Question

World star Fender is a competitor of JMACS fender. JMACS Fender also uses a standard cost system and provide the following? information:

Static budget variable overhead	$3,500
Static budget fixed overhead	$28,000
Static budget direct labor hours	700	hours
Static budget number of units	28,000	units
Standard direct labor hours	0.025	hours per fender

Fender allocates manufacturing overhead to production based on standard direct labor hours. JMAC

Fender reported the following actual results for 2016 actual number of fenders? produced,20,000

actual variable? overhead, $4,960?; actual fixed? overhead $35,000, actual direct labor? hours, 410

Required

1.	Compute the overhead variances for the? year: variable overhead cost? variance, variable overhead efficiency? variance, fixed overhead cost? variance, and fixed overhead volume variance.
2.	Explain why the variances are favorable or unfavorable.

Answer 1

From the given information, the following calculations can be made:

Standard Variable Overhead per unit = $3,500 / 28,000 = $0.125 per unit.

Standard Fixed Overhead per unit = $28,000/28,000 = $1 per unit.

1. Variance Calculations:

a. Variable Overhead Cost Variance:

= Variable Overhead Recovered - Actual Variable Overhead Incurred

= Standard Variable Overhead per unit x Actual Number of units - Actual Variable Overhead Incurred

= $0.125 x 20,000 - $4,960

= $2,500 - $4,960

= $2,460 Adverse

b. Variable Overhead Efficiency Variance:

= Standard rate per unit x (Standard Output - Actual Output)

= $0.125 x (28,000 - 20,000)

= $1,000 Favorable

c. Fixed Overhead Cost Variance:

= Fixed Overhead recovered - Actual Fixed Overhead

= $1 x 20,000 - $35,000

= $20,000 - $35,000

= $15,000 Adverse

d. Fixed Overhead Volume Variance:

= (Budgeted Output - Actual Output) x Standard Fixed overhead rate per unit

= (28,000 - 20,000) x $1

= $8,000 Favorable

2. Cost variances are Adverse because the actual cost is more when compared to the standards. When compared to volume, the actual volume is less to the standards, hence they are favorable.