Question

The Platter Valley factory of Bybee Industries manufactures field boots. The cost of each boot includes direct materials, direct labor, and manufacturing overhead. The firm traces all direct costs to products, and it assigns overhead based on direct labor hours. The company budgeted $15,000 variable overhead and 2,500 direct labor hours to manufacture 5,000 pairs of boots in March. The factory used 2,700 direct labor hours in March to manufacture 4,800 pairs of boots and spent $15,600 on variable overhead during the month. For March the Platter Valley factory of Bybee Industries budgeted $90,000 of fixed overhead. Its practical capacity is 2,500 direct labor hours per month (to manufacture 5,000 pairs of boots). The actual fixed overhead incurred for the month was $92,000.

a. Provide appropriate journal entries to record the variable overhead spending and efficiency variances.

b. The Platter Valley factory of Bybee Industries uses a three-variance analysis of the total factory overhead variance.

Required: 1. Compute the total overhead spending variance, the efficiency variance, and the fixed overhead production volume variance.

2.Determine the spending variances (both variable and fixed), the efficiency variance, and the fixed overhead production volume variance.

Answer 1

(a) Preparation of  journal entries to record the variable overhead spending and efficiency variances.We have,

Budgeted variable factory overhead	$ 15,000
Budgeted direct labor hours	2,500
Budgeted production in pair of boots	5,000
Actual variable factory overhead	$ 15,600
Actual direct labor hours	2,700
Actual production in pair of boots	4,800

(1) Standard variable overhead rate per direct labor hour = BudgetedTotal Variable Factory Overhead / Budgeted Total Direct Labor Hours

Standard variable overhead rate per direct labor hour = 15,000 / 2,500 = $ 6.00

(2) Standard direct-labor hours per unit = Budgeted Total Direct Labor Hours / Budgeted Total Units

  Standard direct-labor hours per unit = 2,500 / 5,000 = 0.5 per unit

(3) Actual variable overhead rate per direct labor hour = Actual Total Variable Factory Overhead / Actual Total Direct Labor Hours

Actual variable overhead rate per direct labor hour = 15,600 / 2,700 = $ 5.777 per hrs

(i) Variable overhead spending variances = Actual production units ( Actual price - Standard price)

Variable overhead spending variances = 2,700 ( 5.777 - 6.00) = $ 600 ( Favourable)

(ii) Variable overhead efficiency variances = ( Actual hours - Standard hours ) Standard rate

   Variable overhead efficiency variances = ( 2,700 - 2,400) 6.00 = $ 1,800 ( Unfavourable)

Journal entry:

(1) To record favourable variable overhead spending variances.

Dr.   Factory Overhead (Variable Factory Overhead) - $ 600

Cr.  Variable Overhead Spending Variance - $ 600

(2) To record unfavourable Variable overhead efficiency variances.

Dr.  Variable overhead efficiency variances - $ 1,800

Cr.   Factory Overhead (Variable Factory Overhead) - $ 1,800

(b)

Budgeted Fixed factory overhead	$ 90,000
Budgeted direct labor hours	2,500
Budgeted production in pair of boots	5,000
Actual Fixed factory overhead	$ 92,000
Actual direct labor hours	2,700
Actual production in pair of boots	4,800

(a) Standard fixed factory overhead application rate per direct labor hour = Budgeted Fixed Factory Overhead / Total Direct Labor Hours

Standard fixed factory overhead application rate per direct labor hour = 90,000 / 2,500 = $ 36.00

(b) Standard direct-labor hours per unit = Budgeted Total Direct Labor Hours / Budgeted Total Units

  Standard direct-labor hours per unit = 2,500 / 5,000 = 0.5 per unit

(c) Actual fixed overhead rate per direct labor hour = Actual Total Fixed Factory Overhead / Actual Total Direct Labor Hours

Actual fixed overhead rate per direct labor hour = 92,000 / 2,700 = $ 34.00 per hrs

(1) Computation of the total overhead spending variance, the efficiency variance, and the fixed overhead production volume variance.We have,

(a) Fixed overhead spending variances = Actual Fixed Cost - Budgeted Fixed Cost

  Fixed overhead spending variances = 92,000 - 90,000 = $ 2,000 (U)

(b) Fixed overhead efficiency variances = ( Standard production hrs - Actual production hrs) Standard rate

Fixed overhead efficiency variances = ( 2,500 - 2,400) 36 = $ 3,600 (F)

( c) Fixed overhead production volume variances = 90,000 - 2,400 x 36 = $ 3,600 (U)

(2) Determination of spending variances (both variable and fixed), the efficiency variance, and the fixed overhead production volume variance.We have,

Spending variances = 600 (F) + 2,000 (U) = $ 1,400 (U)

Efficiency variances = 1,800 (U) + 3,600 (F) = $ 1,800 (F)

Production Volume variances = 600 (F) + 3,600 (U) = $ 3,000 (U)