Alden Company uses a three-variance analysis for factory overhead variances. Practical capacity is defined as 26 setups and 26,000 machine hours to manufacture 6,500 units for the year. Selected data for 2022 follow: Budgeted fixed factory overhead: Setup cost $ 54,600 Other 178,000 $ 232,600 Total factory overhead cost incurred $ 481,000 Variable factory overhead rate: Per setup $ 400 Per machine hour $ 6.00 Total standard machine hours allowed for the units manufactured 30,000 hours Machine hours actually worked 34,500 hours Actual total number of setups 22 Actual number of units produced during the year 7,500 Standard number of setups for units produced during the year 30 Required: 1. Compute (a) the total overhead spending variance, (b) the overhead efficiency variance, and (c) the total overhead flexible budget variance for 2022. Label each variance as favorable (F) or unfavorable (U). 2. Assume that the company includes all setup costs as variable factory overhead. The budgeted total fixed overhead, therefore, is $178,000, and the standard variable overhead rate per setup is $2,500. What are (a) the total overhead spending variance, (b) the overhead efficiency variance, and (c) the total overhead flexible budget variance for the year? Label each variance as favorable (F) or unfavorable (U).
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Alden Company uses a three-variance analysis for factory
| Budgeted fixed factory overhead: | |||
|---|---|---|---|
| Setup cost | $ 54,600 | ||
| Other | 178,000 | $ 232,600 | |
| Total |
$ 481,000 | ||
| Variable factory overhead rate: | |||
| Per setup | $ 400 | ||
| Per machine hour | $ 6.00 | ||
| Total standard machine hours allowed for the units manufactured | 30,000 | hours | |
| Machine hours actually worked | 34,500 | hours | |
| Actual total number of setups | 22 | ||
| Actual number of units produced during the year | 7,500 | ||
| Standard number of setups for units produced during the year | 30 |
Required:
1. Compute (a) the total overhead spending variance, (b) the overhead efficiency variance, and (c) the total overhead flexible
2. Assume that the company includes all setup costs as variable factory overhead. The budgeted total fixed overhead, therefore, is $178,000, and the standard variable overhead rate per setup is $2,500. What are (a) the total overhead spending variance, (b) the overhead efficiency variance, and (c) the total overhead flexible budget variance for the year? Label each variance as favorable (F) or unfavorable (U).
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