Question

E9-11 Calculating Variable Manufacturing Overhead Variances [LO 9-5]

Lamp Light Limited (LLL) manufactures lampshades. It applies variable overhead on the basis of direct labor hours. Information from LLL’s standard cost card follows:

	Standard Quantity	Standard Rate	Standard Unit Cost
Variable manufacturing overhead	0.6	$0.80	$0.48

During August, LLL had the following actual results:

Units produced and sold		25,100
Actual variable overhead	$	9,500
Actual direct labor hours		16,100

Required:
Compute LLL’s variable overhead rate variance, variable overhead efficiency variance, and over- or underapplied variable overhead. (Do not round intermediate calculations. Indicate the effect of each variance by selecting "F" for Favorable/Overapplied and "U" for Unfavorable/Underapplied.)

Answer 1

Calculation of variable overhead rate variance :
Variable Overhead Rate Variance = ( SVR -AVR ) * AH
= ( SVR * AH ) - ( AVR * AH )
= ( SVR * AH ) - Actual variable overhead cost
= ( $ 0.80 * 16,100 ) - $ 9,500
= $ 12,880 - $ 9,500
= $ 3,380 F
Thus, Variable Overhead Rate Variance $ 3,380 F
Calculation of variable overhead efficiency variance :
Variable Overhead Efficiency Variance = ( SH - AH ) * SVR
= ( 15,060 - 16,100 ) * $ 0.80
= $ 832 U
Thus, Variable Overhead Efficiency Variance $ 832 U
Working note:
Standard labor hours allowed (SH) = Actual production * Standard labor hours required per unit
= 25,100 * 0.6
= 15,060 labor hours.
Calculation of Over or under applied variance overhead :
Over or under applied variance overhead = Applied overhead - Actual overhead
= $ 12,048 - $ 9,500
= $ 2548
Thus, variable overhead $ 2548 overapplied
Applied overhead = Actual production * Standard variable overhead cost per unit
= 25,100 * $ 0.48
= $ 12,048
Note:
AH =	Actual labor hours
SH =	Standard labor hours
SVR =	Standard variable overhead rate per labor hour
AVR =	Actual variable overhead rate per labor hour