Actual production cost-determine cause of variances

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Reference no: EM13318067

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

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.

Reference no: EM13318067

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