Question

The Platter Valley factory of Bybee Industries manufactures field boots. The cost of each boot includes direct materials, direct labor, and manufacturing (factory) overhead. The firm traces all direct costs to products, and it assigns overhead cost to products based on direct labor hours.

The company budgeted $15,000 variable factory overhead cost and 2,500 direct labor hours to manufacture 5,000 pairs of boots in March.

The factory used 2,700 direct labor hours in March to manufacture 4,800 pairs of boots and spent $15,600 on variable overhead during the month

For March, the Platter Valley factory of Bybee Industries budgeted $90,000 for fixed factory overhead cost. Its practical capacity is 2,500 direct labor hours per month (to manufacture 5,000 pairs of boots)

The factory used 2,700 direct labor hours in March to manufacture 4,800 pairs of boots. The actual fixed overhead cost incurred for the month was $92,000.

 

The Platter Valley factory of Bybee Industries currently uses a four-variance analysis of the total factory overhead cost variance but is thinking of changing to a three-variance analysis.

Required:

1. Compute the total overhead spending variance, the (variable overhead) efficiency variance, and the production volume variance for March and indicate whether each variance is favorable (F) or unfavorable (U).

2. Prepare the appropriate journal entries at the end of March to record each of the following: (a) the total overhead spending variance, (b) the (variable overhead) efficiency variance, and (c) the production volume variance. Assume that all overhead costs are recorded in a single account called "Factory Overhead."

Answer 1

Solution:-

	Budgeted	Actual
Output	5000 Pairs	4800 Pairs
Numbers of labor hours	2500 hours	2700 Hours
Variable Factory Overheads	$15000	$15600
Fixed Factory Overheads	$90000	$92000

Standared Variable overhead per unit = $15000/5000= 3 per unit

Standared Variable overhead per hour = $15000/2500= 6 Per hour

Time Allowed for per unit of output = 2500/5000= .50 Hour

Standared Fixed overhead per unit = 90000/5000= 18 per unit

Standared Fixed overhead per Hour = 90000/2500=36 per hour

Total Overhead Spending Variance = Actual units X Standard rate - Actual overheads Cost

Total Overhead Spending Variance = 4800 X (3+18)- (92000+15600)

Total Overhead Spending Variance = 4800 X 21- 107600 = -6800 (Unfavorable)

Variable Efficiency Variance = (Standard Time for Actual production X Standard Variable overhead rate per hour) -

(Actual hours Worked X Standard variable overheads rate per hour)

Variable Efficiency Variance= (2400 X 6) - (2700 X 6) = -1800 (Unfavorable)

Standard Time for actual production is .50 hour (half hour) for one unit and for 4800 units is 2400 hour

Volume Variance = It is a part of Fixed Overhead Variance

Volume Variance = Actual Units X Standard Fixed Overhead rate - Budgeted Fixed overheads

Volume Variance = 4800 X 18 - 90000  

Volume Variance = 86400 - 90000 = -3600 (unfavorable )

Total Overhead Spending Variance = 4800 X 21- 107600 = 6800 (Unfavorable)

Variable Efficiency Variance= (2400 X 6) - (2700 X 6) = 1800 (Unfavorable)

Volume Variance = 86400 - 90000 = 3600 (unfavorable )

JOURNAL ENTRIES

	DEBIT	CREDIT
A) Work in progress A/c Dr (14400+86400)	100800
Total Overhead Spending Variance A/c Dr (Unfavorable)	6800
To Total Overheads Control A/c (15600 +92000)		107600
(Being Total overheads recorded in control A/c )
Total Overheads Control A/c (15600 +92000)	107600
To Miscellaneous A/c		107600
Costing Profit And Loss A/c Dr	6800
To Total Overhead Spending Variance A/c Dr (Unfavorable)		6800

	DEBIT	CREDIT
B) Variable Efficiency Variance A/c Dr (Unfavorable)	$1800
To Variable Overheads Control A/c		$1800
Costing Profit And Loss A/c Dr	$1800
To Variable Efficiency Variance A/c Dr (Unfavorable)		$1800
C) Fixed Volume Variance A/c Dr (Unfavorable)	$ 3600
To Fixed Overheads Control A/c		$3600
Costing Profit And Loss A/c Dr	$3600
ToFixed Volume Variance A/c Dr (Unfavorable)		$3600