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 123,000 units requiring 492,000 direct labor hours. (Practical capacity is 512,000 hours.) Annual budgeted overhead costs total $816,720, of which $585,480 is fixed overhead. A total of 119,500 units using 490,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $261,100, 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	$

Answer 1

Solution 1:

Budgted fixed overhead = $585,480

Fixed overhead rate = $585,480 / 492000 = $1.19 per hour

Standard hours per unit = 492000/123000 = 4 hours per unit

Actual fixed overhead incurred = $555,050

Fixed overhead applied = SH * SR = (119500*4 * $1.19) = $568,820

Fixed overhead spending variance = Budgeted fixed overhead - Actual fixed overhead = $585,480 - $555,050 = $30,430 F

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

= $568,820 - $585,480 = $16,660 U

Solution 2:

Stanrad rate of variable overhead = ($816,720 - $585,480) / 492000 = $0.47 per hour

Actual rate of variable overhead = $261,100 / 490000 = $0.532857 per hour

Standard hours for actual production = 119500*4 = 478000 hours

Actual hours = 490000 hours

Variable overhead spending variance = (SR - AR) * AH = ( $0.47 - $0.532857) * 490000 = $30,800 U

Variable overhead efficiency variance = (SH - AH) * SR = (478000 - 490000) * $0.47 = $5,640 U