Question

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Overhead Variances, Four-Variance Analysis, Journal Entries

Laughlin, Inc., uses a standard costing system. The predetermined overhead rates are calculated using practical capacity. Practical capacity for a year is defined as 1,000,000 units requiring 200,000 standard direct labor hours. Budgeted overhead for the year is $750,000, of which $300,000 is fixed overhead. During the year, 900,000 units were produced using 190,000 direct labor hours. Actual annual overhead costs totaled $800,000, of which $294,700 is fixed overhead.

Required:

1. Calculate the fixed overhead spending and volume variances.

Fixed Overhead Spending Variance	$	Favorable
Fixed Overhead Volume Variance	$	Unfavorable

2. Calculate the variable overhead spending and efficiency variances.

Variable Overhead Spending Variance	$	Unfavorable
Variable Overhead Efficiency Variance	$	Unfavorable

3. Prepare the journal entries that reflect the following:

1. Assignment of overhead to production
2. Recognition of the incurrence of actual overhead
3. Recognition of overhead variances
4. Closing out overhead variances, assuming they are not material

Answer 1

Ans: Standard direct labor hours= 200,000

Budgeted Units= 1,000,000

Standard labor hours per unit= 200,000/1,000,000

=> 0.2

Budgeted Fixed Overhead= 300,000

Standard Direct labor hours= 200,000

Fixed Overhead rate per labor hour= 300,000/200,000= 1.50 per labor hour

Actual Fixed overhead= 294,700

applied fixed overhead= 900,000*1.5*0.20

=> 270,000

Fixed Overhead Spending Variance= Budgeted overhead- Actual overhead

=> 300,000-294,700

=> 5,300 Favorable

Fixed Overhead Volume Variance= Applied overhead- budgeted overhead

=> 270,000-300,000

=> 30,000 unfavorable

Fixed Overhead Spending Variance= 5,300 favorable

Fixed Overhead Volume Variance= 30,000 Unfavorable

2. Variable overhead= (750,000-300,000)\

=> 450,000

Standard direct labor hours=200,000

Variable overhead rate per labor hour= (450,000/200,000)= 2.25 per labor hour

Actual variable overhead= (800,000-294,700)

=> 505,300

Applied variable overhead= (900,000*0.20*2.25)= 405,000

Variable overhead spending variance= standard rate* Actual rate )- Actual variable overhead

=> 2.25*190,000)-505,300

=> 427,500-505,300

=> 77,800 unfavorable

Variable overhead Efficiency variance= Applied variable overhead- (Standard rate * actual hours)

=> 405,000-{2.25*190,000}

=> 405,000-427,500

=> 22,500 Unfavorable

Variable overhead spending variance=77,800 Unfavorable

Variable overhead Efficiency variance=22,500 Unfavorable

3. Journal Entry

S.no	Account title and explanation	Debit($)	Credit($)
1	Work in progress	675,000
	Variable overhead control		405,000
	Fixed Overhead Control		270,000
	(to record Assignment of overhead to production)
2.	Variable overhead control	$505,300
	Fixed overhead Control	$294,700
	Miscellaneous Accounts		$800,000
	(to record Recognition of the incurence of actual overhead)
3	Fixed volume overhead Variance	30,000
	Variable overhead Spending Variance	77,800
	Variable overhead Efficiency Variance	22,500
	Fixed Overhead Spending control		5,300
	Fixed overhead control		24,700
	Variable overhead control		100,300
	( to record Recognition of overhead variances)
4.	Cost of goods sold	$130,300
	Fixed Overhead Volume variance		$30,000
	Variable Overhead efficiency Variance		$22,500
	Variable overhead spending variance		$77,800
	(to record Closing out overhead variances)
	Fixed Overhead spending variance	$5,300
	Cost of Goods Sold		$5,300