Question

Calgary Paper Company produces paper for photocopiers. The company has developed standard overhead rates based on a monthly capacity of 80,000 direct-labor hours as follows:

Standard costs per unit (one box of paper):
Variable overhead (3 direct-labor hours @ $4) $12
Fixed overhead (3 direct-labor hours @ $12) $36
Total $48

During April, 26,000 units were scheduled for production: however, only 20,000 units were actually produced. The following data relate to April.
Actual direct-labor cost incurred was $1,425,000 for 75,000 actual hours of work.
Actual overhead incurred totaled $1,372,500, of which $472,500 was variable and $900,000 was fixed.

Required:
Prepare two exhibits which show the following variances. State whether each variance is favorable or unfavorable, where appropriate.
1. Variable-overhead spending variance.
2. Variable-overhead efficiency variance.
3. Fixed-overhead budget variance.
4. Fixed-overhead volume variance.
5. Variable-Overhead Spending and Efficiency Variances.

Answer 1

1. Variable-overhead spending variance. = $ 172,500 (favorable)

2. Variable-overhead efficiency variance. = $ 20,000 Favorable

3. Fixed-overhead budget variance. ( is not applicable)

4. Fixed-overhead volume variance. $ 60,000

5. Variable-Overhead Spending and Efficiency Variances.

$ 172,500 (fav) and $ 20,000 ( fav)

Step-by-step explanation:

1. Variable-overhead spending variance=

Actual Variable Factory Overhead = $ 472,500

Variable Expense ( 75,000 actual hours at $ 4) = $ 300,000

Variable OH Spending Variance= $ 172,500 (favorable)

2. Variable-overhead efficiency variance.

Actual hours ( 75,000 ) * Standard OH rate= $ 300,000

Overhead charged to Production ( 80,000 * 4) = $ 320,000

Efficiency variance $ 20,000 Favorable

3. Fixed-overhead budget variance.

Fixed Expense Actual = $ 900,000

Fixed Expense Budgeted = ( 75000 Hours @ 12)= $ 900,000

Fixed OH Budget Variance = ( )

4. Fixed-overhead volume variance.

Normal Capacity Hours 80,000

Actual Hours allowed for production 75000

Capacity hours not utilized 5000

Volume variance ( 5000 hours *12) = $60,000

5. Variable-Overhead Spending and Efficiency Variances.

Actual Variable Expense = $ 472,500

Variable Expense for standard hours allowed ( 75000 *4) = 300,000

Variable Overhead Spending Variance = $ 172,500 favorable

Efficiency Variance

Actual Hours * Standard Overhead Rate = 75,000 * 4= $ 300,000

Overhead Charged To Production = 80,000 * 4= $ 320,000

Efficiency Variance = $20,000 Favorable