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2.Factory overhead variance analysis (Two, Three, Four-way Variance method) Ezekiel company provides the following production data:...

2.Factory overhead variance analysis (Two, Three, Four-way Variance method)

Ezekiel company provides the following production data:
Total standard overhead cost per unit of a product: 4 hours at 3.00 per hour
•Budgeted fixed factory overhead 20,000   
•Normal production 2,500 units
•Actual production 2,000 units   
•Actual hours 7,500 hours
•Actual factory overhead incurred (75% fixed) P26,000

Required: Determine the following:
a. Budget factory overhead
b. Standard factory overhead
c. Budgeted FOH based on actual hours
d. Budgeted FOH based on standard hours
e. Controllable variance
f. Volume variance
g. Spending variance
h. Variable efficiency variance
i. Variable spending variance
j. Fixed spending variance

Solutions

Expert Solution

Ezekiel company provides the following production data:

Total standard overhead cost per unit of a product: 4 hours at 3.00 per hour

•Budgeted fixed factory overhead 20,000   

•Normal production 2,500 units

•Actual production 2,000 units   

•Actual hours 7,500 hours

•Actual factory overhead incurred (75% fixed) P26,000

Determine the following:

a. Budget factory overhead

The factory overhead budget shows all the budgeted manufacturing costs which are needed to produce the budgeted production level of a period, other than direct costs which are direct material and direct labor.

Budget factory overhead = Budgeted fixed factory overhead + Budgeted variable overhead

Or

Budget factory overhead = standard overhead cost per unit of a product * Normal production

Here we can use this formula

Where,

standard overhead cost per unit of a product  = 4 hours at 3.00 per hour = 4 * 3 = 12 per units

Normal production = 2500 units

Budget factory overhead = 12 * 2500 = $30000

b. Standard factory overhead : It is calculated by multiplying standard cost per units with actual production

Standard factory overhead  = standard overhead cost per unit of a product * Actual production

standard overhead cost per unit of a product = 12 per units

Actual production = 2000 units

Standard factory overhead  = 12 * 2000 = $24000

c. Budgeted FOH based on actual hours

Budgeted FOH based on actual hours = Standard rate per hour * actual hours

Standard rate per hour = 3 per hour

actual hours = 7500 hours

Budgeted FOH based on actual hours = 3 * 7500 = $22500

d. Budgeted FOH based on standard hours

Budgeted FOH based on standard hours = Standard rate per hour * standard hours

standard hours = standard hours per units * actual units

standard hours = 4 * 2000 = 8000

Budgeted FOH based on standard hours = 3 * 8000 = 24000

e. Controllable variance

The controllable variance is equal to the sum of the variances, which are the

variable overhead spending variance, the variable overhead efficiency variance, and the fixed over

head spending variance. So The controllable variance is the total overhead flexible budget variance

Formula

Total actual overhead incurred

– Budgeted fixed overhead

– Flexible budget variable overhead (or variable overhead applied to production)

= Controllable variance

Positive = Unfavorable

Negative = favorable

Where,

Total actual overhead incurred

P26000

– Budgeted fixed factory overhead

20000

Flexible budget variable overhead

8000

= Controllable variance

-2000

Flexible budget variable overhead = variable overhead applied to production

Flexible budget variable overhead = std variable over head rate * actual production

std variable over head rate = budgeted variable overhead / normal production

budgeted variable overhead = Budgeted factory overhead - fixed budget overhead

Budgeted factory overhead = standard cost per unit * normal production

Budgeted factory overhead = 12 * 2500 = 30000

fixed budget overhead = 20000

budgeted variable overhead = 30000 - 20000 = 10000

std variable over head rate = 10000 / 2500 = 4 per units

Flexible budget variable overhead = 4 * 2000 = $8000

Here the variance is negative, so favorable

f. Volume variance

The fixed overhead production-volume variance is the difference between the budgeted amount of fixed overhead and the amount of fixed overhead applied.

Budgeted fixed overheads

– Standard fixed overhead applied (standard rate per units × actual production)

= Fixed overhead production-volume variance

• A negative amount (applied fixed overhead is greater than budgeted fixed overhead) is Favor

able because it indicates that actual production has exceeded the budgeted production level.

• A positive amount (budgeted fixed overhead is greater than applied fixed overhead) is Unfavorable because it indicates that actual production has been lower than the budgeted production

level

standard rate per units = 20000 / 25000 = 8 per units

Standard fixed overhead applied = 8 * 2000 = 16000

Budgeted fixed overheads

20000

– Standard fixed overhead applied

16000

= Fixed overhead production-volume variance

4000

* here positive, so Unfavorable

g. Spending variance

The spending variance is equal to the variable overhead spending variance plus the fixed over

head spending variance.

Calculation

Actual total factory overhead incurred

-Budgeted fixed factory overhead

-Budgeted variable factory overhead based on actual usage of the allocation base

=Spending variance

Budgeted variable factory overhead based on actual usage of the allocation base = std rate * actual direct labor hour

Budgeted variable factory overhead based on actual usage of the allocation base = 1.25 * 7500 = 9375

Actual total factory overhead incurred

26000

-Budgeted fixed factory overhead

20000

-Budgeted variable factory overhead based on actual usage of the allocation base

9375

=Spending variance

-3375

Negative, so Favorable

h. Variable efficiency variance

Budgeted variable overhead based on inputs actually used (AQ x SP)

− Standard variable overhead allowed for production/applied to production (SQ x SP)

= Variable overhead efficiency variance

Budgeted variable overhead based on inputs actually used (AQ x SP)

7500 * 1.25 = 9375

− Standard variable overhead allowed for production/applied to production (SQ x SP)

8000 * 1.25 = 10000

= Variable overhead efficiency variance

625 Favorable

i. Variable spending variance

Actual total variable overhead incurred (AP x AQ)

– Budgeted variable overhead based on inputs actually used (SP x AQ)

= Variable overhead spending variance

Actual total variable overhead incurred

26000 * 25% = 6500

– Budgeted variable overhead based on inputs actually used (SP x AQ)

1.25 * 7500 = 9375

= Variable overhead spending variance

2875 favorable

j. Fixed spending variance

The fixed overhead spending variance is the difference between the actual fixed overhead costs incurred and the budgeted fixed overhead.

Actual fixed overhead incurred

– Budgeted fixed overheads

= Fixed overhead spending

Actual fixed overhead incurred 26000 * 75%

19500

– Budgeted fixed overheads

20000

= Fixed overhead spending

500

Negative , so favorable


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