Question

Mason Fender also uses a standard cost system and provides the following information:

Static budget variable overhead $2300
Static budget fixed overhead $23,000
Static budget direct labor hours 575 hours
Static budget number of units 23,000 units
Standard direct labour hours 0.025 hours per fender

Fender allocates manufacturing overhead to production based on standard direct labor hours. Mason Fender reported the following actual results for 2018​: actual number of fenders​ produced, 20,000​; actual variable​ overhead, $ 5,350​; actual fixed​ overhead, $ 26,000​; actual direct labor​ hours, 460.

Requirements
a. Compute the overhead variances for the year: variable overhead cost variance, variable overhead efficiency variance, fixed overhead cost variance, and fixed overhead volume variance.
b. Explain why the variances are favorable or unfavorable.

Answer 1

a)Standard overhead rate = $2,300 / 575 = $4 /hour

Standard hours for actual production = 20000*0.025 = 500 hours

Actual rate of variable overhead = $5,350 / $460 = $11.63 per direct labor hour

Actual direct labor hours = 460

Variable overhead spending variance = Actual hours worked x (Actual overhead rate - standard overhead rate)

Variable overhead spending variance = 460 * ($11.63 - $4 ) = $3,510 UF

Variable overhead efficiency variance = Standard overhead rate x (Actual hours - standard hours)

Variable overhead efficiency variance = $4 * (460 - 500) = 160 (F)

Budgeted fixed overhead = $23,000

Actual fixed overhead = $26,000

Fixed overhead rate = $23,000 / 575 = $40 per hour

Fixed overhead applied =500 * $40 = $20,000

Fixed overhead cost variance = Actual Fixed overhead - Budgeted fixed overhead = $26,000 - $23,000 = $3,000 UF

Fixed overhead volume variance = (units produced - budgeted production) x budgeted overhead rate

fixed overhead volume variance = (20000 - 23000) x $23000/23000

fixed overhead volume variance = 3000 x 1 = 3000 UF

b) Budgeted performance and actual performance may differ due to change the environment. In this case, actual cost may be higher or lower than standard cost. Therefore variances are occured. Variance is favorable when actual cist is lower than standard cost, while variance is unfavorable when f actual cost is higher than standard cost.