Chapter 15, Problem 31E

1.

To determine

Compute the total overhead spending variance, the efficiency variance, and the fixed overhead production volume variance.

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

A cost variance is the difference between the cost actually incurred and the amount of costs money earmarked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

Overhead costs, sometimes referred to as overhead or operating expenses, are those costs that are associated with running a business that cannot be connected to constructing or manufacturing a product or a service. They are the expenses the business incurs in staying in business, irrespective of its level of achievement.

The total overhead cost variance for the period is equal to the difference between actual overhead cost incurred and the standard overhead cost applied to the production.

The overhead total flexible-budget variance is equal to the difference between the overhead total actual factory overhead cost over a period and the output-based flexible budget overhead overall.

The fixed overhead spending (budget) variance is the difference between budgeted and actual fixed factory costs overhead for the period.

Calculate Standard variable factory overhead rate per direct labor hour (DLH):

$\begin{array}{c}\text{Std}\text{.variable factory overhead rate}=\text{Bgtd}\text{. total variable factory Overhead}÷\text{Bgt}\text{. total DLH}\\ =\$15,000÷\$2,500\text{ hrs}\\ =\$6.00\text{per direct labor hour}\end{array}$

Calculate Standard fixed factory overhead rate per direct-labor hours (DLH):

$\begin{array}{c}\text{Std}\text{. fixed factory overhead DLH}=\text{Bgtd}\text{. Total fixed factory overhead}÷\text{Practical capacity LH}\\ =\$90,000÷\$2,500\\ =\$36.00\text{/direct labor hr}\end{array}$

The standard factory overhead rate per direct labor hour (DLH) is $42.00/DLH ($6.00 + $36.00).

Calculate Standard direct-labor hours (DLH) per unit:

$\begin{array}{c}\text{Std}\text{. DLH/unit}=\text{Practical capacity labor hrs}÷\text{Practical capacity in units}\\ =\$2,500÷\$5,000\text{ hrs}\\ =\$0.5\text{ direct labor hour/unit}\end{array}$

The three variance overhead analysis is shown below:

Actual Cost	Flexible Budget Based on Inputs (AQ × SP)	Flexible Budget Based on Output (SQ × SP)	Applied (SQ × SP)
15,600	2,700 × $6 = $  16,200	2,400 × $6 = $14,400	2,400 × $42 = $100,800
Add: 92,000	90,000	90,000
$107,600	$106,200	$104,400

The formula to calculate the variable overhead spending (budget) variance is as follows:

$\text{Variable overhead spending variance}=\text{Actual variable cost overhead}-\text{Flexible budget based on inputs}$

Calculate the variable overhead spending (budget) variance:

$\begin{array}{c}\text{Variable overhead spending variance}=\$107,600-\$106,200\\ =\$1,400\text{ U}\end{array}$

Hence, the variable overhead spending (budget) variance is $1,400 U.

The formula to calculate variable overhead efficiency variance is as follows:

$\text{Efficiency variance}=\text{Flexible budgets based on inputs}-\text{Flexible budget based on output}$

Calculate the variable overhead efficiency variance:

$\begin{array}{c}\text{Variable overhead Efficiency variance}=\$106,200-\$104,400\\ =\$1,800\text{ U}\end{array}$

Hence, the variable overhead efficiency variance is $1,800 U.

The formula to calculate the fixed overhead production volume variance is as follows:

$\text{Fixed overhead production volume variance}=\text{Budgeted fixed overhead}-\text{Applied fixed Overhead}$

Calculate the fixed overhead production volume variance:

$\begin{array}{c}\text{Fixed overhead production volume variance}=\$104,400-\$100,800\\ =\$3,600\text{ U}\end{array}$

Hence, the fixed overhead production volume variance is $3,600 U.

2.

To determine

Compute the spending variances both for variable and fixed; the efficiency variance, and the fixed overhead production volume variance.

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

Overhead costs, sometimes referred to as overhead or operating expenses, are those costs that are associated with running a business that cannot be connected to constructing or manufacturing a product or a service. They are the expenses the business incurs in staying in business, irrespective of its level of achievement.

A cost variance is the difference between the cost actually incurred and the amount of costs money earmarked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

The formula to calculate the variable overhead spending (budget) variance is as follows:

$\text{Variable overhead spending variance}=\text{Actual variable cost overhead}-\text{Flexible budget based on inputs}$

Calculate the variable overhead spending (budget) variance:

$\begin{array}{c}\text{Variable overhead spending variance}=\left(2700\text{ hrs}\times \$5.7777\text{hr}\right)-\left(2700\times \$\text{6}.00\text{/hr}.\right)\\ =\$15,600-\$16,200\\ =\$600\text{ F}\end{array}$

Hence, the variable overhead spending (budget) variance is $600 F.

The formula to calculate variable overhead efficiency variance is as follows:

$\text{Efficiency variance}=\text{Flexible budgets based on inputs}-\text{Flexible budget based on output}$

Calculate the variable overhead efficiency variance:

$\begin{array}{c}\text{Variable overhead Efficiency variance}=\left(2700\times \$\text{6}.00\text{/hr}\right)-\left(4,800\times 0.5\times \$\text{6}.00\text{/hr}\right)\\ =\$16,200-\$14,400\\ =\$1,800\text{ U}\end{array}$ Hence, the variable overhead efficiency variance is $1,800 U.

The formula to calculate fixed overhead spending (budget) variance is as follows:

$\text{Fixed overhead spending (budget) variance}=\text{Actual fixed overhead}-\text{Budgeted fixed overhead}$

Calculate fixed overhead spending (budget) variance:

$\begin{array}{c}\text{Fixed overhead spending }\left(\text{budget}\right)\text{variance}=\$\text{92},000–\$\text{92},000\\ =\$\text{2},000\text{ F}\end{array}$

Hence, the fixed overhead spending (budget) variance for March is $2,000 F

Fixed variance in the overhead production volume is the difference between the budgeted fixed overhead over the period and the standard fixed overhead applicable to production.

The formula to calculate the fixed overhead production volume variance is as follows:

$\text{Fixed overhead production volume variance}=\text{Budgeted fixed overhead}-\text{Applied fixed Overhead}$

Calculate the fixed overhead production volume variance:

$\begin{array}{c}\text{Fixed overhead production volume variance}=\$\text{9}0,000-\left(4,800\text{ units}\times \text{0}\text{.5 hrs}\times \$\text{36/hr}.\right)\\ =\$90,000-\$86,400\\ =\$3,600\text{ U}\end{array}$ Hence, the fixed overhead production volume variance is $3,600 U.

Calculate total overhead spending variance, total overhead efficiency variance and the fixed overhead production volume variance:

Particulars
Overhead Spending Variance:
Variable Overhead Spending Variance	$\$600\text{ F}$
Fixed Overhead Spending Variance	$2,000\text{ U}$	$\$1,400\text{ U}$
Overhead Efficiency Variance:
Variable overhead efficiency variance		$\$1,800\text{ U}$
Overhead production volume variance:
Fixed Overhead Production Volume Variance		$\$3,600\text{ U}$
Total Overhead Variance		$\$6,800\text{ U}$