Question

2 . Atlantic Company has the following monthly flexible budget information based on an expectation of operating at 80% of the factory’s capacity or 10,000 units produced:

	Operating Levels
	70%	80%	90%
Budgeted output in units	8,000	10,000	12,000
Budgeted labor (standard hours)	16,000	20,000	24,000
Budgeted overhead
Variable overhead	$ 48,000	$60,000	$ 72,000
Fixed overhead	40,000	40,000	40,000
Total overhead	$ 88,000	$100,000	$112,000

During the current month, the company operated at 70% of capacity and employees worked 16,500 hours and the flowing actual overhead costs were incurred:

Variable overhead	$ 47,300
Fixed overhead	41,000
Total overhead	$88,300

Required:

1. Compute the predetermined overhead rate per direct labor hour for variable overhead, fixed overhead, and total overhead.
2. Compute the variable overhead spending and efficiency variances.

Compute the fixed overhead spending and volume variance

Answer 1

Solution 1:

Predetermined variable overhead rate = Budgeted variable overhead at 80% capacity / Budgeted labor hours

= $60,000 / 20000 = $3 per hour

Predetermined fixed overhead rate = Budgeted fixed overhead / Budgeted labor hours = $40,000 / 20000 = $2 per labor hour

Total overhead rate = $3 + $2 = $5 per labor hour

Solution 2:

Variable Overhead Cost Variance
Actual Cost					Standard cost for actual quantity					Standard Cost
AH *	AR =				AH *	SR =				SH *	SR =
16500	$2.87	$47,300.00			16500	$3.00	$49,500.00			16000	$3.00	$48,000.00
			$2,200.00	Favorable				$1,500.00	Unfavorable
			Variable overhead spending variance					Variable overhead efficiency variance
Variable overhead Spending variance					$2,200.00	Favorable
Variable overhead efficiency variance					$1,500.00	Unfavorable

Fixed Overhead Cost Variance

Actual Fixed OH Cost

Budgeted Fixed Overhead

Standard Cost (FOH Applies)

SH*

BR

$41,000.00

$40,000.00

16000

$2.00

$32,000.00

$1,000.00

Unfavorable

$8,000.00

Unfavorable

Fixed overhead Spending Variance

Fixed overhead volume variance

Fixed overhead Spending Variance

$1,000.00

Unfavorable

Fixed overhead volume variance

$8,000.00

Unfavorable