Question

Hello. I am running into difficulty solving the problem below and would greatly appreciate a step-by-step explanation on how to arrive at the correct answer:

NATLA Company manufactures consumer products and provided the following information for the month of February:

• Units produced 131,000
• Standard direct labor hours per unit 0.20
• Standard variable overhead rate (per direct labor hour) $3.40
• Actual variable overhead costs $88,670
• Actual hours worked 26,350

1. Calculate the variable overhead spending variance and variable overhead efficiency variance using the three-pronged graphical approach.

2. What if 26,100 direct labor hours were actually worked in February? What impact would that have had on the variable overhead spending variance? On the variable overhead efficiency variance?

Note: please try to give your calculations and explanations on Word or excel sheet as handwriting is sometimes difficult to read.

Also, I would appreciate detailed calculations as possible so I can better understand how to arrive at the correct answer. Thank you.

Answer 1

Part 1

Variable overhead spending variance = Actual variable overhead –(Standard variable overhead rate × Actual hours)= $88,670–($3.40 × 26,350) =-920 =$920 F

Variable overhead efficiency variance = (Actual hours –Standard hours) x Standard variable overhead rate = (26350-26200)*$3.40 = $510 U

Standard hours = Units produced x Standard direct labor hours per unit = 131000*0.20 = 26200

Actual Variable Overhead				Budgeted Variable Overhead				Applied Variable Overhead
AVOR	x	AH		SVOR	x	AH		SVOR	x	SH
				3.40		26350		3.40		26200
	88670				85950
			Spending Variance $920				Efficiency Variance $510 U

Part 2

The variable overhead spending variance would be favorable though smaller compared to previous results on working 26,100 direct labor hours in February, while there would be favorable variable overhead efficiency variance as 100 (26200-26100) hours are less than the standard direct labor hours allowed for actual production.