Question

Required information [The following information applies to the questions displayed below.) The Platter Valley factory of Bybee Industries manufactures field boots. The cost of each boot includes direct materials, direct labor, and manufacturing (factory) overhead. The firm traces all direct costs to products, and it assigns overhead cost to products based on direct labor hours. The company budgeted $15,000 variable factory overhead cost and 2,500 direct labor hours to manufacture 5,000 pairs of boots in March. The factory used 2,700 direct labor hours in March to manufacture 4,800 pairs of boots and spent $15,600 on variable overhead during the month. For March, the Platter Valley factory of Bybee Industries budgeted $90,000 for fixed factory overhead cost. Its practical capacity is 2,500 direct labor hours per month (to manufacture 5,000 pairs of boots). The factory used 2,700 direct labor hours in March to manufacture 4,800 pairs of boots. The actual fixed overhead cost incurred for the month was $92,000. Required: 1. Compute the fixed overhead spending (budget) variance and the production volume variance for March and indicate whether each variance is favorable (F) or unfavorable (U). 2. Compute the fixed overhead flexible-budget variance for March. Is this variance favorable (F) or unfavorable (U)? 3. Provide the appropriate journal entry to record the fixed overhead spending variance and the appropriate journal entry to record the production volume variance for March. Assume that the company uses a single account, Factory Overhead, to record overhead costs.

Answer 1

1)	Fixed OH spending variance =			Budgeted OH - Actual OH
			=	$ 90000 - $ 92000
			=	$      2,000.00	(Unfavorable)
	Fixed OH Volume variance =			Recovered OH - Budgeted OH
			=	$ 86400 - $ 90000
			=	$      3,600.00	(Unfavorable)

Workings:

Fixed OH
Budgeted Hours			2500
Budgeted OH			$ 90,000.00
Recovery Rate			$         36.00
Standard Hours			2400	(2500 x 4800/5000)
Recovered OH			$ 86,400.00
Actual OH			$ 92,000.00
Fixed OH spending variance =			Budgeted OH - Actual OH
		=	$ 90000 - $ 92000
		=	$   2,000.00	(Unfavorable)
Fixed OH Volume variance =			Recovered OH - Budgeted OH
		=	$ 86400 - $ 90000
		=	$   3,600.00	(Unfavorable)

2)					Flexible
	Particulars			Actual	Budget	Workings	Variance
	Fixed OH			$    92,000.00	$   90,000.00		$    2,000.00	(Unfavorable)

3)	Journal Entries			Debit	Credit
	Fixed OH spending variance			$      2,000.00
	To Factory OH				$     2,000.00
	Production volume variance			$      3,600.00
	To Factory OH				$     3,600.00