Question

Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 125,000 units requiring 500,000 direct labor hours. (Practical capacity is 520,000 hours.) Annual budgeted overhead costs total $815,000, of which $580,000 is fixed overhead. A total of 119,200 units using 498,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $261,300, and actual fixed overhead costs were $556,150.

1. Compute the fixed overhead spending and volume variances.

Fixed Overhead Spending Variance	$
Fixed Overhead Volume Variance	$

2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations

Variable Overhead Spending Variance	$
Variable Overhead Efficiency Variance	$

Answer 1

1)The Computation of the fixed overhead spending and volume variances is shown below:

a)Fixed overhead spending variance = Actual fixed overhead -Budgeted fixed overhead

   = $556,150 - $580,000

  = -$23,850F

b)Fixed overhead volume variance= standard cost for actual output - budgeted cost

    = (4.64*119,200 units) - $580,000

   = $553,088 - $580,000

     =-$26,912 U

standard fixed cost = $580,000/125,000 units

= 4.64

2) The Computation of the variable overhead spending and efficiency variances is shown below:

a)Variable overhead spending variance= Actual variable cost - standard cost for actual output

    = $261,300 - (0.47*498,000 hours)

= $261,300 - $234,060

= $27,240 U

standard variable rate = ($815,000 - $580,000)/500,000hours

=0.47 per hour

b)variable overhead efficiency variance = Actual Hours*Standard rate per hour -standard hours *standard rate per hour

= (498,000 hours*0.47) -(476,800 hours* 0.47)

= $234,060 - $224,096

= $9,964 U

standard rate per hour =Budgeted variable overhead /Standard hours

= ($815,000 - $580,000)/500,000 hours

= 0.47 per hour

Standard hours for actual output= 500,000 hours*119,200 units/125,000 units

= 476,800 hours required