Question

Item8 12.5 points eBookPrintReferencesCheck my workCheck My Work button is now enabled3Item 8 Zeta, Incorporated, produces handwoven rugs. Budgeted production is 5,000 rugs per month, and the standard direct labor required to make each rug is 2 hours. All overhead is allocated based on direct labor hours. Zeta’s manager is interested in what caused the recent month’s $3,000 unfavorable overhead variance. The following information was available to aid in the analysis: Budgeted Amounts Actual Results Production in units 5,000 4,500 Total labor hours 10,000 9,000 Total variable overhead $ 60,000 $ 55,000 Total fixed overhead 40,000 38,000 Total overhead $ 100,000 $ 93,000 Required: What was the overhead spending variance for the month? What was the overhead volume variance? Note: For all requirements, 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

The overhead spending variance for Zeta, Incorporated, in the recent month is $990 Unfavorable, and the overhead volume variance is $6,000 Unfavorable. These are calculated by comparing the actual labor rates and hours with the budgeted amounts, and factoring in the standard cost per hour.

Step-by-step explanation:

To calculate the overhead spending variance and overhead volume variance, we first need to establish the standard and actual costs.

Let's begin with the overhead spending variance, which is the difference between the actual overhead costs and what the costs should have been for the actual level of activity.

For Zeta, Incorporated:

• Standard variable overhead rate (per labor hour) = Budgeted variable overhead / Budgeted labor hours = $60,000 / 10,000 hours = $6 per hour
• Actual variable overhead rate (per labor hour) = Actual variable overhead / Actual labor hours = $55,000 / 9,000 hours = $6.11 per hour
• Overhead spending variance = (Actual variable overhead rate - Standard variable overhead rate) × Actual labor hours = ($6.11 - $6) × 9,000 hours = $0.11 × 9,000 hours = $990 Unfavorable

Now, for the overhead volume variance, which reflects the difference between the budgeted volume of activity and the actual volume of activity:

• Standard hours for actual production = Actual units produced × Standard hours per unit = 4,500 units × 2 hours/unit = 9,000 hours
• Overhead volume variance = (Budgeted labor hours - Standard hours for actual production) × Standard variable overhead rate = (10,000 hours - 9,000 hours) × $6 per hour = 1,000 hours × $6 = $6,000 Unfavorable

Overhead spending variance for the month is $990 Unfavorable, and the overhead volume variance is $6,000 Unfavorable.