Question

Q. A company uses direct labor hours(DLH) as the measure of activity. Data from flexible budget is as follows:

Denominator of Activity- 7,400 DLH

Overhead costs of denominator level of Activity:

Variable overhead costs- $56,980. Fixed overhead costs- $95,090.

The following data relate to operations in the last period:

Actual Hours- 7,800 DLH. Standard hours allowed for the actual output- 7,700 DLH. Actual total variable overhead costs- $58,890. Actual Fixed Overhead Costss- $95,990

Assuming the standard variable overhead rate is $7.70 per DLH, what is the variable overhead spending variance for the last period? Also tell if favourable or unfavorable?

Answer 1

Actual Variable overhead costs	58,890
Actual labor hour	7,800
Actual variable overhead rate	=58890/7800
	7.55
Variable overhead spending variance=	Actual hours * (Standar rate - Actual rate)
Variable overhead pricing variance=	7800 * (7.70- 7.55)
Variable overhead pricing variance=	1,170	Favorable
Variable overhead effectiveness variance=	Standard overhead recovery rate * (Standard hour - Actual hour)	Favorable
	7.70 * (7700 - 7800)
Variable overhead effectiveness variance=	(770)	Unfavorable
Variable overhead spending variance=	Pricing variance + effectiveness variance
Variable overhead spending variance=	=1170-770
Variable overhead spending variance=	400	favorable

Spending variance is 1170 favorable