Redtop Co Uses a Standard Cost System and Flexible Budgets

question 143

Essay

Redtop Co. uses a standard cost system and flexible budgets. The following flexible budget was prepared at the 80% operating level for the year: However, for purposes of calculating the fixed overhead application rate, the company defined the denominator volume as the 90% capacity level. The standard calls for four DLHs per unit manufactured. During the year, Redtop worked 33,600 DLHs to manufacture 8,500 units. The actual factory overhead was $12,000 greater than the flexible-budget amount for the units produced, of which $5,000 was due to fixed factory overhead.
Required: Calculate (and provide supporting details for) each of the following variances:
1. The standard variable overhead application rate.
2. The variable overhead efficiency variance.
3. The factory overhead spending variance.
4. The factory overhead production volume variance.
5. The variable overhead spending variance.
6. Provide an interpretation for each of the above variances you calculated

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Definitions:

Prime Interest Rate

The interest rate that commercial banks charge their most creditworthy customers, often used as a benchmark in lending rates.

Equation of Exchange

An economic formula representing the relationship between the supply of money in an economy and the level of prices of goods and services, expressed as M*V = P*T.

Nominal GDP

The gross domestic product measured in current prices, without adjustment for inflation.

Real GDP

Gross Domestic Product adjusted for inflation, representing the total value of all goods and services produced over a specific time period in real terms.