Question

The following information relates to Watson, Inc.'s overhead costs for the month: E: (Click the icon to view the information.) Requirements 1. Compute the overhead variances for the month: variable overhead cost variance, variable overhead efficiency variance, fixed overhead cost variance, and fixed overhead volume variance. 2. Explain why the variances are favorable or unfavorable. Requirement 1. Compute the overhead variances for the month: variable overhead cost variance, variable overhead efficiency variance, fixed overhead cost variance, and fixed overhead volume variance. Begin by selecting the formulas needed to compute the variable overhead (VOH) and fixed overhead (FOH) variances, and then compute each variance amount = VOH cost variance = VOH efficiency variance = J = FOH cost variance = FOH volume variance A Data Table Requirement 2. Explain why the variances are favorable or unfavorable. Static budget variable overhead Static budget fixed overhead $ 7,700 $ 3,300 1,100 hours 2,750 units The variable overhead cost variance is because Watson actually spent than budgeted. Static budget direct labor hours Static budget number of units The variable overhead efficiency variance is because the actual hours used was than budgeted. The fixed overhead cost variance is because Watson actually spent than budgeted for fixed overhead. Watson allocates manufacturing overhead to production based on standard direct labor hours. Last month, Watson reported the following actual results: actual variable overhead, $10,100; actual fixed overhead, $2,830; actual production of 6,800 units at 0.20 direct labor hours per unit. The standard direct labor time is 0.4 direct labor hours per unit (1,100 static direct labor hours / 2,750 static units). The fixed overhead volume variance is because Watson allocated overhead to jobs than the budgeted fixed overhead amount. Print Done

Answer 1

Requirement 1

Actual direct labour hour = Actual Production 6,800 Units x 0.20 direct labor hour per unit

= 1,360 labor hours

Actual Variable Overhead rate per direct labor hour = Total Actual Variable Overhead / Actual Direct labor hour

= $10,100 / 1,360 Hours

= $7.43 per hour

Actual Hours Worked = 1,360 Direct labor hours

Variable Overhead Rate/Spending/Cost Variance
Actual Hourly Variable Overhead Rate (Total actual $10,100 / Actual hours 6800 units*0.20)	7.43	Per Hour
Standard Hourly Variable Overhead Rate ($7,700 / 1,100 hours)	7.00	Per Hour
Variance or Difference in Rate	0.43	Per Hour
x Actual Hours Worked	1360	Hours
Variable Overhead Rate/Spending Variance	$580	Unfavorable
Variable Overhead Efficiency/Quantity Variance
Standard Hours Allowed for actual production:
Actual Production	6,800	Pools
x Allowed Standard Hours Per Unit	0.4	Hours
Total Standard Hours Allowed for actual production (SHAP)	2720	Hours
Actual Hours Worked (AH)	1360	Hours
Variance or Difference in Hours	1360	hours
x Standard Hourly Variable Overhead Rate	$7.00	per hour
Variable Overhead Efficiency Variance	$9,520	Favorable

Fixed Overhead Expenditure/Spending/Budget Variance
Budgeted Fixed Overheads (BFOH)	$3,300
Actual Fixed Overheads (AFOH)	$2,830
Fixed Overhead Expenditure Variance	$470	Favorable
Fixed Overhead Volume Variance
Budgeted Fixed Manufacturing Overheads	$3,300
Fixed Overhead Cost Applied (Refer Note)	$8,160
Fixed Overhead Volume Variance	$4,860	Favorable
Note:
Actual Production	6800	Units
Std labor hours allowed per unit	0.4	Hours
Total Std labor hours allowed for the actual output	2720	Hours
Std Fixed Overhead Rate per labor hour ($3300 / 1100 Hours)	$3.00	Per labor hour
Applied Fixed Overhead Cost	$8,160

Requirement 2

The variable cost variance is Unfavorable because Watson actually spent MORE than budgeted

The variable overhead efficiency variance is FAVORABLE because the actual hours used was LESS than budgeted

The fixed overhead cost variance is UNFAVORABLE because Watson actually spent LESS than budgeted for fixed overhead

The fixed overhead volume variance is FAVORABLE because Watson allocated MORE overhead to jobs than the budgeted fixed overhead amount.

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