Question

Jake’s cheese Company produces gourmet cheese for resale at local grocery stores. Jake’s expected to use 0.50 direct labor hours to produce one unit (batch) of product, and the variable overhead rate is $5.00 per hour. Actual results are in for last year, which indicates 45,000 batches of cheese were produced and sold. The company's direct labor workforce worked 27,500 hours, and variable overhead costs totaled $144,000. Required: (1) Calculate the variable overhead spending variance. (2) Calculate the variable overhead efficiency variance. (3) Suggest several possible reasons for the variable overhead spending and efficiency variances.

Answer 1

(1).

Variable overhead spending variance = $6600 Unfavourable

Explanation;

Formula of variable overhead spending variance is as follow;

Actual hours worked (Standard overhead rate – Actual overhead rate)

Actual hours worked is given = 27500

Standard overhead rate = $5.00

Actual overhead rate ($144000 / 27500) = $5.24

Now let’s put values in above given formula;

Variable overhead spending variance = 27500 ($5 – $5.24) = $6600 Unfavourable

(2).

Variable overhead efficiency variance = $25000 Unfavourable

Explanation;

Formula of variable overhead efficiency variance is as follow;

Standard overhead rate (Standard hours – Actual hours)

Actual hours worked is given = 27500

Standard hours (45000 * 0.50) = 22500

Standard overhead rate = $5.00

Now let’s put values in above given formula;

Variable overhead efficiency variance = $5 (22500 – 27500) = $25000 Unfavourable

(3).

Variable overhead spending variance is unfavourable due to higher actual per unit overhead cost, As we have seen that standard per unit overhead cost is $5 whereas actual overhead cost per unit is $5.24 that is why spending variance is unfavourable. Actual rate may be higher due to higher expectations of the workers or due to high inflation rate or due to rise in living standards of the workers etc.

Variable overhead efficiency variance is unfavourable due to higher actual hours worked, As we have seen that standard hours is 22500 whereas actual hours worked is 27500 that is why variable overhead efficiency variance is unfavourable. Actual hours worked may be higher due to low productivity of the workers or due to inefficient production process.