Question

OVERHEAD APPLICATION, FIXED AND VARIABLE OVERHEAD VARIANCES

Tules Company is planning to produce 2,400,000 power drills for the coming year. The company uses direct labour hours to assign overhead to products. Each drill requires 0.5 standard hour of labour for completion. The total budgeted overhead was $2,700,000. The total fixed overhead budgeted for the coming year is $1,320,000. Predetermined overhead rates are calculated using expected production, measured in direct labour hours. Actual results for the year are:

Actual production (units)    2,360,000

Actual direct labour hours 1,190,000

Actual variable overhead    $1,410,000

Actual fixed overhead         $1,260,000

Required:

1. Compute the applied fixed overhead.

2. Compute the fixed overhead spending and volume variances.

3. Compute the applied variable overhead.

4. Compute the variable overhead spending and efficiency variances.

Answer 1

Solution 1:

Budgeted rate of fixed overhead = Budgeted fixed overhead / Budgeted direct labor hours

= $1,320,000 / 1200000 = $1.10 per labor hour

Applied fixed overhead = SH * SR = (2360000*0.50) * $1.10 = $1,298,000

Solution 2:

Fixed overhead spending variance = Budgeted fixed overhead - Actual fixed overhead

= $1,320,000 - $1,260,000 = $60,000 F

Fixed overhead volume variance = Fixed overhead applied - Budgeted fixed overhead

= $1,298,000 - $1,320,000 = $22,000 U

Solution 3:

Variable overhead rate per hour = ($2,700,000 - $1,320,000) / 1200000 = $1.15 per hour

Actual rate of variable overhead = $1,410,000 / 1190000 = $1.18487 per hour

Variable overhead spending variance = (SR - AR) * AH = ($1.15 - $1.18487) * 1190000 = $41,500 U

Variable overhead efficiency variance = (SH - AH) * SR = (2360000*0.50 - 1190000) * $1.15 = $11,500 U