Question

Overhead Application, Overhead Variances, Journal Entries

Plimpton Company produces countertop ovens. Plimpton uses a standard costing system. The standard costing system relies on direct labor hours to assign overhead costs to production. The direct labor standard indicates that two direct labor hours should be used for every oven produced. The normal production volume is 100,000 units. The budgeted overhead for the coming year is as follows:

Fixed overhead	$760,000
Variable overhead	446,000*
*At normal volume.

Plimpton applies overhead on the basis of direct labor hours.

During the year, Plimpton produced 97,000 units, worked 196,000 direct labor hours, and incurred actual fixed overhead costs of $770,400 and actual variable overhead costs of $437,580.

Required:

1. Calculate the standard fixed overhead rate and the standard variable overhead rate. Round your answers to the nearest cent. Use rounded answers in the subsequent computations.

Standard fixed overhead rate	$	per direct labor hour
Standard variable overhead rate	$	per direct labor hour

2. Compute the applied fixed overhead and the applied variable overhead. Use the application rates from part (1) in your calculations.

Fixed	$
Variable	$

What is the total fixed overhead variance?
$  Unfavorable

What is the total variable overhead variance?
$  Unfavorable

3. Break down the total fixed overhead variance into a spending variance and a volume variance.

Spending Variance	$	Unfavorable
Volume Variance	$	Unfavorable

4. Compute the variable overhead spending and efficiency variances.

Spending Variance	$	Unfavorable
Efficiency Variance	$	Unfavorable

5. Now assume that Plimpton’s cost accounting system reveals only the total actual overhead. In this case, a three-variance analysis can be performed. Using the relationships between a three- and four-variance analysis, indicate the values for the three overhead variances.

Volume variance	$	Unfavorable
Variable overhead efficiency variance	$	Unfavorable
Spending variance	$	Unfavorable

Feedback

6. Prepare journal entries (1) to apply overhead to production, (2) to record the actual overhead costs incurred, (3) to record the variable and fixed overhead variances, and (4) to close the variance accounts at the end of the year. Assume variances are closed to Cost of Goods Sold. If an amount box does not require an entry, leave it blank or enter "0".

1.	Work in Process
	Variable Overhead Control
	Fixed Overhead Control
2.	Variable Overhead Control
	Fixed Overhead Control
	Various Accounts
3.	Fixed Overhead Spending Variance
	Fixed Overhead Volume Variance
	Variable Overhead Spending Variance
	Variable Overhead Efficiency Variance
	Fixed Overhead Control
	Variable Overhead Control
4.	Cost of Goods Sold
	Fixed Overhead Spending Variance
	Fixed Overhead Volume Variance
	Variable Overhead Spending Variance
	Variable Overhead Efficiency Variance

Answer 1

normal production units= 100,000

standard labour hours= 2*100,000= 200,000 hrs.

1) Standard fixed overhead rate = std. fixed overhead/ std. labour hrs. = 760,000/200,000=3.8 per direct labour hrs.

Standard variable overhead rate= std. variable overhead/ std. labour hrs.= 446,000/200,000=2.23 per direct labour hrs.

2) Applied fixed overhead = std. fixed overhead rate* actual hours worked= 3.8*196,000=744,800

Applies variable overhead= std. var. overhead rate* actual hrs. woeked=2.23*196,000=437,080

total fixed overhead variance = Actual fixed overhead - ( std. hrs.*actual production*fixed overhead absorption rate) = 770,400-(2*97,000*3.8)= 33,200 (unfavorable)

total variable overhead variance = Actual variable overhead - (std. hrs*actual production* variable overhead absorption rate) = 437,580-(2*97,000*2.23) = 4,960 (unfavorable)

3) Fixed overhead spending variance = Actual fixed overhead - ( std. fixed overhead rate*actual hrs.) = 770,400-(3.8*196,000)= 25,600 (unfavorable)

Fixed overhead volume variance= ( budgeted hrs. -actual hrs.) std. rate= (2*97,000-196,000)*3.8= 7,600 (unfavorable)

4) Variable overhead spending variance= Actual variable overhead -( std. variable overhead rate*actual hrs.) =

437,580-( 2.23*196,000)= 500 (unfavorable)

Variable overhead efficiency variance= (actual hrs. - std. hrs.)* std. overhead rate=

(196,000-2*97,000)*2.23= 4,460 ( unfavorable)