Question

OVERHEAD APPLICATION, FIXED AND VARIABLE OVERHEAD VARIANCES

Tules Company is planning to produce 2,400,000 power drills for the coming year. The company uses direct labour hours to assign overhead to products. Each drill requires 0.5 standard hour of labour for completion. The total budgeted overhead was $2,700,000. The total fixed overhead budgeted for the coming year is $1,320,000. Predetermined overhead rates are calculated using expected production, measured in direct labour hours. Actual results for the year are:

Actual production (units)      2,360,000

Actual direct labour hours    1,190,000

Actual variable overhead   $1,410,000

Actual fixed overhead         $1,260,000

Required:

1. Compute the applied fixed overhead.

2. Compute the fixed overhead spending and efficiency variances.

3. Compute the applied variable overhead.

4. Compute the variable overhead spending and volume variances.

Answer 1

SOLUTION

Total direct labor hours = Budgeted production * Direct labor hours per unit

= 2,400,000 * 0.50 = 1,200,000

Budgeted variable overheads = Total budgeted overhead - Budgeted fixed overheads

= $2,700,000 - $1,320,000 = $1,380,000

Variable overhead per hour = $1,380,000 / 1,200,000 = $1.15

Fixed overhead per hour = $1,320,000 / 1,200,000 = $1.10

1. Applied fixed overhead = Actual direct labor hours * Fixed overhead per hour

= 1,190,000 * $1.10 = $1,309,000

2.  Fixed overhead spending variance = Actual fixed overhead - Applied fixed overhead

= $1,260,000 - $1,309,000 = $49,000 F

Fixed overhead efficiency variance = Standard hours for actual production - Actual direct labor hours

= (2,360,000*0.50) - 1,190,000

= 1,180,000 - 1,190,000 = $11,000 F

3. Applied variable overhead = Actual direct labor hours * Variable overhead per hour

= 1,190,000 * $1.15 = $1,368,500

4. Variable overhead spending variance = Actual variable overhead -Applied variable overhead

= $1,410,000 - $1,368,500 = $41,500 U

Variable overhead volume variance = Budgeted direct labor hours - Actual direct labor hours

= 1,200,000 - 1,190,000 = 10,000 U