Question

Suppose that the variable production overhead cost of a product is as follows:

4 hours at $3 = $12per unit.

During the period, 5,000 units of the product were made. The labour worked 6,050 hours of which 90 hours were recorded as idle time. The Variable overhead cost was $20,000.

Calculate the following variances:

1. The variable overhead total variance
2. The Variable production overhead Expenditure Variance
3. The Variable production overhead Efficiency Variance.

Answer 1

Standard hours to produce 5000 units =actuai units * standard hrs per unit =5000*4=20000

Standard cost for 5000 units =Standard hrs for 5000 units * standard rate per unit = 20000*3 = 60000

Actual per hr overhead rate =Actul overhead/actual hrs of production = 20000/6050=3.3057

Efficiency Variance :

(actual labor hours less budgeted labor hours) x hourly rate for standard variable overhead

=(6050-20000)*3 =41850 Favourable

Expenditure variance :

(actual labor rate less budgeted labor rate) x Actual hrs worked

=(3.3057-3)*6050 = 1850 Adverse

Total overhead variance =

=Expenditure variance + Efficiency variance

or

= Actual cost - Standard Cost

=20000-60000(workings on the top) or 41850-1850

= 40000 Favourable