Question

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 $813,120, of which $575,960 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 $260,800, and actual fixed overhead costs were $555,950.

Required:

1. Compute the fixed overhead spending and volume variances.

Fixed Overhead Spending Variance	$.	Favorable
Fixed Overhead Volume Variance	$	Unfavorable

2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations

Variable Overhead Spending Variance	$.	Unfavorable
Variable Overhead Efficiency Variance	$	Unfavorable

Answer 1

1.Fixed overhead spending variance = Actual fixed overhead -Budgeted fixed overhead

                                                       = $555950-575960

                                                      = $20010 Favorable

Fixed overhead volume variance= standard cost for actual output - budgeted cost

                                               = (575960/121000)*119500-575960

                                               =$7140 Unfavorable

2. Variable overhead spending variance= Actual variable cost - standard cost for actual output

                                                     = $260800-(0.49*482000)

                                                   = $24620 Unfavorable

**standard variable rate = (813120-575960)/484000= 0.49 per hour

Variable overhead efficiency variance = Actual Hours*Standard rate per hour -standard hours *standard rate per hour

                                                = (482000*0.49)-(478000*0.49)

                                               = 1960 Unfavorable

*484000*119500/121000 = 478000 hours required