Oerstman, Inc., uses a standard costing system and develops its overhead rates f
ID: 2511385 • Letter: O
Question
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 $739,200, of which $532,800 is fixed overhead. A total of 119,400 units using 478,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $241,900, and actual fixed overhead costs were $555,000.
Required:
1. Compute overhead variances using a two-variance analysis.
2. Compute overhead variances using a three-variance analysis.
Budget Variance $ Volume Variance $Explanation / Answer
1. Volume variance is =bugted iverhead rate per unit *(actual output -bugted output)
=532800/120000(119400-120000)
=2664U
BUDGTED VARIANCE
Budgted overhead - actual overhead
= 532800-555000
=22200 U
2. Spending variance is same as capacity variancei.e
=Bugted rate per hour *(actual hrs -bugted hours)
= 532800/480000*(478000- 480000)
=2200 U
Efficiency variance
(Flexible bugted hours for actual output -actual hrs ) bugted rate
Flexuble bug hrs for actual output = 480000/120000)119400
=477600
Variance = 477600-478000)532800/480000
=400*1.11
=444.44 U
Volume variance same as above
=2664
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