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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

The following information relates to

Longman, Inc.'s

overhead costs for the month:

1(Click

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Requirements

1.	Compute the overhead variances for the month: variable overhead cost variance, variable overhead efficiency variance, fixed overhead cost variance, and fixed overhead volume variance.
2.	Explain why the variances are favorable or unfavorable.

Requirement 1. Compute the overhead variances for the month: variable overhead cost variance, variable overhead efficiency variance, fixed overhead cost variance, and fixed overhead volume variance.

Begin by selecting the formulas needed to compute the variable overhead (VOH) and fixed overhead (FOH) variances, and then compute each variance amount.

(Actual cost - Standard cost) × Actual hours	=	VOH cost variance
(Actual hours - Standard hours allowed) × Standard cost	=	VOH efficiency variance
Actual overhead - Budgeted overhead	=	FOH cost variance
Budgeted overhead - Allocated overhead	=	FOH volume variance

=
=
=
=

Requirement 2. Explain why the variances are favorable or unfavorable.

The variable overhead cost variance is

(1)

because

Longman

actually spent

(2)

than budgeted.

The variable overhead efficiency variance is

(3)

because the actual hours used was

(4)

than budgeted.

The fixed overhead cost variance is

(5)

because

Longman

actually spent

(6)

than budgeted for fixed overhead.

The fixed overhead volume variance is

(7)

because

Longman

allocated

(8)

overhead to jobs than the budgeted fixed overhead amount.

1: Data Table

Static budget variable overhead	$7,500
Static budget fixed overhead	$3,000
Static budget direct labor hours	1,500 hours
Static budget number of units	7,500 units

Longman

allocates manufacturing overhead to production based on standard direct labor hours. Last month,

Longman

reported the following actual results: actual variable overhead,

$10,100;

actual fixed overhead,

$2,840;

actual production of

7,200

units at

0.25

direct labor hours per unit. The standard direct labor time is

0.2

direct labor hours per unit

(1,500

static direct labor hours /

7,500

static units).

(1)

unfavorable

favorable

(2)

less

(3)

unfavorable

favorable

(4)

less

(5)

favorable

unfavorable

(6)

less

(7)

unfavorable

favorable

(8)

less

YOU ANSWERED:

Actual overhead - (Standard hours allowed × Standard cost)	=	VOH cost variance
(Actual hours - Standard hours allowed) × Standard cost	=	VOH efficiency variance
Actual overhead - Budgeted overhead	=	FOH cost variance
Budgeted overhead - Allocated overhead	=	FOH volume v

Definition Definition System of assigning an estimated cost to the product (instead of the actual cost) so that the product cost can be determined well in advance and the pricing of the product can be done on time. Since the actual cost cannot be predicted at the initial stage of the production process, the estimated cost is recorded in the books. Any deviation of the estimated cost of the actual cost is adjusted in the books at the end of the period.

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