Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 43

Fixed Overhead Rate, Denominator Level, and Two-Variance Analysis Overhead information for Danielson Company for October follows:

Total overhead incurred	$28,800
Budgeted fixed overhead	$7,200
Total standard overhead rate per machine hour (MH)	$4.50
Standard variable overhead rate per MH	$3.00
Standard MHs allowed for the units manufactured	3,500

Required

1. What is the standard fixed factory overhead rate per machine hour?

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2. What is the denominator activity level that was used to establish the fixed overhead application note?

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3. Prepare a diagram such as the one in Exhibit 15.7, Panel 3, to calculate the following overhead variances for October:

a. Total flexible-budget variance for factory overhead.

b. Factory overhead production-volume variance.

c. Total factory overhead variance.

Step 1 of 6

Budget is a statement prepared by the management of the business entity which helps them to estimate the expenses, income, receipts, payment, sales and purchases during the period. It is prepared keeping in mind the companies objectives and abilities with respect to resources they have. Often businesses deviate from their budgeted figures either in favourable way or unfavourable way. Such deviations are commonly referred to as variances.