Question

Overhead Variances, Two- And Three-Variance Analyses Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 122,500 units requiring 490,000 direct labor hours. (Practical capacity is 510,000 hours.) Annual budgeted overhead costs total $769,300, of which $553,700 is fixed overhead. A total of 119,200 units using 488,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $241,200, and actual fixed overhead costs were $556,350

. 1. Compute overhead variances using a two-variance analysis.

Budget Variance:

Volume Variance:

2. Compute overhead variances using a three-variance analysis.

Spending Variance $

Efficiency Variance $

Volume Variance $

Answer 1

	Budget	Actual
Output	122,500	119,200
Direct labour hours	490,000	488,000
Fixed Overheads	553,700	556,350
Variable Overheads	235,600	241,200
Per hour Variable Cost	0.48	0.49
Hours required for each unit	4.00	4.09
Per hour Fixed Cost	1.13	1.14

1	Budget variance= Actual Factory Overheads-Budget allowed on standard hours
	Budget Variance=556350+241200-(553700+(119200*4*0.48))
	Budget Variance= $14,986 (Unfavourable)
	Volume Variance=Budget allowed on standard hours-Standard Factory Overheads
	Volume Variance=(553700+(119200*4*0.48))-(119200*4*(.48+1.13))
	Volume Variance= $ 14,256.78
2	Spending Variance=Actual Factory Overheads-Budget allowed on actual hours
	Spending variance= 556350+241200-((4,88,000*0.48)+5,53,700)
	Spending Variance= $9,211.633
	Efficiency Variance=Budget allowed on actual hours-Budget allowed on standard hours
	Efficiency Variance=((4,88,000*0.48)+5,53,700)-(553700+(119200*4*0.48))
	Efficiency Variance= $5,385.143
	Volume Variance=Budget allowed on standard hours-Standard Factory Overheads
	Volume Variance=553700+(119200*4*0.48))-(119200*4*(.48+1.13))
	Volume Variance= $ 14,916