Question

Overhead Variances, Four-Variance Analysis 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 124,000 units requiring 496,000 direct labor hours. (Practical capacity is 516,000 hours.) Annual budgeted overhead costs total $818,400, of which $585,280 is fixed overhead. A total of 119,400 units using 494,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $260,600, and actual fixed overhead costs were $555,050. Required: 1. Compute the fixed overhead spending and volume variances. Fixed Over

Overhead Variances, Four-Variance Analysis

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 124,000 units requiring 496,000 direct labor hours. (Practical capacity is 516,000 hours.) Annual budgeted overhead costs total $818,400, of which $585,280 is fixed overhead. A total of 119,400 units using 494,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $260,600, and actual fixed overhead costs were $555,050.

Required:

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	$

head 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

Solution 1:

Fixed overhead rate = Budgeted fixed overhead / Budgeted direct labor hours = $585,280 / 496000 = $1.18 per hour

Standard hour per unit = 496000 / 124000 = 4 hours per unit

Standard hours for actual production = 119400 * 4 = 477600 hours

Budgeted fixed overhead = $585,280

Actual fixed overhead = $555,050

Fixed overhead applied = SH * Standard rate of fixed overhead = 477600 * $1.18 = $563,568

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

= $585,280 - $555,050 = $30,230 F

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

= $563,568 - $585,280 = $21,712 U

Solution 2:

Standard rate of variable overhead = ($818,400 - $585,280) / 496000 = $0.47 per hour

Acutal rate of variable overhead = $260,600 / 494000 = $0.527530 per hour

Variable overhead spending variance = (SR - AR) * AH = ($0.47 - $0.527530) * 494000 = $28,420 U

Variable overhead efficiency variance = (SH - AH) * SR = (477600 - 494000) * $0.47 = $7,708 U