Question

Overhead Variances, Two- And Three-Variance Analyses

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 123,500 units requiring 494,000 direct labor hours. (Practical capacity is 514,000 hours.) Annual budgeted overhead costs total $780,520, of which $558,220 is fixed overhead. A total of 119,100 units using 492,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $242,000, and actual fixed overhead costs were $556,350.

Required:

1. Compute overhead variances using a two-variance analysis.

Budget Variance	$	Unfavorable
Volume Variance	$	Unfavorable

2. Compute overhead variances using a three-variance analysis.

Spending Variance	$	Unfavorable
Efficiency Variance	$	Unfavorable
Volume Variance	$	Unfavorable

Answer 1

1)

Budget Variance	$1870 U
Volume Variance	$19888 F

Overhead Budget Variance = Actual Fixed Overhead - Budgeted Fixed overhead

= $556350 - $558220

= $1870 U

Overhead Volume Variance = Absorbed Fixed Overhead - Budgeted Fixed Overhead

= (($558220/123500)*119100) - $558220

= $538332 - $558220

= $19888 U

2)

Spending Variance	$20600 U
Efficiency Variance	$7020 U
Volume Variance	$27620

Spending Variance = Standard Variable Overhead - Actual Variable Overhead

= ((($780520 - $558220)/494000)*492000) - $242000

= ($0.45*492000) - $242000

= $221400 - $242000

= $20600 U

Efficiency Variance = (Actual Hours - Standard Hours)*Standard Rate

= (492000 - 476400) * $0.45

= 15600 * $0.45

= 7020 U

Standard Hours = (494000/123500)*119100 = 476400 h

Standard Rate per hour = ($780520 - $558220)/494000

= $222300 / 494000

= $0.45

Volume Variance = Spending Variance + Efficiency Variance

= $20600 U + $7020 U

= $27620 U