Question

Overhead Variance Analysis

The Lubbock plant of Morril’s Small Motor Division produces a major subassembly for a 6.0 horsepower motor for lawn mowers. The plant uses a standard costing system for production costing and control. The standard cost sheet for the subassembly follows:

Direct materials (6.0 lbs. @ $5.00)		$30.00
Direct labor (1.6 hrs. @ $12.00)		19.20
VOH (1.6 hrs. @ $10.00)		16.00
FOH (1.6 hrs. @ $6.00)		9.60
Standard unit cost		$74.80

During the year, the Lubbock plant had the following actual production activity: (a) Production of motors totaled 50,000 units. (b) The company used 82,000 direct labor hours at a total cost of $1,066,000. (c) Actual fixed overhead totaled $556,000. (d) Actual variable overhead totaled $860,000.

The Lubbock plant’s practical activity is 60,000 units per year. Standard overhead rates are computed based on practical activity measured in standard direct labor hours.

1. Compute the variable overhead spending and efficiency variances. Enter amounts as positive numbers and select Favorable or Unfavorable.

Spending variance		$___________	Unfavorable
Efficiency variance		$___________	Unfavorable

2a. CONCEPTUAL CONNECTION Compute the fixed overhead spending and volume variances. Enter amounts as positive numbers and select Favorable or Unfavorable.

Spending variance		$__________	Favorable
Volume variance		$__________	Unfavorable

Answer 1

1.

Absorbed variable overhead = Actual output x Standard overhead rate per unit

= 50,000 x 16

= $800,000

Standard output for actual hours = ( Budgeted output/ Budgeted hours ) x Actual hours

= ( 60,000/96,000 ) x 80,000

= 50,000

Standard variable overhead = Standard output for actual hours x Standard overhead rate per unit

= 50,000 x 16

= $ 800,000

Variable overhead spending variance = Standard variable overheads - Actual variable overheads

= 800,000 - 860,000

= $60,000 (Unfavorable)

Variable overhead efficiency variance = Absorbed variable overheads - Standard variable overheads

= 800,000 - 800,000

= 0

Variable overhead spending and efficiency variance

Spending variance	$60,000	Favorable
Efficiency variance	$0

2.

Absorbed fixed overhead = Actual output x Standard overhead rate per unit

= 50,000 x 9.6

= $480,000

Budgeted fixed overhead = Budgeted output x Standard overhead rate per unit

= 60,000 x 9.6

= $ 576,000

Fixed overhead spending variance = Budgeted fixed overheads - Actual fixed overheads

= 576,000 - 556,000

= $20,000 (Favorable)

Fixed overhead volume variance = Absorbed fixed overheads - Budgeted fixed overheads

= 480,000 - 576,000

= $96,000 (Unfavorable)

Fixed overhead spending and volume variance

Spending variance	$20,000	Favorable
Volume variance	$96,000	Unfavorable