Question

Use the following information of Alfred Industries. Standard manufacturing overhead based on normal monthly volume: Fixed ($304,500 ÷ 20,000 units) $ 15.23 Variable ($100,000 ÷ 20,000 units) 5.00 $ 20.23 Units actually produced in current month 18,000 units Actual overhead costs incurred (including $300,000 fixed) $ 383,800 Compute the overhead spending variance and the volume variance. (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance).) Loading...

Use the following information of Alfred Industries.

Standard manufacturing overhead based on normal monthly volume:
Fixed ($304,500 ÷ 20,000 units)	$	15.23
Variable ($100,000 ÷ 20,000 units)		5.00		$	20.23
Units actually produced in current month					18,000	units
Actual overhead costs incurred (including $300,000 fixed)				$	383,800

Compute the overhead spending variance and the volume variance. (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance).)

Answer 1

Overhead Spending Variance

Overhead spending variance is the difference between actual overhead expenses incurred and the budgeted overheads on actual production.

Overhead spending variance= actual overhead- budgeted overhead on actual production

Computation of overhead spending variance

		$
Actual overheads(A)		383000
(-) Budgeted overhead on actual production:
Fixed overhead (note 1)	304500
Variable overhead (5*18000)	90000
Total budgeted overhead on actual production(B)	394500	394500
Overhead spending variance(A-B)		11500(favourable)

Notes:

1. Total Fixed overheads do not vary with the number of units produced. Therefore, the total fixed overhead will remain the same as budgeted even if the production reduces to 18000 units.
2. The budgeted overhead on actual production is greater than the actual overheads. This means that Alfred industries has made savings in overhead spending and hence the variance is favourable.

Volume variance

Volume variance is what arises when there is difference between the fixed overheads absorbed and the budgeted fixed overhead.

Volume variance is only there for fixed overheads because its per unit value varies with production. But the variable overhead per unit does not vary with production. It remains the same and hence will not have any volume variance. The variance in per unit variable overhead can arise because of changes in efficiency of utilising variable overheads. This variance is called variable overhead efficiency variance.

Fixed overhead volume variance= budgeted fixed overhead - applied fixed overhead

Budgeted fixed overhead= $304500

Fixed overhead rate of application rate is the same as predetermined fixed overhead rate and the formula is as follows:

Fixed overhead application rate= budgeted fixed overhead/budgeted units

= 304500/20000= $15.23 per unit

Actual units produced= 18000 units

Applied fixed overhead= fixed overhead application rate* actual units

= 15.23*18000=$274140

Fixed overhead volume variance= budgeted fixed overhead- applied fixed overhead

= 304500-274140= 30360(unfavorable)

When the overhead applied is less than the budgeted overhead, it means that the business has underutilized its capacity and the variance will be unfavorable.