Question

Berlin Ltd. uses a combined overhead rate of $2.90 per machine hour to apply overhead to products. The rate was developed at an annual expected capacity of 264,000 machine hours; each unit of product requires two machine hours to produce. At 264,000 machine hours, expected fixed overhead for Munich Ltd. is $250,800.

During November, the company produced 11,960 units and used 24,700 machine hours. Actual variable overhead for the month was $ 47,100 and fixed overhead was $ 20,000. Calculate the overhead spending, efficiency, and volume variances for November.

Answer 1

To calculate the overhead variances for Berlin Ltd., the spending variance was found to be -$4,530 (favorable), the efficiency variance was -$2,270 (unfavorable), and the volume variance was $228,076 (favorable).

Step-by-step explanation:

Calculation of Overhead Variances

When analyzing overhead costs, it is crucial to break down variances into three categories: spending, efficiency, and volume variances. To calculate these variances for Berlin Ltd., the following steps are taken based on the provided data.

Overhead Spending Variance is the difference between the actual overhead incurred and the amount that should have been spent according to the standard overhead rate and actual hours.

Standard overhead cost for actual hours = Standard rate * Actual machine hours = $2.90/machine hour * 24,700 machine hours = $71,630

Total actual overhead (fixed + variable) = $47,100 + $20,000 = $67,100

Spending Variance = Actual overhead - Standard overhead cost for actual hours = $67,100 - $71,630 = -$4,530 (Favorable)

Overhead Efficiency Variance is the difference between the standard hours for actual production and the actual hours multiplied by the standard rate.

Standard hours for actual production = Units produced * Standard hours per unit = 11,960 units * 2 hours/unit = 23,920 standard hours

Efficiency Variance = (Standard hours - Actual hours) * Standard rate = (23,920 hours - 24,700 hours) * $2.90/hour = -$2,270 (Unfavorable)

Overhead Volume Variance is the difference between the standard hours allowed for expected production and the standard hours allowed for actual production, multiplied by the standard rate.

Expected production in machine hours = Annual capacity = 264,000 machine hours

Standard hours allowed for actual production = Units produced * Standard hours per unit = 11,960 units * 2 hours/unit = 23,920 standard hours

Volume Variance = (Expected production - Standard hours allowed for actual production) * Fixed overhead rate

Fixed overhead rate = Fixed overhead costs / Annual capacity = $250,800 / 264,000 hours = $0.95/hour

Volume Variance = (264,000 hours - 23,920 hours) * $0.95/hour = $228,076 (Favorable)

Answer 2

Berlin Ltd.

1. Overhead spending variance

= $4,530 F

2. Overhead efficiency variance

= $2,262 U

3. Overhead volume variance

= $741 U

Step-by-step explanation:

a) Data and Calculations:

Combined overhead rate per machine hour = $2.90

Annual expected capacity = 264,000

Machine hours required per unit of product = 2 hours

Total combined expected overhead = $765,600 ($2.90 * 264,000)

Expected fixed overhead = $250,800

Expected variable overhead = $514,800 ($765,600 - $250,800)

Fixed overhead per machine hour = $0.95 ($250,800/264,000)

Variable overhead per machine hour = $1.95 ($514,800/264,000)

November Usage and Production:

Production units = 11,960 units

Standard machine hours = 23,920 (11,960 * 2)

Actual machine hours used = 24,700

Actual variable overhead for the month = $47,100

Variable overhead per machine hour = $1.90688

Standard variable overhead cost = $48,165 ($1.95 * 24,700)

Actual fixed overhead = $20,000

Standard fixed overhead = $23,465 ($0.95 * 24,700)

1. Overhead spending variance = Standard overhead - Actual overhead

= ($2.90 * 24,700 - ($47,100 + $20,000))

= ($71,630 - $67,100

= $4,530 F

2. Overhead efficiency variance = (standard machine hours allowed for production – actual machine hours used) × standard overhead absorption rate per hour

= (23,920 - 24,700) * $2.90

= $2,262 U

3. Overhead volume variance = (Standard machine hours - Actual machine hours) * Standard Fixed Overhead Rate

= (23,920 - 24,700) * $0.95

= $741 U