Problem:
At the start of the year, Frigicor estimated that the company would produce 480 refrigeration units during the year (40 per month). Annual fixed overhead costs were estimated to be $600,000 ($50,000 per month), and estimated variable overhead costs were estimated to be $500 per unit. Standard cost per unit was set at $3,450:
Standard material cost $1,200
Standard labor cost 500
Standard overhead rate per unit 1,750
Total $3,450
During the year, the company experienced stiff competition and ended up producing and selling only 400 units. Actual annual production costs were $1,498,200, and standard cost variances were
as follows:
Summary of Production Variances
Material price variance $ 2,200 unfavorable
Material quantity variance 11,500 unfavorable
Labor rate variance (2,300) favorable
Labor efficiency variance 4,800 unfavorable
Controllable overhead variance 2,000 unfavorable
Overhead volume variance 100,000 unfavorable
Total $118,200 unfavorable
Required to do:
Suppose you are the CFO of Frigicor and you want to determine the cause of significant variances. Given the demands on your time, you don’t want to investigate variances that have an obvious explanation or that are less than 1/2 percent of actual production cost. Which variance(s) would you investigate? Explain the basis for your answer.