Question

Solving for Unknowns, Overhead Analysis Nuevo Company produces a single product. Nuevo employs a standard cost system and uses a flexible budget to predict overhead costs at various levels of activity. For the most recent year, Nuevo used a standard overhead rate equal to $6.25 per direct labor hour. The rate was computed using expected activity. Budgeted overhead costs are $80,000 for 10,000 direct labor hours and $120,000 for 20,000 direct labor hours. During the past year, Nuevo generated the following data: Actual production: 4,000 units Fixed overhead volume variance: $1,750 U Variable overhead efficiency variance: $3,200 F Actual fixed overhead costs: $41,335 Actual variable overhead costs: $70,000 Required: Instructions for parts 1, 2 and 4: If a variance is zero, enter "0" and select "Not applicable" from the drop down box.

1. Determine the fixed overhead spending variance. $ 1,335 Unfavorable

2. Determine the variable overhead spending variance.

3. Determine the standard hours allowed per unit of product. Round your answer to two decimal places.

4. Assuming the standard labor rate is $9.50 per hour, compute the direct labor efficiency variance.

Answer 1

Budgeted overhead costs :

For 10,000 hours = 80,000 and For 20,000 hours = 120,000

Therefore, variable overhead per unit = Change in Costs/Change in labour hours = 120,000-80,000/20,000-10,000 = $4 per labour hour

For 10,000 hours, variable overhead is = 10,000 x 4 = $40,000 and ifxed is 80,000 - 40,000 = $40,000

Since the Standard rate used is $6.25 and the variable portion is $4, the balance $2.25 relates to fixed overhead rate.

Fixed overhead volume variance = 1,750 unfavourable

Absorbed Fixed Overhead - Budgeted Fixed Overhead = Since it is unfavourable, it means that the budgeted is more than what is absorbed.

Absorbed Fixed Overhead = Budgeted Fixed Overhead - FOH volume variance = 40,000 - 1,750 = 38,250

Fixed overhead absorbed rate = $2.25

Therefore, budgeted labour hours = 38,250/2.25 = 17,000 hours (Standard hours)

1. Fixed overhead spending variance is as mentioned 1,335 unfavourable which is correct

2.

Variable overhead efficiency variance = Standard rate x (Actual hours - Standard hours)

Since it is favourable, it means that the actual hours spent was lesser than the standard hours.

Therefore, Standard hours - Actual hours = VOH efficiency variance/Standard rate = 3,200/4 = 800

Actual hours = Standard hours - 800 = 17,000 - 800 = 16,200 hours

Variable overhead spending variance = Actual hours x (Actual rate - Standard rate)

= 16,200 x ((70,000/16200) - 4) = 5,200 (unfavourable)

3.

Standard hours allowed per unit of product = Standard hours/units = 17,000/4,000 = 4.25 hours per unit

4.

Direct labour efficiency variance = Standard rate x (Actual hours - Standard hours) = 9.50 x (16,200-17,000) = 7,600 favourable