Overhead is applied on the basis of direct labor hours. Three direct labor hours
ID: 2594885 • Letter: O
Question
Overhead is applied on the basis of direct labor hours. Three direct labor hours are required for each product unit.
Planned production for the period was set at 8,000 units. Manufacturing overhead for the period is budgeted at
$204,000, of which 30 percent is fixed. The 26,200 hours worked during the period resulted in production of8,500
units. Manufacturing overhead cost incurred was $220,500.
Required:
Using the spreadsheet provided on the following page, calculate the following variances:
a. Overhead spending variance
b. Overhead efficiency variance
c. Overhead volume variance
d. Total overhead variance
e. Interpret your results
Explanation / Answer
Solution:
1 unit
3
hours
Reqd Hours
24,000
Production
8,000
units
Budgeted
Manufacturingfacturing Overhead
204,000
Fixed
0.3
Fixed Manufacturing Overhead
61,200
2.55
61200/24000 = 2.55
Variable Manufacturing Overhead
142,800
5.95
142800/24000 = 5.95
Actual Manufacturing Overhead
220,500
Actual Hours wrkd
26,200
Actual Production
8,500
a. Overhead spending variance
Overhead Spending Variance
Actual Manufacturing Overhead
220,500
Actual Hours wrkd
26,200
Actual Production
8,500
Std Hours for one unit
3
Standard FOverhead rate:
Variable
5.95
Fixed
2.55
Actual FOverhead
220,500
Budgeted allowance based on acutal Hours worked:
Fixed exp budgeted
61,200
Allowed Vari Overhead
155,890
Spending Variance
3,410
Unfavorable
Interpret: It reflects that the spending as per the standard rate for actual hours exceed to the actual amount spend . Thus the result is Favourable.
b. Overhead efficiency variance
Actual Hours worked at std rate
222,700
Overhead charged to production
216,750
Effeciency Variance
5,950
Unfavorable
Interpretation : It reflects that more actual hours as compared to the standard hours for actual production so result is unfavorable.
c. Overhead volume variance
Fixed Expenses budgeted
61,200
variable expeneses
151,725
Budgeted Allowance
212,925
Overhead Charged to production
216,750
Volume Variance
-3,825
Favorable
Interpret: The volume produced exceeds the planned and therefore it is produced more than the planned production
d. Total overhead variance
Total Variable overhead variance = (Standard hours for actual production * Standard rate)- Actual Overhead
= (8500*3)*5.95 – 154350 = 2625 (Unfavorable)
Interpret. : The volume produced exceeds the planned and therefore it is produced more than the planned production
1 unit
3
hours
Reqd Hours
24,000
Production
8,000
units
Budgeted
Manufacturingfacturing Overhead
204,000
Fixed
0.3
Fixed Manufacturing Overhead
61,200
2.55
61200/24000 = 2.55
Variable Manufacturing Overhead
142,800
5.95
142800/24000 = 5.95
Actual Manufacturing Overhead
220,500
Actual Hours wrkd
26,200
Actual Production
8,500
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