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

Reasons reasons for variable overhead spending and efficiency variances

Possible causes of unfavorable variable overhead spending variance are

• A higher mix of skilled indirect labor workers caused hourly rates to be higher than anticipated;
• Utility costs to run the machines were higher than anticipated due to a nationwide increase in energy costs;
• A shortage in available indirect materials caused costs to increase unexpectedly.

Possible causes of unfavorable variable overhead efficiency variance are

• A higher mix of unskilled workers than anticipated caused inefficiencies;
• Cutbacks in training reduced the expected efficiency of direct labor workers;
• Old equipment breaking down caused workers to waste time waiting for repairs.