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Refer to the data in Exercise 9.15. Required: 1. Compute overhead variances using a two-variance analysis. 2. Compute overhead variances using a three-variance analysis. 3. Illustrate how the two- and three-variance analyses are related to the four-variance analysis. Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 120,000 units requiring 480,000 direct labor hours. (Practical capacity is 500,000 hours.) Annual budgeted overhead costs total $787,200, of which $556,800 is fixed overhead. A total of 119,400 units using 478,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $230,600, and actual fixed overhead costs were $556,250. Required: 1. Compute the fixed overhead spending and volume variances. How would you interpret the spending variance? Discuss the possible interpretations of the volume variance. Which is most appropriate for this example? 2. Compute the variable overhead spending and efficiency variances. How is the variable overhead spending variance like the price variances of direct labor and direct materials? How is it different? How is the variable overhead efficiency variance related to the direct labor efficiency variance?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 9, Problem 16E
Textbook Problem
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Refer to the data in Exercise 9.15.

Required:

  1. 1. Compute overhead variances using a two-variance analysis.
  2. 2. Compute overhead variances using a three-variance analysis.
  3. 3. Illustrate how the two- and three-variance analyses are related to the four-variance analysis.

Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 120,000 units requiring 480,000 direct labor hours. (Practical capacity is 500,000 hours.) Annual budgeted overhead costs total $787,200, of which $556,800 is fixed overhead. A total of 119,400 units using 478,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $230,600, and actual fixed overhead costs were $556,250.

Required:

  1. 1. Compute the fixed overhead spending and volume variances. How would you interpret the spending variance? Discuss the possible interpretations of the volume variance. Which is most appropriate for this example?
  2. 2. Compute the variable overhead spending and efficiency variances. How is the variable overhead spending variance like the price variances of direct labor and direct materials? How is it different? How is the variable overhead efficiency variance related to the direct labor efficiency variance?

1.

To determine

Calculate the overhead variances using a two variance analysis.

Explanation of Solution

Fixed overhead spending variance: It is the difference between actual fixed overhead and the budgeted fixed overhead.

Favorable variance occurs only when the fixed overhead is less than the budgeted overhead. Unfavorable variance occurs only when the fixed overhead is more than the budgeted overhead.

The following formula is used to calculate fixed overhead spending variance:

 Fixed overhead spending variance = (Actual fixed overheadBudgeted fixed overhead)

Fixed overhead volume variance: It is the difference between budgeted fixed overhead and the applied fixed overhead.

The following formula is used to calculate fixed overhead volume variance:

Volume variance = (Budgeted fixed overheadApplied fixed overhead)

Calculate the overhead variances using a two variance analysis:

(i) Calculate the budget variance:

Budget variance = (Actual  overheadBudgeted  overhead) = ($786,850$786,048)=$802 U

Working note 1: Calculate the actual overhead:

Actual  overhead(Actual variable overhead cost for the year+ Actual fixed overhead cost for the year) = ($230,600 + $556,250)=$786,850

Working note 2: Calculate the budgeted overhead:

Budgeted overhead(Applied variable overhead+ Budgeted fixed overhead) = ($229,248 + $556,800)=$786,048

(ii) Calculate the volume variance:

Step 1: Compute the applied overhead.

Applied overhead =[ (Standard fixed overhead rate + Standard variable overhead rate)×Standard hours]=[$1

2.

To determine

Calculate the overhead variances using a three-variance analysis.

3.

To determine

Explain how the two and three variance analyses are related to four variance analysis.

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Chapter 9 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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