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 factory overhead flexible-budget variance, the factory overhead spending variance, and the efficiency variance for variable factory overhead for March and state whether each variance is favorable (F) or unfavorable (U). 2. Provide the appropriate journal entry to record the variable overhead spending variance and a second entry to record the variable overhead efficiency variance for March. Assume that the company uses a single account, Factory Overhead, to record overhead costs.

Answer 1

1)					Flexible
	Particulars			Actual	Budget	Workings	Variance
	Units manufactured			4800	4800
	Variable OH
	Hours			$   2,700.00	$   2,400.00	(2500 x 4800/5000)
	Cost			$ 15,600.00	$ 14,400.00	($ 15000 x 2400/2500)	$ 1,200.00	(Unfavorable)

Budget (5000 pairs)				Standard (4800 pairs)				Actual (4800 pairs)
Hour	Rate	Amount		Hour	Rate	Amount		Hour	Rate	Amount
2500	$      6.00	$ 15,000.00		2400	$      6.00	$ 14,400.00		2700	$      5.78	$ 15,600.00
Variable OH spending variance =			(Standard Rate - Actual Rate) x Actual Hours
		=	($ 6 - $ 5.78) x 2700
		=	$    600.00	(Favorable)
Variable OH efficiency variance =			(Standard Hours - Actual Hours) x Standard Rate
		=	(2400 - 2700) x $ 6
		=	$ 1,800.00	(Unfavorable)

2)

Journal Entries			Debit	Credit
Factory OH			$    600.00
To Variable OH spending variance				$    600.00
Variable OH efficiency variance			$ 1,800.00
To Factory OH				$ 1,800.00