Hoover Company applies overhead based on direct labor hours and has the followin

Question

Hoover Company applies overhead based on direct labor hours and has the following available for the current month:
Standard:

Direct labor hours per unit
5
Variable overhead per DLH
$.75
Fixed overhead per DLH

(based on 8,900 DLHs)
$1.90
Actual:

Units produced
1,800
Direct labor hours
8,900
Variable overhead
$6,400
Fixed overhead
$17,500
1) Refer to Hoover Company. Compute all the OH appropriate variances using the four-variance approach.
2) Refer to Hoover Company. Compute all the OH appropriate variances using the three-variance approach.

Explanation / Answer

FOUR VARIANCE APPROACH
Sales Price Variance
= Actual sales revenue - Flexible budget sales revenue for actual units sold
=(8900-1800)*(5+1.90+.75)=54315$


Unit Cost Variance
= Actual variable costs - Flexible budget variable costs for actual units sold
=1800(0.75)-6400=(-3000)
Revenue Part of Sales Volume Variance
= Flexible Budget Sales Revenue for actual units sold - Master budget sales revenue
=1800(5+1.9+0.75)-8900+6400+17500=19030
Total Variance in Sales Revenue = Sales price variance + Revenue part of sales volume variance
19030+54315=73345

three variance approach
Formula of Spending Variance:

[Actual factory overhead – Budgeted allowance based on actual hours worked*]

=8900-1800=7100

Following formula/equation is used for the calculation of factory overhead idle capacity variance:

[Budgeted allowance based on actual hours worked*– (Actual hours worked × Standard overhead rate)]

1800-(8900)=(-7100)

Following formula is used for the calculation of factory overhead efficiency variance:

[(Actual hours worked × Standard overhead rate) – (Standard hours allowed for actual production × Standard overhead rate)]

8900-8900*5 =(-35600)

cheeers :)

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