Question

Overhead Variances, Two- And Three-Variance Analyses

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 124,000 units requiring 496,000 direct labor hours. (Practical capacity is 516,000 hours.) Annual budgeted overhead costs total $758,880, of which $555,520 is fixed overhead. A total of 119,100 units using 494,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $241,400, and actual fixed overhead costs were $555,450.

Required:

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

Budget Variance	$	Unfavorable
Volume Variance	$	Unfavorable

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

Spending Variance	$	Unfavorable
Efficiency Variance	$	Unfavorable
Volume Variance	$

Answer 1

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Oerstman, Inc.
Overhead variances using a two-variance analysis	Amount $	Note
Expected annual output	124,000.00	A
Direct labor hours required	496,000.00	B
Direct labor hours per unit	4.00	C=B/A
Annual budgeted overhead costs	758,880.00	D
Annual budgeted Fixed overhead	555,520.00	E
Annual budgeted Variable overhead	203,360.00	F=D-E
Variable overhead per hour	0.41	R=F/B
Variable Overhead Variance		Finished Units	Input per unit	Input required	Rate per unit	Amount $
Standard Hours allowed for Actual Output at Standard Rate		119,100.00	4.00	476,400.00	0.41	195,324.00	G
Actual Hours of Input, at Standard Rate				494,000.00	0.41	202,540.00	H
Actual Hours of Input, at Actual Rate						241,400.00	I
Variable overhead efficiency variance (H-G)						7,216.00	Unfavorable
Variable overhead Spending variance (I-H)						38,860.00	Unfavorable
Actual Fixed cost						555,450.00		P
Standard Fixed cost						555,520.00		J
Fixed Overhead Budget Variance						70.00	Unfavorable	Q=J-P
Budget Variance
Variable overhead efficiency variance						7,216.00
Variable overhead Spending variance						38,860.00
Fixed Overhead Budget Variance						70.00
Overhead Budget Variance						46,146.00	Unfavorable
Fixed Overhead Volume Variance
Annual budgeted Fixed overhead						555,520.00		J
Annual budgeted (hours)						496,000.00		K
Standard Fixed overhead per hour						1.12		L=J/K
Standard Hours allowed for Actual Output						476,400.00		M
Applied fixed overhead						533,568.00		N=M*L
Overhead Volume Variance						21,952.00	Unfavorable	O=J-N
Overhead variances using a three-variance analysis
Spending Variance
Variable overhead Spending variance						38,860.00
Fixed Overhead Budget Variance						70.00
Spending Variance						38,930.00	Unfavorable
Efficiency variance
Variable overhead efficiency variance						7,216.00	Unfavorable
Volume Variance
Fixed Overhead Volume Variance						21,952.00	Unfavorable