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 128,000 units requiring 512,000 direct labor hours. (Practical capacity is 532,000 hours.) Annual budgeted overhead costs total $844,800, of which $604,160 is fixed overhead. A total of 119,500 units using 510,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $262,000, and actual fixed overhead costs were $555,550.

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

1

a)Fixed overhead spending variance

= Actual fixed overhead -Budgeted fixed overhead

= 555,550- 604,160   

=48610 favorable

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1-b)

Fixed overhead volume variance

= standard cost for actual output - budgeted cost

=(4.72*119500)-604160

=40120 favorable

**standard fixed cost = 604160/12800 = 4.72

_______________________________

2a)

Variable overhead spending variance

= Actual variable cost - standard cost for actual output

=262,000 - (.47*510000)

=22300 favorable

* *standard variable rate = (844800-604160)/512000=.47 per hour

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2-b)

variable overhead efficiency variance

= Actual Hours*Standard rate per hour -standard hours *standard rate per hour

                                                = (510000*.47) -(512000*.47)

                                                = 239700-240640

                                               = 940(F)