Question

Case 12-66 (Part Level Submission)

You have started working as a cost accountant for a firm that has only been in business for one month. The firm is able to buy a new type of biodegradable plastic at a fixed price of $100 per roll. The plastic is then cut and sealed to make garbage bags. Fixed factory overhead is estimated to be $125,000 per month. During this past month, 8,000 cartons of garbage bags were produced, which represents 80% of the activity volume. You are given the following information: Rolls of plastic used 40 Variable overhead incurred $61,000 Overhead efficiency variance $5,000 U Standard costs per carton of garbage bags: Labour hours 2 Wage rate $8 per hour Total overhead $20 Rolls of plastic 0.004 rolls

Applied overhead per direct labour hour

$ 10

Standard direct labour hours allowed for units produced

16000

Activity volume	10000		cartons
	20000		direct labour hours

Predetermined fixed overhead rate		12.50	carton
		6.25	per direct labour hour

Fixed overhead

100,000

$

What is the variable overhead spending variance?

Variable overhead spending variance

$

Choose 1 (Not applicable)         (Favorable)    ( Not Favorable)

Answer 1

Answer:

Total Activity Costs   = Units Produced / Activity Volume                                           = 8,000 / 80%                                           = 10,000 (Standard Quantity )

Predetermined Fixed overhead rate          = Estimated Fixed Overhead Costs / Total Activity Costs          =   $ 125,000 / 10,000          = $ 12.50

Total Overhead rate          = Variable Overhead rate + Fixed overhead rate $ 20 =   Variable Overhead rate + $ 12.50 Standard Variable Overhead rate    = $ 20 (-) $ 12.50   = $ 7.50

Variable overhead spending variance         = Actual Quantity x ( Standard Variable Overhead rate   (-) Actual Variable Overhead rate )         = 8,000 x ( $ 7.50 (-) ( $ 61,000 / 8,000 units) )         = 8,000 x ( $ 7.50 (-) $ 7.625 )         =    $ 1,000   ( unfavourable)

Variable overhead spending variance   $ 1,000   ( unfavourable)