Question

Overhead Application, Fixed and Variable Overhead Variances

Zepol Company is planning to produce 600,000 power drills for the coming year. The company uses direct labor hours to assign overhead to products. Each drill requires 0.75 standard hour of labor for completion. The total budgeted overhead was $1,777,500. The total fixed overhead budgeted for the coming year is $832,500. Predetermined overhead rates are calculated using expected production, measured in direct labor hours. Actual results for the year are:

Actual production (units)		594,000		Actual variable overhead	$928,000
Actual direct labor hours (AH)		446,000		Actual fixed overhead	$835,600

Required:

1. Compute the applied fixed overhead.
$

2. Compute the fixed overhead spending and volume variances. Enter amounts as positive numbers and select Favorable or Unfavorable.

Spending variance		$
Volume variance		$

3. Compute the applied variable overhead.
$

4. Compute the variable overhead spending and efficiency variances. Enter amounts as positive numbers and select Favorable or Unfavorable.

Spending variance		$
Efficiency variance		$

Answer 1

Solution :

(1) Applied Fixed Overhead :

Applied Fixed Overhead = (Budgeted Fixed Overhead / Budgeted Hours) * Actual Hours

= [ $ 832,500 / (600000 * 0.75) ] * 446,000

=  $ 1.85 * 446,000

= $ 825,100 (See Note too)

(2) Fixed Overhead Spending and Volume Variance :

(a) Fixed Overhead Spending Variance = Budgeted Fixed OH - Actual Fixed OH

= $ 832,500 - $ 835,600

= 3,100 Unfavorable

(b) Fixed Overhead Volume Variance   = ( Budgeted Hours - Standard Hour for Actual Output) * Overhead Rate

= [ (600,000 * 0.75) - (594,000 * 0.75) ] * $ 1.85

= [ 450,000 - 445,500 ] * $ 1.85

= $ 8,325 Unfavorable.

(3) Applied Variable Overhead :

Applied Variable Overhead = (Budgeted Variable Overhead / Budgeted Hours) * Actual Hours

= [ ( $ 1,777,500 - 832,500) / (600000 * 0.75) ] * 446,000

= $ 2.1 * 446,000

= $ 936,600 (See Note too)

(4) Variable Overhead Spending and Efficiency Variance :

(a) Variable Overhead Spending Variance = Applied Variable OH - Actual OH

= $ 936,600 - $ 928,000

= $ 8,600 Favorable

(b) Variable OH Efficiency Variance = (SH - AH) * Overhead rate

= [(594,000 * 0.75) - 446,000] * 0.10

= $ 1,050 Unfavorable

Note :

There is one more approach for applying overhead we can assume :

Fixed Overhead Applied : ( 594,000 * 0.75) * $ 1.85 = $ 824,175

Variable Overhead Applied : ( 594,000 * 0.75) * $ 2.10 = $ 935,550

Since question is says overhead applied on the basis of direct labor hours. I have applied Overhead Based on Actual Direct Labor Hour Basis. However there is no impact on Variances.

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