Question

Use the following information of Alfred Industries: Standard manufacturing overhead based on normal monthly volume: Fixed ($303,200 ÷ 20,000 units) $ 15.16 Variable ($100,000 ÷ 20,000 units) 5.00 $ 20.16 Units actually produced in current month 18,000 units Actual overhead costs incurred (including $300,000 fixed) $ 383,800 Required: Compute the overhead spending variance and the volume variance. Note: Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance).

Answer 1

Overhead Spending Variance: $20,680 (Unfavorable)

Volume Variance: -$10,000 (Favorable)

The Breakdown

To compute the overhead spending variance and the volume variance, we need to compare the actual overhead costs incurred with the standard overhead costs based on the actual units produced.

1. Overhead Spending Variance:

Actual Overhead Costs Incurred - (Actual Units Produced × Standard Variable Overhead Rate + Standard Fixed Overhead)

= $383,800 - (18,000 units × $5.00 + $15.16 × 18,000 units)

= $383,800 - ($90,000 + $273,120)

= $383,800 - $363,120

= $20,680

The overhead spending variance is $20,680. Since the actual overhead costs incurred are higher than the standard overhead costs, the variance is unfavorable.

2. Volume Variance:

(Actual Units Produced - Standard Units Allowed) × Standard Variable Overhead Rate

= (18,000 units - 20,000 units) × $5.00

= (-2,000 units) × $5.00

= -$10,000

The volume variance is -$10,000. Since the actual units produced are less than the standard units allowed, the variance is favorable.