Question

Overhead Variances, Four-Variance Analysis

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 120,000 units requiring 480,000 direct labor hours. (Practical capacity is 500,000 hours.) Annual budgeted overhead costs total $787,200, of which $561,600 is fixed overhead. A total of 119,100 units using 478,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $260,100, and actual fixed overhead costs were $555,750.

Required:

1. Compute the fixed overhead spending and volume variances.

Fixed Overhead Spending Variance	$
Fixed Overhead Volume Variance	$

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

Variable Overhead Spending Variance	$
Variable Overhead Efficiency Variance	$

Answer 1

Solution:

Standard costing system: In accounts, Standard costing system tell us about planning budgets, managing and controlling cost of product. It realize us estimating the required costs of a production process.

1.)

Fixed overhead rate = Budgeted fixed overhead / Budgeted direct labor hours

= $561,600 /480,000

= $1.17

Standard hour per unit (480,000 / 120,000)	4 hours per unit
Standard hours for actual production (119,100 × 4)	476,400
Budgeted fixed overhead	$561,600
Actual fixed overhead	$555,750
Fixed overhead applied (SH × Standard rate of fixed overhead)	$557,388 (476,400 × $1.17)
Fixed overhead spending variance (Budgeted fixed overhead - Actual fixed overhead)	$5,850 F ($561,600 - $555,750)
Fixed overhead volume variance (Fixed overhead applied - Budgeted fixed overhead)	$4,212 U ($557,388 -$561,600)

2.)

Standard hour per unit (480,000/ 120,000)	4hours per unit
Annual budgeted overhead costs	$787,200
Annual budgeted fixed overhead	-$561,600
Annual budgeted variable overhead	$225,600
Variable overhead per hour ($225,600 / 480,000)	$0.47

Variable overhead variance:

Variable overhead variance	Finished units	Input per unit	Input required	Rate per unit	Amount
Standard hours allowed for actual output at standard rate	119,100	4.00	476,400	$0.47	$223,908
Actual hours of input, at standard rate			478,000	0.47	$224,660
Actual hours of input, at actual rate					$260,100

Variable overhead efficiency variance ($224,660 - 223,908)	$752 U
Variable overhead spending variance ($260100 - $224660)	$35,440 U
Total variable overhead variance ($260,100 - 223,908)	$36,192 U