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 121,000 units requiring 484,000 direct labor hours. (Practical capacity is 504,000 hours.) Annual budgeted overhead costs total $735,680, of which $537,240 is fixed overhead. A total of 119,500 units using 482,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $240,600, and actual fixed overhead costs were $555,150.

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

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

Answer 1

(1) Using Two Variance Analysis :-

Budget Variance :-

Variable O/H Variance + Fixed O/h Spending variance

Variable O/H Variance = Absorbed – Actual

   = [(198440/121000 units) * 119500 units] – 240600 = 44620 (U)

Fixed O/H Spending Variance = Budgeted – Actual

537240-555150 = 17910 (U)

Budget Variance = 44620(U) + 17910(U) = 62530 (U)

Volume Variance:-

Absorbed – Budgeted

[(537240/121000 units) * 119500 units] – 537240 = 6660 (U)

(2) Using Three Variance Analysis :-

Spending Variance :-

Variable spending variance + Fixed O/h Spending Variance

SR for Variable O/h = ($198440/484000 hrs) = 0.41

AR = $240600/482000 hrs = 0.499

V. O/h Spending Variance = (SR – AR) * A Hrs

(0.41 – 0.499) * 482000 = 42900 (U)

Fixed O/H Spending Variance = Budgeted – Actual

537240-555150 = 17910 (U)

Total Spending Variance = 42900(U) + 17910(U) = 60810 (U)

Efficiency Variance:-

(S hrs – A Hrs) * SR

S Hrs = 484000 / 121000 units * 119500 units = 478000 hrs

(478000 – 482000) * 0.41 = 1640 (U)

Volume Variance:-

Absorbed – Budgeted

[(537240/121000 units) * 119500 units] – 537240 = 6660 (U)