Question
In: Accounting
Overhead Variances, Four-Variance Analysis Oerstman, Inc., uses a standard costing system and develops its overhead rates...
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 126,000 units requiring 504,000 direct labor hours. (Practical capacity is 524,000 hours.) Annual budgeted overhead costs total $821,520, of which $594,720 is fixed overhead. A total of 119,300 units using 502,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $260,300, and actual fixed overhead costs were $555,850.
Required:
1. Compute the fixed overhead spending and volume variances.
| Fixed Overhead Spending Variance | $ | Favorable |
| Fixed Overhead Volume Variance | $ | Unfavorable |
2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations
| Variable Overhead Spending Variance | $ | Unfavorable |
| Variable Overhead Efficiency Variance | $ | Unfavorable |
Solutions
Expert Solution
Solution 1:
(a)
Fixed Overhead spending variance = Budgeted fixed Overhead - Actual fixed Overhead
= $594720 - $555850
= $38,870 (Favourable)
(b)
Predetermined fixed overhead rate = $594720 / 504000 = $1.18 per hour
Standard Hours = 119300 * (504000/126000) = 119300*4 = 477,200
Fixed overhead applied = Standard hours * predetermined fixed overhead rate = 477200*$1.18 = $563,096
Fixed overhead Volume Variance = Fixed overhead applied - Budgeted Fixed Overhead = $563,096 - $594720
= -$31,624 (Unfavourable)
Solution 2:
(a)
Standard Rate of variable Overhead =Budgeted variable overheads /budgeted labor hours
= (821520- 594720)/ 504000
= 226800 / 504000
= $0.45 per hour
Actual rate of variable overhead = Actual variable overhead/ Actual labor hours
= 26300/119500
= $0.51852589 per hour
Variable overhead spending variance = (SR - AR) * Actual Hours
=(0.45 - 0.51852589)* 502000
= -$34,400 (Unfavourable)
(b)
Standard hours for Actual Production = 119300 * (504000/126000) = 119300*4 = 477,200
Variable overhead efficiency variance = (Standard hours - Actual hours)*SR
= (477200 - 502000) *$0.45
= -$11,160 (Unfavourable)
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