In: Accounting
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