Lancaster Ltd. produces a unique item. Lancaster\'s management team wishes to pr
ID: 2460617 • Letter: L
Question
Lancaster Ltd. produces a unique item. Lancaster's management team wishes to preform a variance analysis on its fixed overhead. Fixed overhead is applied to units produced using direct labor hours as its cost driver. The company's managerial accountant has compiled the following information:
Projected data:
Estimated direct labor hours 40,000 hours
Estimated fixed overhead $90,000
Actual data:
Actual production 300,000 units
Actual direct labor hours used 50,000 hours
Actual fixed overhead $100,000
Required:
A. Compute the fixed overhead spending variance and identify if the variance is favorable or unfavorable.
B.Compute the fixed overhead volume variance and identify if the variance is favorable or unfavorable.
Explanation / Answer
Solution :
a) fixed overhead spending variance is defined as the difference between the actual fixed overhead and the budgeted fixed overhead.
fixed overhead spending variance = $100,000 - $90,000
fixed overhead spending variance = $ 10,000 ( Unfavourable )
b) Actual volume = 300,000
Estimated fixed overhead rate = Estimated fixed overhead / Estimated direct labor hours
Estimated fixed overhead rate = $ 90,000/40,000
Estimated fixed overhead rate = 2.25
Fixed overhead volume variance = $ 2.25 X ( 40,000 hours - 50,000 hours)
Fixed overhead volume variance = $ 22,500 ( favourable )
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