Question

Knee-Jerk Industries operates a delivery service for local restaurants, delivering call-in, to-go meals for restaurant customers. Variable overhead costs are applied at the budgeted rate of $26 per driving hour. The typical roundtrip takes a driver 15 minutes to complete. Actual results for March follow.

Number of roundtrips run: 1,390

Hours of delivery time: 910

Variable overhead cost incurred: $4,300

Knee-Jerk uses flexible budgets and variance analysis to monitor performance.

Required:

1. Prepare a flexible-budget performance report that shows (1) actual variable overhead, (2) the amount of variable overhead that should have been incurred for the number of roundtrips taken, and (3) the variance between these amounts.
2. Compute the company's variable-overhead spending and efficiency variances.

A.	Budgeted variable overhead
	Variance	$0
B.	Spending variance
	Efficiency variance

Answer 1

A.

Budgeted Variable Overhead	$            9,035
Actual Variable Overhead	$            4,300
Variance	$            4,735	Favorable

Budgeted Variable Overhead = 1390 roundtrips x 15 / 60 hours x $26 per hour

B.
Spending Variance = (Actual Rate - Standard Rate) x Actual hours
= ($4.73 - 26) x 910 = $19355 (F)
Actual Rate = $4300 / 910 = $4.73 per hour

Efficiency Variance = (Actual hours - Standard hours) x Standard Rate
= (910 - 347.5) x $26 = $14625 (U)
Standard hours = 1390 x 1/4 hour = 347.50 hours