Question

Summary Problem—Four-Variance Breakdown of the Total Overhead Variance; Journal Entries ACME manufacturing is a low-cost producer of a single, commodity product: RGL-01. Standard overhead cost information for one unit of this product is presented below:

Standard number of machine hours per unit produced 0.5

Standard variable overhead rate per machine hour $30.00

Budgeted fixed overhead (for the year) $300,000

Practical capacity, in units (annual basis) 10,000

Budgeted output for the coming year, in units 8,000

Normal capacity, in units (per year) 9,000

Actual production for the year (in units) 9,200

Actual overhead costs incurred during the year:

Fixed overhead $288,000

Variable overhead $142,600

Actual number of machine hours per unit for work done this period 0.49

Required

Calculate the fixed overhead application rate per machine hour (rounded to 2 decimal places) using (a) budgeted output, (b) normal capacity, and (c) practical capacity.

What is the total overhead application rate per machine hour (rounded to 2 decimal places) for each of the three choices identified in requirement 1?

What is the total overhead variance for the year when the overhead application rate per machine hour is determined under each of the following options: (a) budgeted output, (b) normal capacity, and (c) practical capacity? [Round answers to nearest whole number, and indicate whether each variance is favorable (F) or unfavorable (U).]

What is causing the results you observe in requirement 3?

What is the Overhead Efficiency Variance (= Variable Overhead Efficiency Variance) for the year when the overhead application rate per machine hour is determined under each of the following options: (a) budgeted output, (b) normal capacity, and (c) practical capacity? [Round answers to nearest whole number, and indicate whether each variance is favorable (F) or unfavorable (U).]

Provide an interpretation of the results reported in requirement 5.

What is the total Overhead Spending Variance for the year under each of the following assumptions regarding the denominator activity level used to set the overhead application rate for the year: (a) budgeted output, (b) normal capacity, and (c) practical capacity? Round answers to nearest whole dollar, and state whether each variance is favorable (F) or unfavorable (U).

Break down the Total Overhead Spending Variance (as determined in requirement 7) into: (a) a Fixed Overhead Spending Variance, and (b) a Variable Overhead Spending Variance. Round answers to nearest whole dollar, and state whether each variance is favorable (F) or unfavorable (U).

Provide an interpretation of the results reported in requirements 7 and 8. Calculate the Production Volume Variance when the overhead application rate per machine hour is determined under each of the following options: (a) budgeted output, (b) normal capacity, and (c) practical capacity. Round answers to nearest whole dollar, and state whether each variance is favorable (F) or unfavorable (U).

Provide an interpretation of the results reported in requirement 10.

Summary analysis: Prepare a four-variance analysis of the total overhead variance for the period under each of the following options for determining the fixed overhead application rate: (a) budgeted output, (b) normal capacity, and (c) practical capacity.

Provide summary journal entries at the end of the year to (a) record all four overhead cost variances (calculated above, in requirement 12) and (b) to close the variances to Cost of Goods Sold (CGS). Assume that variances were determined using “practical capacity” as the denominator volume level for establishing the fixed overhead application rate and the total overhead application rate. Also assume that the company uses a single account, Factory Overhead, to record overhead costs.

Answer 1

Part: 1 Fixed Overhead Application Rate:

Solution (a):

Budgeted Output = 8000 units

Actual Fixed OH = $ 288,000

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Budgeted Hours for 8000 units = 8000 *0.49 = 3920 hrs

Per Hour Fixed OH = $ 288,000 / 3920 hrs = $73.47 per Hour

Solution (b):

Normal Capacity = 9000 units

Actual Fixed OH = $ 288,000

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Normal Hours for 9000 units = 9000 *0.49 = 4410 hrs

Per Hour Fixed OH = $ 288,000 / 4410 hrs = $65.31 per Hour

Solution (c):

Normal Capacity = 10000 units

Actual Fixed OH = $ 288,000

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Practical Hours for 10000 units = 10000 *0.49 = 4900 hrs

Per Hour Fixed OH = $ 288,000 / 4900 hrs = $58.75 per Hour

Part: 2 Total Overhead Application Rate:

Total Overhead = Fixed OH + Variable OH = $288,000 + $142,600 = $4,30,600

Solution (a):

Budgeted Output = 8000 units

Total Overhead = $ 4,30,600

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Budgeted Hours for 8000 units = 8000 *0.49 = 3920 hrs

Per Hour Total OH = $ 4,30,600 / 3920 hrs = $109.85 per Hour

Solution (b):

Normal Capacity = 9000 units

Total Overhead = $ 4,30,600

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Normal Hours for 9000 units = 9000 *0.49 = 4410 hrs

Per Hour Total OH = $ 4,30,600 / 4410 hrs = $97.64 per Hour

Solution (c):

Normal Capacity = 10000 units

Total Overhead = $ 4,30,600

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Practical Hours for 10000 units = 10000 *0.49 = 4900 hrs

Per Hour Total OH = $ 4,30,600 / 4900 hrs = $87.88 per Hour

Part: 3 Total Overhead Variance Rate:

Total Overhead Cost Variance = Total OH absorbed - Actual Total OH incurred

If more Total OH absorbed is more than the Actual Total OH incurred it is considered as Unfavourable because it will reduce the income and If the Total OH absorbed is Less than the Actual Total OH incurred it is considered as Favourable because it increases the income.

Actual Total Overhead = $ 4,30,600

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Actual production Hours for 9200 units = 9200 *0.49 = 4508 hrs

Per Hour Total OH = $ 4,30,600 / 4508 hrs = $95.52 per Hour

Solution (a):

Budgeted Output = 8000 units

Total Overhead = $ 4,30,600

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Budgeted Hours for 8000 units = 8000 *0.49 = 3920 hrs

Per Hour Total OH = $ 4,30,600 / 3920 hrs = $109.85 per Hour

Total OH Variance = $109.85 – $95.52 = $ 14.33 (U)

Solution (b):

Normal Capacity = 9000 units

Total Overhead = $ 4,30,600

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Normal Hours for 9000 units = 9000 *0.49 = 4410 hrs

Per Hour Total OH = $ 4,30,600 / 4410 hrs = $97.64 per Hour

Total OH Variance = $97.64 – $95.52 = $ 2.12 (U)

Solution (c):

Normal Capacity = 10000 units

Total Overhead = $ 4,30,600

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Practical Hours for 10000 units = 10000 *0.49 = 4900 hrs

Per Hour Total OH = $ 4,30,600 / 4900 hrs = $87.88 per Hour

Total OH Variance = $87.88 – $95.52 = $ 7.64 (F)

Part: 4 Overhead Efficiency Variance:

Variable Overhead Efficiency Variance = Is the difference of the Actual Variable OH incurred and Absorbed (or Budgeted) Variable OH

If the absorbed Variable OH is less than the Actual Variable Overhead then it considered as unfavourable and Vice versa

Actual Variable Overhead = $ 1,42,600

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Actual production Hours for 9200 units = 9200 *0.49 = 4508 hrs

Per Hour Total OH = $ 1,42,600 / 4508 hrs = $31.63 per Hour

Solution (a):

Budgeted Output = 8000 units

Actual Variable OH = $ 142,600

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Budgeted Hours for 8000 units = 8000 *0.49 = 3920 hrs

Per Hour Variable OH = $ 142,600 / 3920 hrs = $36.38 per Hour

Variable Overhead Variance = $36.38 - $31.63 = $4.74 per hour (F)

Solution (b):

Normal Capacity = 9000 units

Actual Variable OH = $ 142,600

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Normal Hours for 9000 units = 9000 *0.49 = 4410 hrs

Per Hour Variable OH = $ 142,600 / 4410 hrs = $32.34 per Hour

Variable Overhead Variance = $36.38 - $32.34 = -$0.70 per hour (U)

Solution (c):

Normal Capacity = 10000 units

Actual Variable OH = $ 142,600

Actual Number of Machine Hours Required per Unit = 0.49 hrs

Practical Hours for 10000 units = 10000 *0.49 = 4900 hrs

Per Hour Variable OH = $ 142,600 / 4900 hrs = $29.10 per Hour

Variable Overhead Variance = $36.38 - $29.10 = -$2.53 per hour (U)