Question

Question 4:

Eric Co. uses machine hours to apply standard overhead cost to production. The following data pertain to October:

Master budget data:
Units		2,500
Total machine hours (denominator volume)		100,000
Total variable overhead cost	$	250,000
Total fixed overhead cost	$	50,000
Actual operating results:
Variable overhead cost incurred	$	265,000
Fixed overhead cost incurred	$	54,000
Units manufactured		2,250
Total machine hours		96,000

Required: Compute the following variances using machine hours as the activity variable used to assign standard overhead costs to production. Show calculations, indicate favorable / unfavorable, and provide a short description (i.e., interpretation) of each of the variances.

1. Variable overhead spending variance

2. Variable overhead efficiency variance

3. Fixed overhead spending variance

4. Fixed overhead production-volume variance.

Please explain and show work. Will rate.

Answer 1

Solution 1 & 2:

Standard machine hours per unit = 100,000/2500 = 40 hours

Standard rate of variable overhead = $250,000 / 100000 = $2.50 per machine hour

Standard hours of actual production = 2250*40 = 90000 hours

Actual rate of variable overhead = $265,000 /96000 = $2.76041666

Variable overhead spending variance = (SR - AR) * AH = ($2.50 - $2.76041666) * 96000 = $25,000 U

Variable overhead efficiency variance = (SH - AH) * SR = (90000- 96000) * $2.50 = $15,000 U

Solution 3&4:

Budgeted fixed overhead = $50,000

Actual fixed overhead = $54,000

Fixed overhead rate = $50,000 / 100000 = $0.50 per machine hour

Fixed overhead applied = 90000 * $0.50 = $45,000

Fixed overhead spending variance = Budgeted fixed overhead - Actual fixed overhead = $50,000 - $54,000 = $4,000 U

Fixed overhead volume variance = Fixed overhead applied - Budgeted fixed overhead = $45,000 - $50,000 = $5,000 U