Question

Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 123,500 units requiring 494,000 direct labor hours. (Practical capacity is 514,000 hours.) Annual budgeted overhead costs total $765,700, of which $558,220 is fixed overhead. A total of 119,200 units using 492,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $240,400, and actual fixed overhead costs were $555,150.

1) Compute overhead variances using a two-variance analysis.

a) Budget Variance?

b) Volume Variance?

2) Compute overhead variances using a three-variance analysis.

a) Spending Variance?

b) Efficiency Variance?

c) Volume Variance?

Answer 1

Notations used in the Solution :

SR - Standard Overhead Rate

AR - Actual Overhead Rate recovered

SH - Standard Hours for Actual Output

AH - Actual Hours For Actual Output

a) Variable Overhead Variances :

Budgeted Variable Overheads : $7,65,700 - $ 5,58,220 = $2,07,480

Budgeted Hours per Anum: 4,94,000 Hours

Standard/Budgeted Overhead Rate : (Budgeted Variable Overheads)/(Budgeted Hours per Anum)

SR = $2,07,480/4,94,000

SR = $ 0.42 per Hour

Actual Variable Overheads Recovered: (AR*AH) = $ 2,40,400

Actual Hours Worked: 4,92,000 Hours

SH = (Budgeted Hours*Actual Output)/Budgeted Output

SH = (494000*119200)/123500

SH = 476800 Hours

SR = = $ 0.42 per Hour

Variable Overhead Efficiency Variance: (SH - AH) * SR

Variable Overhead Efficiency Variance: (476800-492000) * $ 0.42

Variable Overhead Efficiency Variance: $6384 Adverse.

Variable Overhead Expenditure Variance: ( SR - AR ) * AH = (SR*AH - AR*AH)

Variable Overhead Expenditure Variance : ( $ 0.42 * 492000) - ($ 240400)

Variable Overhead Expenditure Variance: $ 33760 Adverse

Variable overhead Cost/Budget Variance: (SR*SH - AR*AH)

Variable overhead Cost Variance = ($0.42*476800) - ($ 240400)

Variable overhead Cost Variance = $ 40144 Adverse

b) Fixed Overhead Variances

Standard Fixed Overhead per unit = Budgeted Fixed Overhead
     Budgeted Production

Standard Fixed Overhead per unit = ($558220)/ 123500

Standard Fixed Overhead per unit = $ 4.52 per Unit

Absorbed Fixed Overhead by Actual production = Actual Production * Standard rate

Absorbed Fixed Overhead = 119200*4.52

Absorbed Fixed Overhead = $ 538784

i) Fixed Overhead Budget Variance = Overhead Recovered/Absorbed – Actual Overhead

Fixed Overhead Budget Variance = $ 538784 - $ 555150

Fixed Overhead Budget Variance = $ 16366 Adverse

Fixed Overhead Expenditure/Spending variance = Budgeted Overhead – Actual Overhead

Fixed Overhead Expenditure/Spending variance = $ 558220 - $ 555150

Fixed Overhead Expenditure/Spending variance = $ 3070 Favourable

Fixed Overhead Volume Variance = Overhead recovered – Budgeted Overhead

Fixed Overhead Volume Variance = $538784 - $558220

Fixed Overhead Volume Variance = $19436 Adverse

Standard Fixed Overhead Rate Per Hour = $558220/494000

Standard Fixed Overhead Rate Per Hour = $1.13 Per Hour

Fixed Overhead Capacity Variance = (Actual Hours - Budgeted Hours) * Standard Fixed Overhead Rate Per Hour

Fixed Overhead Capacity Variance = (492000 - 494000) * $1.13

Fixed Overhead Capacity Variance = $2260 Adverse

Fixed Overhead Efficiency Variance = (Standard Hours - Actual Hours) *  Standard Fixed Overhead Rate Per Hour

Standard Hours for actual output: SH = (Budgeted Hours*Actual Output)/Budgeted Output

SH = (494000*119200)/123500

SH = 476800 Hours

Fixed Overhead Efficiency Variance = (476800-492000)*$1.13

Fixed Overhead Efficiency Variance = $17176 Adverse