Question

Pratt, Inc., uses a standard costing system and develops its predetermined overhead rate from the annual flexible budget. The budget is based on an expected annual output of 40,000 units requiring total 160,000 budgeted direct labor hours. The company applied overhead based on direct labor hours. Annual budgeted overhead costs totaal $1,280,000of which $480,000 is variable overhead. A total of 30,000 units were produced during the year, using 100,000direct labor hours. Actual overhead costs incurred for the year were total $1,100,000 of which $320,000 were variable overhead costs.

1. Compute the variable overhead spending and efficency variances. Indicate whether the variiances are favorable or unfaborable

2.compute the fixed overhead budget and volume variances. indicate whether the variances are favorable or unfavorable

Answer 1

Std labor hours per unit of output (160000/40000): 4 hours
Std hours allowed for actual output (30000*4): 120000 hours
Std variable OH rate per hour (480000/160000): 3 per hour
Std fixed OH per hour: (800,000/160000): 5 per hour
Variable H spending variance: Std hours*Std rate -Actual variable OH
			120000 *3 - 320000 = 40000 Fav
Variable OH efficiency variance: Std rate (Std hours-Actual hours)
			3 (120000-100000): 60000 Fav
Budgeted Fixed OH: $ 800000
Fixed OH budget variance: Budgeted OH-Actual fixed Oh
		800000-780000 =20000 Favv
Fixed OH Volume variance: Std hours*Std Fixed OH rate - Budgeted Fixed Oh
		120000*5- 800,000= 200000 Unfav