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 123,000 units requiring 492,000 direct labor hours. (Practical capacity is 512,000 hours.) Annual budgeted overhead costs total $772,440, of which $551,040 is fixed overhead. A total of 119,300 units using 490,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $240,600, and actual fixed overhead costs were $555,750.

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	$	Unfavorable

Answer 1

Solution: