Question

Mantuach Printing is a highly automated printing company. Mantuach allocates factory overhead based on machine hours. During a recent month, 310 machine hours were worked. These machine hours resulted in the production of 30,000 books.   The production standards have an objective of 100 books per machine hour. Facts about budgeted and actual factory overhead are as follows:

	Actual total variable factory overhead for the month was $250,000.
	Variable factory overhead was estimated and applied at $800 per machine hour.
	Actual total fixed factory overhead for the month was $120,000.
	Fixed factory overhead was estimated and applied at $450 per machine hour.
Mantuach based the fixed overhead allocation rates on an assumed production level of 28,000 books.

(a)	Calculate the overhead variances.
(b)	Prepare journal entries to apply factory overhead to production, and record the related variances.

Answer 1

Worksheet for Part (1)

               

1. Variable overhead Variances:

                               

Actual hours                                                       310 machine hours worked

Actual cost of variable overhead                               $250,000

Actual output                                                    30,000 books

Standard hours to achieve output            300 hours (30,000 books / 100 books per hour)

Standard rate per hour                                  $800 per Machine hour

Standard cost of variable overhead         $240,000 (300 hours * $800 per hour)

Variable overhead Efficiency Variance:

Efficiency Variance = Standard overhead rate * (Actual Hours – Standard Hours)

Efficiency Variance = $800 * (310 – 300)

Efficiency Variance = $8,000 Unfavorable

Variable Overhead Spending Variance:

Spending variance = Actual hours worked * (Actual overhead rate – Standard overhead rate)

Spending variance = Actual cost of variable overhead – (Actual hours worked * Standard overhead rate)

Spending variance = $250,000 – (310 * $800)

Spending variance = $250,000 - $248,000

Spending variance = $2,000 Favorable

               

1. Fixed Overhead Variance:

Actual hours310 hours

Actual cost of fixed overhead$120,000

Actual output$30,000 books

Standard hours to achieve output333 hours (30,000 books / 90 per hour)

Standard rate per hour$450 per hour

Budgeted fixed overhead$149,500 ($450 * 333)

Fixed Overhead Expenditure / Spending Variance:

Expenditure / Spending variance = Actual Fixed Overhead – Budgeted Fixed Overhead

Expenditure / Spending variance = $120,000 – 149,500

Expenditure / Spending variance = $29,500 Favorable

Fixed Overhead Volume Variance:

Volume Variance = Absorbed Fixed Overhead – Budgeted Fixed Overhead

Volume Variance = (Actual Output – Budgeted Output) * Fixed overhead rate

Volume Variance = (30,000 – 28,000) * $450

Volume Variance = $900,000 Favorable

Journal Entries:

Variable Overhead Variance journal

Work in process Inventory                           Dr           $244,000

Variable overhead spending Variance                    Cr            $2,000

Variable overhead efficiency variance    Dr           $8,000

Variance Overhead Expenses                                     Cr            $250,000

(To increase work in process for the standard variable overhead, and record the related spending and efficiency variances)

Fixed Overhead Variance Journal:

Work in process inventory                           Dr           $1,049,500

Fixed overhead Spending variance                          Cr            $29,500

Fixed overhead volume variance                              Cr            $900,000

Fixed overhead Expenses                                            Cr            $120,000

(To increase work in process for the standard fixed overhead, and record the related spending and volume variances)