Question

The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply factory overhead:

Actual total factory overhead cost	$24,000
Actual fixed overhead cost	$10,000
Budgeted fixed overhead cost	$11,000
Actual machine hours	5,000
Standard machine hours for the units manufactured	4,800
Denominator volume—machine hours	5,500
Standard variable overhead rate per machine hour	$3

1. The variable overhead spending variance is:

2. Under a three-variance breakdown (decomposition) of the total factory overhead variance, the total factory overhead spending variance is:

3. Under a two-variance breakdown (decomposition) of the total factory overhead variance, the total flexible-budget variance is:

Answer 1

1) Variable overhead spending variance $1,000 favorable

• Variable overhead spending variance = actual variable overhead cost - flexible budget for variable overhead, based on inputs (i.e., actual machine hours worked).
• Actual variable overhead = $14,000 (Actual variable overhead cost incurred = Actual total overhead cost - actual fixed overhead cost incurred = $24,000 - $10,000 = $14,000).
• Flexible budget for variable overhead = 5,000 machine hours x$3.00/machine hour = $15,000. 4. Variable overhead spending variance = $14,000 - $15,000 = $1,000 favorable

2)Total overhead spending variance = $2,000 favorable

• Total overhead spending variance = Total actual overhead cost incurred - FB for overhead based on inputs (i.e., actual machine hours worked).
• Total actual overhead cost incurred this period = $24,000 (given).
• Flexible budget for variable overhead, based on inputs =$3.00/machine hour x 5,000 machine hours worked = $15,000.
• Flexible budget for fixed overhead = $11,000 lump-sum amount.
• Total overhead spending variance = $24,000 - ($15,000 + $11,000) = $24,000 - $26,000 = $2,000 favorable

3)Total FB variance for overhead or total flexible-budget variance = $1,400 favorable

• Total flexible-budget variance = total actual overhead - FB for overhead based on output (i.e., based on allowed machine hours).
• Total actual overhead = $24,000 (given).
• FB for overhead based on output = Budgeted fixed overhead + budgeted variable overhead based on standard allowed machine hours = $11,000 + ($3/machine hour x 4,800 machine hours) = $25,400.
• Total FB variance for overhead =$24,000 - $25,400 = $1,400 favorable