Question

Sharp Company manufacturers jeans. In June, Sharp made 1200 pairs of jeans, but had budgeted production at 1400 pairs of jeans. The allocation base for overhead costs is direct labor hours. The following additional data is available for the month:

Variable overhead cost standard $0.60 per DLHr

Direct labor efficiency standard 2.00 DLHr per jean

Actual amount of direct labor hours 2520 DLHr

Actual cost of variable overhead $1512

Fixed overhead cost standard $0.25 per DLHr

Budgeted fixed overhead $700

Actual cost of fixed overhead $750

Calculate:

Variable overhead cost variance

Variable overhead efficiency variance

Total variable overhead variance

Fixed overhead cost variance

Fixed overhead volume variance

Total fixed overhead variance

Answer 1

• Standard Data for Variable Overheads:

Standard variable overhead hours = 2 DLH per jeans x 1200 pair of jeans = 2,400 direct labor hour = Standard hours

Standard variable overhead rate = $ 0.60 per DLH

Total Variable overhead Standard Cost = 2,400 DLH x $ 0.60 per DLH = $ 1,440

                Hence,

                Standard Labor Hour (SH) = 2400

Standard Labor Rate (SR) = $ 0.6

Standard Cost = $ 1,440

• Actual data for Variable Overheads:

Actual cost = $ 1,512

Actual labor hour (AH) = 2,520 hours

Actual Labor cost Rate (AR) = $ 1512 / 2520 hours = $ 0.60 per DLH

• Answer 1: Variable Overhead cost variance = (SR – AR) x AH = ( $ 0.60 - $ 0.60) x 2520 DLH = $ 0

Variance = ZERO

• Answer 2: Variable Overhead efficiency Variance = (SH – AH) x SR = (2,400 DLH – 2,520 DLH) x $ 0.60 = $ (72)

Variance = $ 72 Unfavourable

• Answer 3: Total variable Overhead Variance = Answer 1 + 2 = 0 + (-72) = -72

Variance = $ 72 Unfavourable

• Budgeted Fixed Overhead = 1,400 pairs x 2 DLH per jeans x $ 0.25 per DLH = $ 700
• Standard Fixed Overhead = 1,200 pairs x 2 DLH per jeans x $ 0.25 per DLH = $ 600
• Actual Fixed Overhead = $ 750
• Answer 4: Fixed Overhead cost Variance = Standard Fixed Overhead – Actual Fixed Overhead = $ 600 - $ 750 = $ (150)

Variance = $ 150 Unfavourable

• Answer 5: Fixed Overhead Volume Variance = Budgeted Fixed Overhead – Standard Fixed Overhead = $ 700 - $ 600 = $ 100

Variance = $ 100 Favourable

• Answer 6: Total Fixed Overhead Variance = Answer 4 + 5 = $ (150) + $ 100 = $ (50)

Variance = $ 50 Unfavourable.