Question

Alden Company uses a two-variance analysis for overhead variances. Practical capacity is defined as 36 setups...

Alden Company uses a two-variance analysis for overhead variances. Practical capacity is defined as 36 setups and 36,000 machine hours to manufacture 7,200 units for the year. Selected data for 2016 follow:

  Budgeted fixed factory overhead:
     Setup   $ 57,600   
     Other 265,000
$ 322,600
  Total factory overhead incurred $ 494,000
  Variable factory overhead rate:
     Per setup $ 650
     Per machine hour $ 4
  Total standard machine hours allowed for the units manufactured 24,000 hours
  Machine hours actually worked 28,000 hours
  Actual total number of setups 32

1) Assume that the company includes all setup costs as variable factory overhead. The budgeted total fixed overhead, therefore, is $265,000, and the standard variable overhead rate per setup is $2,250. What are the (a) overhead spending, (b) efficiency, and (c) flexible-budget variances for the year?

  2) Assume that the company uses only machine hours as the activity measure to apply both variable and fixed overhead, and that it includes all setup costs as variable factory overhead. What is the (a) overhead spending variance, (b) efficiency variance, and (c) flexible-budget variance for the year?   

Homework Answers

Answer #1
a)Standard MH per unit=36000/7200=5
No of units manufactured= Std allowed MH/std MH per unit
=24000/4=6000
Budgeted no of units per setup= units/no of set up
=7200/36=200 units/setup
Std no of setups for units manufactured
=6000/200=20
Spending variance=variable Overhead+Fixed overhead- actual overhead
VOH=(32*650)+(28000*4)
Fixed OH=322600
actual overhead=494,000
=[(32*650)+(28000*4)+322600)]-494000
=455400-494000
=38600 unfavourable
Efficency variance=[(20*650)+(24000*4)+(322600)]-455400
=436800-455400
=26,600U
Flexible budget variance= Spending variance+Efficency variance
=38600+26600= 65200 U
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