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Overhead Variances

Overhead Variances. Swan is a specialty chemical produced in batches. Normal denominator volume is 100 batches per week. The weekly flexible budget for indirect costs is $1600 plus $5 per standard hour of direct labor. Indirect costs are absorbed on the basis of standard hours of direct labor.

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Overhead Variances

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  1. Overhead Variances • Swan is a specialty chemical produced in batches. Normal denominator volume is 100 batches per week. The weekly flexible budget for indirect costs is $1600 plus $5 per standard hour of direct labor. Indirect costs are absorbed on the basis of standard hours of direct labor.

  2. Overhead Variances • Data for the week just ended are: (1) Production amounted to 103 batches (2) 315 hours of direct labor were used, costing $2,472. (3) Standards allow 3 hours of DL per batch (4) Actual variable overhead for the week was $1,550 (5) Actual fixed overhead for the week was $3,700

  3. Relevant Costs:Adding and Dropping Products • What is the contribution lost? • What is the change in Fixed costs? • Costs that will simply be assigned to other activities (i.e. unavoidable costs) should NOT be assumed to go away (obvious but not always self-evident during an exam).

  4. C-V-P Analysis: Breakeven • An object can be sold for $10. The variable cost of manufacturing is $3 and that of selling and distribution is $1. Fixed costs are $120,000 p.a. Tax rates are 40%. • Compute BEV. 120,000/[10-3-1] = 20000 • Compute target sales for profit of $150,000. 150,000/[(1-.4)*6] + 20000 = 61,667

  5. C-V-P Analysis: Breakeven • Compute BEV if tax rates change to 50%. BEV is independent of taxes -- why?? • Compute target sales for profit of $150,000 when tax rate is 50%. 150000/[(1-.5)*6] + 20000 = 70,000

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