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  • 1.  Question in Performance Management

    Posted 06-19-2019 01:46 AM

    The following information relates to a given department of Herman Company for the fourth quarter:

    Total actual overhead (fixed plus variable) $178,500
    Budget formula $110,000 plus $0.50 per hour
    Total overhead application rate $1.50 per hour
    Spending variance $8,000 unfavorable
    Volume variance $5,000 favorable

    What were the actual hours worked in this department during the quarter?

    137,000
    121,000
    127,000
    119,000

    Could someone please help me in this question, thank you! 


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    Ritu
    Student
    Bangalore
    India
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  • 2.  RE: Question in Performance Management

    Posted 06-20-2019 09:33 AM
    The 119,000 x $1.5 = $178,500 but is it that easy? If you use the budgeted formula assuming $110,000 is your fixed rate then $68,500 is your variable x .50 = 137,000. 
    Anyone else have thoughts?






  • 3.  RE: Question in Performance Management

    Posted 06-20-2019 10:21 AM
    Ritu,

    I am coming up to 137000 hours? do you know the answer?

    Thanks

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    Sadia Khan
    Analyst
    Frisco TX
    United States
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  • 4.  RE: Question in Performance Management

    Posted 06-20-2019 12:50 PM
    This is an interesting question as it test how deep is the understanding of the concept of factory overhead variance.

    Here the volume variance is a noise and should be ignored.

    You should use the formula for the spending variance to solve the problem.
    Let's assume X is the actual hours:

    (1) VOH spending variance = 0.5X - (Actual variable OH rate * X)

    (2) FOH Spending variance = 110 000 - Actual Fixed cost
    -------------------------

    (1) +(2) OH Spending variance =  0.5 X + 110 000 - Actual OH

    Note that there is no need to calculate the Actual variable OH rare since you are given the actual spend.

    Putting the numbers on the equation lead to the below equation: 
    (8000) = 0.5 X + 110 000 - 178 500

    0 = 0.5 X + 110 000 - 178 500 + 8000

    X = 60 500 / 0.5

    X = 121 000 ! This is the answer !

    a faster way is to understand the spending variance is the difference between the predicted variable costs and total Actual costs.
    in this case,

    (8 000) = 0.5 X + 110 000 - 178 500

    solving this equation give you the same result as above.

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    Jean Georges Ngatsimi
    Katy TX
    United States
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