Question

Overhead Variances, Two- And Three-Variance Analyses 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 123,000 units requiring 492,000 direct labor hours. (Practical capacity is 512,000 hours.) Annual budgeted overhead costs total $752,760, of which $555,960 is fixed overhead. A total of 119,000 units using 490,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $241,800, and actual fixed overhead costs were $555,450.

Required:

1. Compute overhead variances using a two-variance analysis.

Budget Variance	$
Volume Variance	$

2. Compute overhead variances using a three-variance analysis.

Spending Variance	$
Efficiency Variance	$
Volume Variance	$

Answer 1

Solution 1:

Standard rate of variable overhead = ($752,760 - $555,960) / 492000 = $0.40 per direct labor hour

Standard hour per unit = 492,000 / 123000 = 4 hours per unit

Standard rate of fixed overhead = $555,960 / 492000 = $1.13 per direct labor hour

Budgeted overhead for actual production = (119000*4*$0.40) + $555,960 = $746,360

Actual overhead incurred = $241,800 + $555,450 = $797,250

Budget variance = Budgeted overhead - actual overhead = $746,360 - $797,250 = $50,890 U

Fixed overhead applied = 119000*4*$1.13 = $537,880

Budgeted fixed overhead = $555,960

Volume variance = Fixed overhead applied - Budgted fixed overhead = $537,880 - $555,960 = $18,080 U

Solution 2:

Actual rate of variable overhead = $241,800 / 490000 = $0.49346938 per hour

Spending variance = Variable overhead rate variance + Fixed overhead budget variance

Variable overhead rate variance = (SR - AR)*AH = ($0.40 - $0.49346938) * 490000 = $45,800 U

Fixed overhead budget variance = Budgeted fixed overhead - Actual fixed overhead

= $555,960 - $555,450 = $510 F

Spending variance = $45,800 U + $510 F = $45,290 U

Efficiency variance = (SH - AH) * SR of variable overhead = (476,000 - 490000) * $0.40 = $5,600 U

Volume variance = Fixed overhead applied - Budgted fixed overhead = $537,880 - $555,960 = $18,080 U