Question

Overhead Variances, Four-Variance Analysis, Journal Entries

Laughlin, Inc., uses a standard costing system. The predetermined overhead rates are calculated using practical capacity. Practical capacity for a year is defined as 1,000,000 units requiring 200,000 standard direct labor hours. Budgeted overhead for the year is $750,000, of which $300,000 is fixed overhead. During the year, 900,000 units were produced using 190,000 direct labor hours. Actual annual overhead costs totaled $800,000, of which $294,700 is fixed overhead.

Required:

1. Calculate the fixed overhead spending and volume variances.

Fixed Overhead Spending Variance	$	Favorable
Fixed Overhead Volume Variance	$	Favorable

2. Calculate the variable overhead spending and efficiency variances.

Variable Overhead Spending Variance	$	Unfavorable
Variable Overhead Efficiency Variance	$	Favorable

3. Prepare the journal entries that reflect the following:

1. Assignment of overhead to production
2. Recognition of the incurrence of actual overhead
3. Recognition of overhead variances
4. Closing out overhead variances, assuming they are not material

Note: Close the variances with a debit balance first. For compound entries, if an amount box does not require an entry, leave it blank or enter "0".

a.	Fixed Overhead Control
	Variable Overhead Control
	Miscellaneous Accounts
b.	Work in Process
	Fixed Overhead Control
	Variable Overhead Control
c.	Fixed Overhead Volume Variance
	Variable Overhead Spending Variance
	Variable Overhead Efficiency Variance
	Fixed Overhead Spending Variance
	Fixed Overhead Control
	Variable Overhead Control
d.	Cost of Goods Sold
	Fixed Overhead Spending Variance
	Variable Overhead Spending Variance
	Variable Overhead Efficiency Variance
	Fixed Overhead Spending Variance
	Cost of Goods Sold

Answer 1

1. Calculate the fixed overhead spending and volume variances.
Actual Fixed Overhead  (AFOH)	$ 2,94,700.00
Budgeted Fixed Overhead (BFOH)	$ 3,00,000.00
Fixed Overhead Spending Variance = AFOH -BFOH	$    (5,300.00)	Favorable
Fixed overhead rate (SFOR) = $300,000/200,000 =	$             1.50	per direct labor hour
Predetermined Rate = 200000/1000000	$             0.20
Applied  Fixed Overhead = 1.50 x (.20 x 900000)	$ 2,70,000.00
Fixed Overhead Volume Variance =  BFOH - Applied Fixed overhead (300000 - 270000)	$    30,000.00	Unfavorable
2. Calculate the variable overhead spending and efficiency variances.
Actual variable overhead = $800,000 - $294,700)	$ 5,05,300.00
Variable overhead rate = $450,000/200,000 =	$             2.25	per direct labor hour
Budgeted Variable Overhead = $2.25 x 190000	$ 4,27,500.00
Variable Overhead Spending Variance = (505300 - 427500)	$    77,800.00	Unfavorable
Applied Variable overhead  (2.25 x .20 x 900000)	$ 4,05,000.00
Variable Overhead Efficiency Variance (427500 - 405000)	$    22,500.00	Unfavorable
3. Prepare the journal entries that reflect the following:
Assignment of overhead to production
Recognition of the incurrence of actual overhead
Recognition of overhead variances
Closing out overhead variances, assuming they are not material
Note: Close the variances with a debit balance first. For compound entries, if an amount box does not require an entry, leave it blank or enter "0".
Account Titles & explanation	Debit	Credit
a.
Work in Process	$ 6,75,000.00
Variable Overhead Control		$ 4,05,000.00
Fixed Overhead Control		$ 2,70,000.00
b.
Variable Overhead Control	$ 5,05,300.00
Fixed Overhead Control	$ 2,94,700.00
Miscellaneous Accounts		$ 8,00,000.00
c.
Fixed Overhead Volume Variance	$    30,000.00
Variable Overhead Spending Variance	$    77,800.00
Variable Overhead Efficiency Variance	$    22,500.00
Fixed Overhead Spending Variance		$      5,300.00
Fixed Overhead Control		$    24,700.00
Variable Overhead Control		$ 1,00,300.00
d.
Cost of Goods Sold	$ 1,30,300.00
Fixed Overhead Volume Variance		$    30,000.00
Variable Overhead Spending Variance		$    77,800.00
Variable Overhead Efficiency Variance		$    22,500.00
Fixed Overhead Spending Variance	$      5,300.00
Cost of Goods Sold		$      5,300.00