Question

Better Fitness Gear applies overhead on the basis of direct labor hours. Five direct labor hours are required for each unit produced. Planned production for the period was set at 8,000 units. Budgeted fixed manufacturing overhead for the period is budgeted at $20,000 and variable manufacturing overhead is budgeted at $100,000. The 48,500 hours worked during the period resulted in production of 9,500 units. Actual manufacturing overhead cost incurred was $156,000.

Required: Calculate the three overhead variances:

a. Total Spending Variance

b. Total Efficiency Variance

c. Total Volume Variance

d. Proof: Total Factory Overhead Variances

e. Interpret your variances

Answer 1

Standard rate per unit Budgeted OH/Budgeted output (120000/8000) Standard rate per hr Budgeted OH/Budgeted hrs-[120000/(8000*5)] 15.00 3.00 Note List of Abbreviations used OH AO AH SR p.u SR p.h Overhead Actual Output produced Actual hours worked Standard rate per unit Standard rate per hr Manufacturing OH Cost Variances AO SR p.u AH SR p.h Budgeted OH Actual OH 9500 15) 142,500 S 8500 3) 145,500 S (20000+100000) 1.20,000 S 1,56,000 Conclusion e. Interpretation a Total Spending Variance Budgeted OH-Actual OH 120000-156000 36,000 Unfavorable 25,500 Favorable 22,500 Favorable 13,500 Unfavorable b Total Efficiency Variance AH*SR p.h - Budgeted OH- 145500-120000 c Total Volume Variance AO SR p.u-Budgeted OH 142500-120000 OH Variance Spending+Volume Var.- 36000+22500 Total Fac