Question

Great Fender is a competitor of Superior Fender. Great Fender also uses a standard cost system and provide the following information:

Static budget variable overhead	$4,608
Static budget fixed overhead​	$23,040​
Static budget direct labor hours​	576 hours
Static budget number of units​	24,000 units
Standard direct labor hours​	0.024 hours per fender

Great Fender allocates manufacturing overhead to production based on standard direct labor hours. Great Fender reported the following actual results for 2016: the actual number of fenders produced, 20,000; actual variable overhead, $ 5,900; actual fixed overhead, $ 34,000; actual direct labor hours, 440.

Read the requirements

Requirement 1. Compute the overhead variances for the year: variable overhead cost variance, variable overhead efficiency variance, fixed overhead cost variance, and fixed overhead volume variance.

2.	Explain why the variances are favorable or unfavorable.

Begin with the variable overhead cost and efficiency variances. Select the required formulas, compute the variable overhead cost and efficiency variances, and identify whether each variance is favorable (F) or unfavorable (U). (Abbreviations used: AC = actual cost; AQ = actual quantity; FOH = fixed overhead; SC = standard cost; SQ = standard quantity; VOH = variable overhead.)

Answer 1

Variable Overhead efficiency variance (VOEV)- This is the difference between the actual and standard budeted hours worked.

Variable overhead Cost variance - this is difference between standard variable overhead for actual output and actual variable overheads incurred.the formula is = Actual outputxstandard rate - Actual overheads.

As per the above definition VOEV is std timexstd rate - actual hoursxstd rate.

It can be seen that the acutal hours used are less than the standard hours hence this is favourable to the organization. hence 320 is a favourable variance.

Variable overhead cost variance -

Actual overheads are more than the standard hence the variance is adverse.

Fixed cost overhead variance - it is the difference between actula fixed overheads incurred and absorbed fixed overheads. Absorbed is nothing but the (budgeted output/budgeted hours)*actual output.

Fixed overhead voulume variance - this is the difference between the Budgeted and (actual outputxstd rate)

Fixed overhead cost variance -

As per the budgeted rate the fixed overhead should be 19,200 but acutally incurred is 34,000 hence it is an adverse variance

Fixed overhead volume variance -

Budgeted is 23,040 however actual overhead as per the FOAR is 19,200. hence it is a favourable variance.