Oerstman, 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 120,000 units requiring 480,000 direct labor hours. (Practical capacity is 500,000 hours) Annual budgeted overhead costs total $772,800, of which $556,800 is fixed overhead. A total of 119,300 units, using 478,000 direct labor hours, were produced during the year. Actual variable overhead costs for the year were $260,400 and actual fixed overhead costs were $555,450. Required: 1. Compute the Fixed Overhead Spending variance and indicate if favorable or unfavorable. 2. Compute the Fixed Overhead Volume variance and indicate if favorable or unfavorable.
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.
Oerstman, Inc. uses a
The budget is based on an expected annual output of 120,000 units requiring 480,000 direct labor hours.
(Practical capacity is 500,000 hours)
Annual budgeted overhead costs total $772,800, of which $556,800 is fixed overhead.
A total of 119,300 units, using 478,000 direct labor hours, were produced during the year.
Actual variable overhead costs for the year were $260,400 and actual fixed overhead costs were $555,450.
Required:
1. Compute the Fixed Overhead Spending variance and indicate if favorable or unfavorable.
2. Compute the Fixed Overhead Volume variance and indicate if favorable or unfavorable.
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