Accounting for Decision Making and Control 8th Edition by Jerold Zimmerman

Exercise 18

Galt Electric Motors
Galt Electric Motors (GEM) produces two types of motors, small and large. Standard machine time to make one small motor is 20 minutes; standard machine time to make one large motor is 30 minutes. GEM plans to make 30,000 small motors and 20,000 large motors during the year. Budgeted manufacturing overhead (fixed and variable) for GEM is $1,800,000. During the year, Galt used 21,600 machine hours to make 27,000 small motors and 24,000 large motors. Actual overhead incurred during the year was $1,900,000.
a. What is GEM's standard overhead rate per machine hour? How much overhead is reflected in the standard cost of each type of motor?
b. Use your answers in part ( a ) to verify that GEM's total overhead variance during the year was $10,000. Is this variance favorable or unfavorable?
c. The table below decomposes the $10,000 overhead variance into spending, efficiency, and volume variances assuming that (1) all overhead is variable and (2) all overhead is fixed. Verify the variances and determine which variances are favorable and which are unfavorable.
d. Explain the economic intuition behind these variances. In particular, explain why even though in each case the expenditures, inputs, and outputs are the same, (1) the spending variances are different, (2) there is no efficiency variance in the "fixed overhead" case, and (3) there is no volume variance in the "variable overhead" case.