Question

8) The formula for computing overhead for the Texas Company for the year is given as $160,000 + $1.25/direct labor hour. The company produces a single product that requires 2.5 direct labor-hours to complete.

Assume that the company chooses 100,000 direct labor-hours as the denominator level of activity, but actually worked 96,000 hours during the year producing 37,000 units.

Actual overhead costs for the year are:

Variable costs $ 124,800

Fixed costs 158,800

Total overhead costs $ 283,600

Required: (Be sure to indicate whether the variances are favorable or unfavorable.)

a. Compute the variable overhead price variance and the variable overhead efficiency variance.

b. Compute the fixed overhead spending (budget) variance and the production volume variance

please explain the steps and reasoning behind your answer

The answers are a)4375 unfavorable b) 12000 unfavorable .

Answer 1

• All working forms part of the answer
• Workings

>Variable Cost

Actual DATA for		37000	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Variable Overhead	96000	$                   1.30	$        124,800.00

Standard DATA for		37000	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Variable Overhead	( 2.5 hours x 37000 units)=92500 hours	$                   1.25	$     115,625.00

>Fixed Cost

	Hrs	Rate	Amount
Budgeted Fixed Overhead	100000	$                   1.60 [160000 / 100000]	$        160,000.00
Standard Fixed Overhead or Fixed Overhead absorbed	92500	$                   1.60	$        148,000.00
Actual Fixed Overhead incurred	96000		$        158,800.00

• Requirement [a]

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                                1.25	-	$                       1.30	)	x	96000
	-4800
	Variance		$              4,800.00			Unfavourable-U

Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	92500	-	96000	)	x	$                           1.25
	-4375
	Variance		$              4,375.00			Unfavourable-U

• Requirement [b]

Fixed Overhead Production Budget Variance
(	Budgeted Fixed Overhead	-	Actual Fixed Overhead incurred	)
(	$                   160,000.00	-	$          158,800.00	)
	1200
	Variance		$              1,200.00			Favourable-F

Fixed Overhead Production Volume Variance
(	Standard Fixed Overhead or Fixed Overhead absorbed	-	Budgeted Fixed Overhead	)
(	$                   148,000.00	-	$          160,000.00	)
	-12000
	Variance		$            12,000.00			Unfavourable-U