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 127,000 units requiring 508,000 direct labor hours. (Practical capacity is 528,000 hours.) Annual budgeted overhead costs total $833,120, of which $604,520 is fixed overhead. A total of 119,400 units using 506,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $260,300, and actual fixed overhead costs were $556,050.

Required:

1. Compute the fixed overhead spending and volume variances. determine if favorable or unfavorable

Fixed Overhead Spending Variance	$
Fixed Overhead Volume Variance	$

2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations. determine if favorable or unfavorable

Variable Overhead Spending Variance	$
Variable Overhead Efficiency Variance	$

Answer 1

1. Fixed overhead spending variance = Actual fixed overhead -Budgeted fixed overhead
= $556,050 - 604,520 = $48,470 Favorable

Fixed overhead volume variance= standard cost for actual output - budgeted cost
= (4.76*119400) - 604,520 =$36,176 Unfavorable

**standard fixed cost = 604,520 / 127000 = $4.76

2. Variable overhead spending variance= Actual variable cost - standard cost for actual output
= $260300 - (0.45*506000) = $32,600 Unfavorable

**standard variable rate = (833120- 604520) / 508000 = $0.45 per hour

Variable overhead efficiency variance = Actual Hours*Standard rate per hour -standard hours *standard rate per hour
= (506000*0.45) -(477600*0.45) = $12,780 Unfavorable

**standard rate per hour =Budgeted variable overhead /Standard hours
= (833120 - 604520) / 508000 = $0.45 per hour

**Standard hours for actual output-If 508000 hours are required to produce to make 127000 units then to make 119400 units , 508000*119400/127000 = 477600 hours required