Question

Overhead Variances, Four-Variance Analysis

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 125,000 units requiring 500,000 direct labor hours. (Practical capacity is 520,000 hours.) Annual budgeted overhead costs total $830,000, of which $585,000 is fixed overhead. A total of 119,100 units using 498,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $261,100, and actual fixed overhead costs were $555,350.

Required:

1. Compute the fixed overhead spending and volume variances.

Fixed Overhead Spending Variance	$	Favorable
Fixed Overhead Volume Variance	$	Unfavorable

2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations

Variable Overhead Spending Variance	$	Unfavorable
Variable Overhead Efficiency Variance	$	Unfavorable

Answer 1

1. Compute the fixed overhead spending and volume variances.

Fixed Overhead Spending Variance = Actual Fixed overheads - Budgeted fixed overheads

= 555350 - 585000

= (29650)

The actual fixed overheads are lower than budgeted therefore the variance is faverable

Fixed Overhead Volume Variance =

a	Budgeted overheads	585,000
b	Budgeted production	125,000
c=a/b	Fixed overhead absorption rate	4.68
d	Actual production	119,100
e= c * d	Absorbed overheads	557,388
f=e-a	Variance	(27,612)

2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations

Variable Overhead Spending Variance = Actual hours *(Actual rate - Standard rate)

a	Total budgeted overheads	830,000
b	Fixed	585,000
c=a-b	Variable	245,000
d	Budgeted hours	500,000
e= c/d	Standard rate	0.49
f	Actial variable overheads	261,100
g	Actual hours	498,000
h=f/g	Actual Rate	0.5242971
i= (h-e) *g	Variance as per formula	17,080

The Above variance is Unfaverable as actual rate is higher than standard rate

Variable Overhead Efficiency Variance = Standard Rate * (Actual Hours - Standard Hours)

a	Standard rate	0.49
b	Actual hours	498,000
c	Budgeted hours	500,000
d= (b-c) *a	Faverable Variance	(980)