Aggregate spending on fixed costs 294000 exceeds the

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8-29 Overhead variances, service sector. Meals Made Easy (MME) operates a meal home-delivery service. It has agreements with 20 restaurants to pick up and deliver meals to customerswho place orders on MME’s website. MME allocates variable and fixed overhead costs on thebasis of delivery time. MME’s owner, Thomas Stewart, obtains the following information forMay 2017 overhead costs:Required:1.Compute spending and efficiency variances for MME’s variable overhead in May 2017.2.Compute the spending variance and production-volume variance for MME’s fixedoverhead in May 2017.3.Comment on MME’s overhead variances and suggest how Thomas Stewart might manageMME’s variable overhead differently from its fixed overhead costs.SOLUTION(20–25 min.) Overhead variances, service sector.1.Meals Made Easy (MME) (May 2017)ActualResultsFlexible BudgetStatic BudgetOutput units (number of deliveries)8,7508,75013,000Hours per delivery0.64a0.700.70Hours of delivery time5,6006,125b9,100cVariable overhead costs per delivery hour$1.90d$1.60$1.60Variable overhead (VOH) costs$10,640$ 9,800e$14,560fFixed overhead costs$39,200$36,400$36,400Fixed overhead cost per hour$4.00g
a5,600 hours 8,750 deliveries = 0.64 hours per deliverybhrs. per delivery actual number of deliveries = 0.70 8,750 = 6,125 hourschrs. per delivery expected number of deliveries = 0.70 13,000 = 9,100 hoursd$10,640 VOH costs 5,600 delivery hours = $1.90 per delivery houre8,750 deliveries 0.70 hours per delivery $1.60 VOH cost per delivery hour = $9,800f13,000 deliveries 0.70 hours per delivery $1.60 VOH cost per delivery hour = $14,560g Fixed overhead rate = Fixed overhead costsStatic budget delivery hours = $36,4009,100 hours = $4 per hourVARIABLE OVERHEADActual CostsIncurredActual Input Qty. Budgeted RateFlexible Budget:Budgeted Input Qty.Allowed for Actual Output Budgeted Rate5,600 hrs $1.60 per hr.6,125 hrs $1.60 per hr.$10,640$8,960$9,800$1,680 U$840 FSpending varianceEfficiency variance2. FIXED OVERHEADActual CostsIncurredFlexible Budget:Same Budgeted Lump Sum (as in Static Budget)Regardless of OutputLevelAllocated:Budgeted Input Qty. Allowed for Actual Output Budgeted Rate6,125 hrs. $4/hr.$39,200$36,400$24,500$2,800 U$11,900 USpending varianceProduction-volume variance3.The spending variances for variable and fixed overhead are both unfavorable. This meansthat MME had increases over budget in either or both the cost of individual items (such as webservices and gasoline) in the overhead cost pools, or the usage of these individual items per unit

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