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 130,000 units requiring 520,000 direct labor hours. (Practical capacity is 540,000 hours.) Annual budgeted overhead costs total $837,200, of which $603,200 is fixed overhead. A total of 119,400 units using 518,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $261,200, and actual fixed overhead costs were $555,550.

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:

Answer 1:

Fixed overhead spending variance:

= Actual fixed overhead - Budgeted fixed overhead

= $555,550 - $603,200

= $ -47,650 (F)

Fixed overhead volume variance:

standard fixed cost = $603,200 / 130,000

= $4.64

Fixed overhead volume variance = standard cost for actual output - budgeted cost

= ($4.64*119,400) - $603,200

= $554,016 - $603,200

= $-49,184 (U)

  

Answer 2 :

Variable overhead spending variance:

standard variable rate = ($837,200 - $603,200) / 520,000

= $0.45 per hour

Variable overhead spending variance = Actual variable cost - standard cost for actual output

= $261,200 - ($0.45 * 518,000)

= $261,200 - $233,100

= $28,100 (U)

Variable overhead efficiency variance:

Standard rate per hour = Budgeted variable overhead / Standard hours

= ( $837,200 - $603,200) / 520,000

= $234,000 / 520,000

= $0.45 per hour

*Standard hours for actual output-If 520,000 hours are required to produce to make 130,000 units then to make 119,400 units , 520,000 * 119,400 / 130,000

= 477,600 hours required

Variable overhead efficiency variance = Actual Hours*Standard rate per hour -standard hours standard rate per hour

= (518,000* 0.45) - (47,7600 * 0.45)

= 233,100 - 214,920

= 18,180(U)

1. Compute the fixed overhead spending and volume variances.

Fixed Overhead Spending Variance	$ -47,650 (F)
Fixed Overhead Volume Variance	$-49,184 (U)

.

2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations

Variable Overhead Spending Variance	$28,100 (U)
Variable Overhead Efficiency Variance	18,180(U)