Question

2. A company has budgeted to produce 2,750 articles in 22,000 hours with fixed overheads of sh 88,000 and variable overheads of sh 55,000. The company’s production during the period of the budget was 2,000 articles in 21,500 working hours with fixed overheads costing sh 90,000 and variable overheads sh 58,000. Required: Calculate: i. Overhead variance ii. Fixed production overhead variance iii. Variable production overhead variance iv. Fixed production overhead volume variance

Answer 1

Step-by-step explanation:

To calculate the overhead variances, you can use the following formulas:

i. **Overhead Variance:**

\[ \text{Overhead Variance} = \text{Actual Overheads} - \text{Budgeted Overheads} \]

ii. **Fixed Production Overhead Variance:**

\[ \text{Fixed Production Overhead Variance} = \text{Actual Fixed Overheads} - \text{Budgeted Fixed Overheads} \]

iii. **Variable Production Overhead Variance:**

\[ \text{Variable Production Overhead Variance} = \text{Actual Variable Overheads} - \text{Budgeted Variable Overheads} \]

iv. **Fixed Production Overhead Volume Variance:**

\[ \text{Fixed Production Overhead Volume Variance} = (\text{Budgeted Hours} - \text{Actual Hours}) \times \text{Fixed Overhead Rate} \]

Now, let's calculate each variance:

Given data:

- Budgeted Articles = 2,750

- Budgeted Hours = 22,000

- Fixed Overheads Budgeted = sh 88,000

- Variable Overheads Budgeted = sh 55,000

- Actual Articles = 2,000

- Actual Hours = 21,500

- Actual Fixed Overheads = sh 90,000

- Actual Variable Overheads = sh 58,000

Calculate rates:

- Fixed Overhead Rate = \(\frac{\text{Fixed Overheads Budgeted}}{\text{Budgeted Hours}}\)

- Variable Overhead Rate = \(\frac{\text{Variable Overheads Budgeted}}{\text{Budgeted Hours}}\)

Now, plug in the values:

i. **Overhead Variance:**

\[ \text{Overhead Variance} = (\text{Actual Fixed Overheads} + \text{Actual Variable Overheads}) - (\text{Budgeted Fixed Overheads} + \text{Budgeted Variable Overheads}) \]

ii. **Fixed Production Overhead Variance:**

\[ \text{Fixed Production Overhead Variance} = \text{Actual Fixed Overheads} - (\text{Budgeted Hours} \times \text{Fixed Overhead Rate}) \]

iii. **Variable Production Overhead Variance:**

\[ \text{Variable Production Overhead Variance} = \text{Actual Variable Overheads} - (\text{Budgeted Hours} \times \text{Variable Overhead Rate}) \]

iv. **Fixed Production Overhead Volume Variance:**

\[ \text{Fixed Production Overhead Volume Variance} = (\text{Budgeted Hours} - \text{Actual Hours}) \times \text{Fixed Overhead Rate} \]

Now substitute the values and calculate each variance.