Question

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 126,000 units requiring 504,000 direct labor hours. (Practical capacity is 524,000 hours.) Annual budgeted overhead costs total $831,600, of which $584,640 is fixed overhead. A total of 119,500 units using 502,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $261,300, and actual fixed overhead costs were $555,550.

Fixed Overhead Spending Variance	$
Fixed Overhead Volume Variance	$

Variable Overhead Spending Variance	$
Variable Overhead Efficiency Variance	$

Answer 1

a) Fixed overhead spending variance= Actual fixed overehead- Budgeted fixed overhead

= $ 555,550 - $ 584,640

= $ (29,090) Favourable

b) Fixed overhead per unit = Budgeted fixed overhead / Budgeted number of units

= $ 584,640/ 126000 units

= $ 4.64

Fixed overhead allocated = Actual units x fixed overhead per unit

= 119500 x 4.64

= $ 554,480

Fixed overhead volume variance= Fixed overhead allocated - Budgeted fixed overhead

= $ 554,480 - $ 584,640

= $ (30,160) favourable

c) Standard variable rate per hour =Budgeted variable overheads/budgeted labour hours

= (831600- 584640)/ 504000

= 0.49 per hour

Actual variable overhead rate per hour = Actual variable overhead/ Actual labour hours

= 261300/119500

= 2.19 per hour

Variable overhead spending variance = Actual hours x (Actual rate- Standard rate)

= 119500 x (2.19- 0.49)

= $ 202745 (Adverse)

d) Variable overhead efficiency variance = Standard overhead x (Actual hours - standard hours)

= 0.49 x (119500 - 504000)

= $ (188405) favourable.