-hours) . . . . . . . . . . . . . . . . . XXXXXXXXXX9,000
Variable manufacturing overhead cost at 9,000 direct labor-hours . . . . . . . $34,200
Fixed manufacturing overhead cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63,000
The standard cost card for the company’s only product is given below:
Direct materials, 4 pounds at $2.60 per pound . . . . . . . . . . . . . . . . . . $10.40
Direct labor, 2 direct labor-hours at $9 per direct labor-hour XXXXXXXXXX00
Overhead, 120% of direct labor cost . . . . . . . . . . . . . . . . XXXXXXXXXX21.60
Standard cost per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50.00
During the year, the company produced 4,800 units of product and incurred the following costs:
Materials purchased, 30,000 pounds at $2.50 per pound . . . . . . . $75,000
Materials used in production (in pounds) . . . . . . . . . . XXXXXXXXXX20,000
Direct labor cost incurred, 10,000 direct labor-hours at
$8.60 per direct labor-hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $86,000
Variable manufacturing overhead cost incurred . . . . . . . . . . . . . . . $35,900
Fixed manufacturing overhead cost incurred . . . . . . . . . . . . . . . . . $64,800
Required:
1. Redo the standard cost card in a clearer, more usable format by detailing the variable and fixed overhead cost elements.
2. Prepare an analysis of the variances for materials and labor for the year.
3. Prepare an analysis of the variances for variable and fixed overhead for the year.
4. What effect, if any, does the choice of a denominator activity level have on standard unit costs? Is the volume variance a controllable variance from a spending point of view? Explain.