Question

Layt Clock Company has developed the following flexible budget for its overhead costs. The standard hours allowed per unit is 1.2 hours. Manufacturing overhead at Layt is applied to production on the basis of standard machine-hours:

Budget Information
Machine Hours 26,400
Clocks produced 22,000
Variable overhead cost per machine hour (standard) $5.90
Fixed overhead cost per unit per machine hours (standard) $6.48
Total Fixed overhead cost $171,072

The actual results for the year were as follows:
Number of clocks produced 21,500
Machine-hours incurred 24,940
Variable overhead cost $145,899
Fixed overhead cost $170,540

Required:
Compute Variable Overhead Rate Variance.

Answer 1

The Variable Overhead Rate Variance is calculated by subtracting the actual variable overhead cost from the standard cost allowed for the actual production. For Layt Clock Company, the variance is $1,247, which is favorable, meaning the company spent less than expected on variable overheads.

Step-by-step explanation:

The Variable Overhead Rate Variance is the difference between what the variable overhead costs should have been for the actual production activities and what they actually were. To calculate this variance, we need to use the standard variable overhead cost per machine hour and compare it to the actual variable overhead costs incurred.

Here are the steps to calculate the Variable Overhead Rate Variance:

1. Determine the standard cost allowed for the actual production. This would be the actual machine hours multiplied by the standard variable overhead cost per machine hour.
2. Compare this standard cost to the actual variable overhead costs incurred.

Since the standard variable overhead cost per machine hour is $5.90 and the actual machine hours are 24,940, the standard cost allowed for the actual production would be:

Standard cost allowed = Standard rate per machine hour * Actual machine hours
Standard cost allowed = $5.90 * 24,940 = $147,146

The actual variable overhead cost was $145,899. The Variable Overhead Rate Variance is calculated as:

Variable Overhead Rate Variance = Standard cost allowed – Actual variable overhead cost
Variable Overhead Rate Variance = $147,146 - $145,899 = $1,247 Favorable

This means the company spent $1,247 less on variable overhead than what was anticipated for the actual production levels, and thus the variance is considered favorable.