Question

Chocolate, 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 145,000 units requiring 620,000 direct labor hours. (Practical capacity is 630,000 hours.) Annual budgeted overhead costs total $802,600, of which $585,800 is fixed overhead. A total of 143,400 units using 619,200 direct labor hours were produced during the year. Actual variable overhead costs for the year were $275,800, and actual fixed overhead costs were $526,400.

Required: a. Compute the fixed overhead spending and volume variances.

b. Compute the variable overhead spending and efficiency variances.

Answer 1

Answer:

a)

Fixed overhead spending variance = (budget fixed overhead-actual fixed overhead)

= 585800 - 526400

= 59400 (favourable)

Fixed overhead volume variance = (absorbed fixed overhead-budgeted fixed overhead)

= ((585800 / 145000) * 143400 - 585800)

= -6464 (Unfavourable)

b)

variable overhead spending variance = (standard variable overhead - actual variable overhead cost)

= [(802600 - 585800) - 275800]

= 216800 - 275800

= -59000 (unfavourable)

variable overhead efficiency variance = (absorbed variable overhead - budgeted variable overhead)

= ((216800 / 145000) * 143400 - 216800)

= [1.49 * 143400 - 216800]

= [214407 - 216800]

= -2393 (unfavourable)