Question

Exercise 9.22

Overhead Variances, Four-Variance Analysis, Journal Entries

Laughlin, Inc., uses a standard costing system. The predetermined overhead rates are calculated using practical capacity. Practical capacity for a year is defined as 1,000,000 units requiring 200,000 standard direct labor hours. Budgeted overhead for the year is $750,000, of which $300,000 is fixed overhead. During the year, 900,000 units were produced using 190,000 direct labor hours. Actual annual overhead costs totaled $800,000, of which $294,700 is fixed overhead.

Required:

Fixed Overhead Spending Variance 5,300 Favorable

Fixed Overhead Volume Variance 30,000 Unfavorable

Variable Overhead Spending Variance 77,800 Unfavorable

Variable Overhead Efficiency Variance 22,500 Unfavorable

3. Prepare the journal entries that reflect the following:

Assignment of overhead to production

Recognition of the incurrence of actual overhead

Recognition of overhead variances

Closing out overhead variances, assuming they are not material

Note: Close the variances with a debit balance first. For compound entries, if an amount box does not require an entry, leave it blank or enter "0".

a.
b.
c.
d.

Answer 1

Variable overheadspendingvaraince -(Variable overheadrateper labor hour xActual hour) -Acutal overheadvariance -(2.25x190,000) -S505,300 -427,500-505,300 77,800 Working notes: Variableoverhead Total overhead-Fixedoverhead $750,000-S300,000 -$450,000 Budgeted variable overhead Standarddirect labor hour 450,000 200,000 Variable overhead rate perlabor hour- -2.25 Actual overheadvariance Actual annual overhead cost -Fixed overhead -$800,000-S294,700 -S505,300 Applied variable overhead-Unit producedx Standard labor hour per unitx Variable overhead rate perlabor hour 900.000 x 0.2 x 2.25 -405,000

Journal Ent S. No. Particular Debit SCredit S 675,000 Work in process Variable overhead control 405,000 270,000 Fixed overhead control Variable overhead control 505,300 Fixed overhead control 294,700 Miscellaneous accounts 800,000 Fixed overhead volume variance 30,000 77,800 22,500 able overhead spending variance Variable overhead efficiencv variance Fixed overhead spending varian Fixed overhead control Variable overhead control 5,300 24,700 100,300

d. Cost of goods sold 130,300 30,000 77,800 22,500 Fixed overhead volume variance Variable overhead spending variance Variable overhead efficiency variance 530 Fixed overhead spending varian ce Cost of goods sold 5,300