Question

Nina Garcia is the newly appointed president of Laser Products. She is examining the May 2017 results for the Aerospace Products Division. This division manufactures solar arrays for satellites. Garcia’s current concern is with manufacturing overhead costs at the Aerospace Products Division. Both variable and fixed overhead costs are allocated to the solar arrays on the basis of laser-cutting-hours. The following budget information is available:

Budgeted variable overhead rate $200 per hour

Budgeted fixed overhead rate $240 per hour

Budgeted laser-cutting time per solar array 1.5 hours

Budgeted production and sales for May 2017 5,000 solar arrays

Budgeted fixed overhead costs for May 2017 $1,800,000

Actual results for May 2017 are as follows:

Solar arrays produced and sold 4,800 units

Laser-cutting-hours used 8,400 hours

Variable overhead costs $1,478,400

Fixed overhead costs $1,832,200

Required

1. Compute the spending variance and the efficiency variance for variable overhead.

2. Compute the spending variance and the production-volume variance for fixed overhead.

3. Give two explanations for each of the variances calculated in requirements 1 and 2.

Answer 1

1 .Variable overhaed spending  variance formula = standard variable overhead rate - actual variable overhead rate * actual laser cutting hours

= 200-176*8400hrs

= 201600

working note - actual variable overhead rate is calculated by actual variable cost divided by actual laser cuttng hours which means 1478400/8400 = 176 per hour

2 variable overhead efficiency variance - standard hours * standard overhead rate - actual hours * standard varaiable overhead rate

= 7500*200-8400*200

= 1500000-1680000

= (180,000) unfavourable

working note - here standard hours are calculated by bugeted lesser cutting hours per solar array * budgeted solar array produced which means 1.5 per hour * 5000 = 7500

3 fixed overead spending variance - actual fixed overhead - bugeted fixed overhead

= 1832200-1800000

= 32,200 favourable

4 fixed overhead volume variance - = applied fixed overhead - budgeted fixed overhead

= 360*4800-1800,000

= 1728000-1800,000

= (72000) unfavourable

Explanation - Variable overhead spending variance is which is the difference between the actual overhead expenses and bugeted varaible  overhead expenses which are applied on machinehours and labour hours as in this problem it is applied on solar array on the basis of laser cutting hours. It is favourable when bugeted varable expenses are are more than actual varable overhead.

Varaible overhead efficiency variance - Variable overhead efficiency variance is te amount of labour hours which are less than the bugeted hours required to maintain the efficency of the manufacturing plant.

Fixed overhead spenng variance - It is the difference between bugeted fixed overhead and actual fixed overhead. If it is favourable it means bugeted antiptations are correct with the actuals.

Fixed overhead volume variance - This varaince is related with the fixed overhead applied on good units with compare to the actual fixed overhead. this evaluates that fixed overheads are applied efficiently or not.

Please upvote?? If you find this helpful.In case of any query/concern then please feel free to write it in the comments section.