Question

The following information relates to Tallman comma Inc.?'s overhead costs for the? month: Static budget variable overhead - $8,000 Static budget fixed overhead - $3,000 Static budget direct labor hours - 1,000 hours Static budget number of units - 5,000 units Tallman allocates manufacturing overhead to production based on standard direct labor hours. Last? month, Tallman reported the following actual? results: actual variable? overhead, $ 10600?; actual fixed? overhead, $ 2780?; actual production of 7400 units at 0.25 direct labor hours per unit. The standard direct labor time is 0.2 direct labor hours per unit ?(1000 static direct labor hours? / 5000 static? units). Requirements 1. Compute the overhead variances for the? month: variable overhead cost? variance, variable overhead efficiency? variance, fixed overhead cost? variance, and fixed overhead volume variance. 2. Explain why the variances are favorable or unfavorable.

Answer 1

(1) Variable Overhead Cost Variance = Budgeted Variable Overhead - Actual Variable Overhead = 8000 - 10600 = -2600 USD (i.e. unfavourable variance)

Variable Overhead Efficiency Variance = (Budgeted Labour Hours - Actual Labour Hours) * Hourly rate for standard variable overhead

= (7400 * 0.20 - 7400 * 0.25) * 8000/1000 = -2960 USD (i.e. unfavourable variance)

Fixed overhead cost variance = Budgeted Fixed Overhead - Actual Fixed Overhead = 3000 - 2780 = 220 USD (favourable variance)

Fixed overhead volume variance = (Budgeted units - Actual units) * Budgeted Fixed Overheads / Budgeted Units

= (5000 - 7400) * 3000 / 5000

= -1440 USD (favourable variance)

2. Variable Overhead Cost Variance is unfavourable as actual variable overheads are higher than budgeted

Variable Overhead Efficiency Variance is unfavourable as to produce 7400 units, the budgeted hours were less than the actual hours taken

Fixed overhead cost variance is favourable as the actual fixed overheads are lower than the budgeted number

Fixed overhead volume variance is also favourable as lower fixed costs were used to produce a greater number of units than had been anticipated/budgeted