Question

The following information is for the third quarter of this year:

Planned Actual

Production 92,000 units 87,000 units

Direct labor hours 506,000 DL hrs 380,000 DL hrs   

Fixed manufacturing overhead $205,000 $182,400

Variable manufacturing overhead $910,000 $841,500

Standard direct labor hour per unit 5.5

Required: Calculate the following three overhead variances, overhead is allocated based on direct labor hours:

1. Overhead volume variance

2. Overhead efficiency variance

3. Overhead spending variance

4. Formulate a hypothesis about the cause of the three variances

Answer 1

1) Over head volume variance:

Fixed over head rate [normal capacity hours - standard hours allowed]

= 380000[(182400/380000)-(205000/506800)]

= 380000* [ 0.480-0.404]

= 380000*[0.076]

= 28880 UnFavourble

2) Overhead efficiency variance

STNADARD RATE * [Actual hours- Standard hours]

= $5.5[ 380000-506800]

= $5.5*[-126800]

= $ 697400 favourble

3) Overhead spending variance

=[actual over head - planed over head ]

=[(841500+182400)-(910000+205000)]

=[1023900-1115000]

=[-91100] favourable

4)Hypothesis about the cause of the three variances is Volume is used more than standard or budget overheads allocated and however in case efficiency and spending variances are within the limits specified or lower the budget is allocated and in case hypothesis uses of variances is different compared to other variances.