Question

Patel and Sons, Inc., uses a standard cost system to apply overhead costs to units produced. Practical capacity for the plant is defined as 55,500 machine hours per year, which represents 27,750 units of output. Annual budgeted fixed overhead costs are $277,500 and the budgeted variable overhead cost rate is $3.80 per unit. Factory overhead costs are applied on the basis of standard machine hours allowed for units produced. Budgeted and actual output for the year was 21,600 units, which took 44,500 machine hours. Actual fixed overhead costs for the year amounted to $270,600 while the actual variable overhead cost per unit was $3.70.

Requires: (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount)

A. Based on the information provided above, what was the fixed overhead spending (budget) variance for the year?

B. What was the fixed overhead production volume variance for the year?

C. Based on the information provided above, what was the variable overhead spending variance for the year?

D. What was the variable overhead efficiency variance for the year?

E. Based on the information provided above, provide the correct summary journal entries for actual and applied overhead costs (both variable and fixed) for the year. Assume that the company uses a single account, Factory Overhead, to record both actual and applied overhead. Also, assume that the only variable overhead cost was electricity and that actual fixed overhead consisted of depreciation of $169,000 and supervisory salaries of $96,900.

F. Based on the information provided above, provide the appropriate journal entries: (a) to record the overhead cost variances for the period (thereby closing out the balance in the Factory Overhead account), and (b) to close the variance accounts to the CGS account at the end of the period.

Answer 1

a) calculate fixed overhead spending variance?

fixed overhead spending varaince = actual fixed manufacturing overhead - budgeted fixed manufacturing overheads

= $270600 - $ 277500 = $6900 unfavourable

Note: in above formula indicates the difference between actual manufacturing cost to budgeted manufactuting costs. because our estimation are uptp mark or not, if it not proper way unnecessary arranging more funds then we will loos interest also.

b) calculate fixed overhead production volume variance for the year

fixed overhead volume variance = absorbed fixed overheads - budgeted fixed overheads

absorbed fixed overheads = actual output X fixed overhead absorption rate per unit of output

= 21600 units X 3.80 = $82080

absorbed budgeted fixed overheads = budgeted output X fixed overhead absorption rate per unit

= 27750X3.80 = $105450

* Fixed overhead production volume varaince = $82080 - $105450

= $23370 unfavourable

Note: in above ratio indiactes the difference between actual fixed overheads to budgeted fixed overheads.

C) what was the varaible overhead spending variance for the year

Varaible overhead spending varaiance = actual manufacturing varaible overhead expenditure - actual hours X standard varaible overhead rate per unit

= $27750 X 3.80 - 44500 hours X 3.80

= $105450 - $ 169100 unfavourable

D) varaible overhead efficiency variance for the year?

varaible overhead efficiency variance = actual hours worked X stadard rate - standard hours allowed X standard rate

= 44500 hours X 3.80 - 55500 hours X 3.80

= $169100 - $210900

=$ 41800 unfavourable