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 125,000 units requiring 500,000 direct labor hours. (Practical capacity is 520,000 hours.) Annual budgeted overhead costs total $830,000, of which $585,000 is fixed overhead. A total of 119,300 units using 498,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $260,000, and actual fixed overhead costs were $555,050.

Required:

1. Compute the fixed overhead spending and volume variances.

Fixed Overhead Spending Variance	$	Favorable
Fixed Overhead Volume Variance	$	Unfavorable

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

Variable Overhead Spending Variance	$	Unfavorable
Variable Overhead Efficiency Variance	$	Unfavorable

Answer 1

Ans:

1a)Fixed overhead spending variance = Actual fixed overhead -Budgeted fixed overhead

                                                       = $555,050 -$585,000

                                                      = $ - 29,950 (F)

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

                                               = (4.68*119300)- $585,000

                                                = 558324-585000

                                               =$ -26676 (U)

**standard fixed cost =$585,000/125000 = 4.68

2a)Variable overhead spending variance= Actual variable cost - standard cost for actual output

                                                     = 260,000 - (.49*498000)

                                                  = 260000 -244020

                                                   = $ 15,980(F)

**standard variable rate = (830,000-585,000)/500000=.49 per hour

b)variable overhead efficiency variance = Actual Hours*Standard rate per hour -standard hours *standard rate per hour

                                                = (498000*.49) -(477200*.49)

                                                = 244020-233828

                                               = 10192 (U)

**standard rate per hour =Budgeted variable overhead /Standard hours

                                     = (830,000-585,000)/500000

                                   

                               = .49 per hour

**Standard hours for actual output-If 500000 hours are required to produce to make 125000 units then to make 119400 units , 500000*119300/125000 = 477200 hours required