70.2K

Verified Solution

Link Copied!

Adler Company budgeted the following amounts at the beginning of the year:

Units		150,000
Direct labor hours		15,000
Variable overhead		$30,000
Fixed overhead		$69,000

Adler Company's variable overhead rate is $ per direct labor hour; fixed overhead rate is $ per direct labor hour; and total overhead rate is $ per direct labor hour.

The standard hours for actual production equal direct labor hours. Fill in the following table, being sure to select the appropriate direction for the variance (Favorable or Unfavorable). Enter all amounts as positive numbers.

	Actual		Applied		Variance
Variable overhead	$		$		$
Fixed overhead
Total overhead	$		$		$

Next, we can break down the total variable overhead variance into the spending and efficiency variances.

Variable overhead spending variance = $27,600 - ($2 14,300) = $27,600 - $28,600 = $1,000 Favorable

The variable overhead spending variance tells us that Adler spent $1,000 less than expected on variable overhead.

Variable overhead efficiency variance = ($2 14,300) - ($2 14,000) = $28,600 - $28,000 = $600 Unfavorable

The variable overhead efficiency variance shows the impact of working hours than standard for the actual production of 140,000 units. This resulted in $600 variable overhead than standard.

We can see that the sum of the variable overhead spending variance and the variable overhead efficiency variance does equal the total variable overhead variance ($1,000 Favorable + $600 Unfavorable = $400 Favorable)

The fixed overhead variances are the fixed overhead spending variance and the fixed overhead volume variance. The fixed overhead spending variance compares actual fixed overhead with budgeted fixed overhead. Remember, fixed overhead is fixed, it depend on the number of units produced or the number of direct labor hours worked.

Fixed overhead spending variance = Actual fixed overhead - Budgeted fixed overhead

Fixed overhead spending variance = $70,000 - $69,000 = $1,000 Unfavorable

Thus, $1,000 was spent on fixed overhead items than was budgeted.

The volume variance occurs when actual production does not equal budgeted production. This is because fixed overhead is applied to production using standard direct labor hours allowed for actual production. If more units are produced than planned, there will be more standard direct labor hours and more fixed overhead applied to production. On the other hand, if fewer units are produced than planned, then there are fewer units over which to spread the budgeted fixed overhead.

Fixed overhead volume variance = Budgeted fixed overhead - (Fixed overhead rate Standard hours)

Fixed overhead volume variance = $69,000 - ($4.60 14,000) = $69,000 - $64,400 = $4,600 Unfavorable

The overhead fixed overhead variance is $5,600 underapplied (or unfavorable). This is composed of the $1,000 Unfavorable fixed overhead spending variance and the $4,600 Unfavorable volume variance.

Suppose Adler Company had made 15,200 units. The volume variance would have been is $ .

Three-Variance Method of Computing Overhead Variances

The three-variance method collapses the variable and fixed overhead spending variances into a spending variance. It retains the efficiency and volume variances from the four-variance method.

Spending variance = Actual overhead - (Budgeted fixed overhead + (Actual direct labor hours Standard variable overhead rate))

At the end of the year, Adler provided the following actual data:

Units		140,000
Direct labor hours		14,300
Variable overhead		$27,600
Fixed overhead		$70,000

Example: Adler Company budgeted the following amounts at the beginning of the year: Units 150,000 Direct labor hours 15,000 Variable overhead $30,000 Fixed overhead $69,000 At the end of the year, Adler provided the following actual data: Units 140,000 Direct labor hours 14,300 Variable overhead $27,600 Fixed overhead $70,000 Adler Company's variable overhead rate is $ per direct labor hour; fixed overhead rate is $ per direct labor hour; and total overhead rate is $ per direct labor hour. direct labor hours. Fill in the following table, being sure to select the appropriate direction for the variance (Favorable or Unfavorable). Enter all amounts as positive The standard hours for actual production equal numbers. Actual Applied Variance Variable overhead S Fixed overhead Total overhead $ Next, we can break down the total variable overhead variance into the spending and efficiency variances. Variable overhead spending variance - $27,600 - ($2 x 14,300) - $27,600 - $28,600 - $1,000 Favorable The variable overhead spending variance tells us that Adler spent $1,000 less than expected on variable overhead. Variable overhead efficiency variance = ($2 x 14,300) - ($2 x 14,000) - $28,600 - $28,000 = $600 Unfavorable hours than standard for the actual production of 140,000 units. This resulted in $600 variable overhead than The variable overhead efficiency variance shows the impact of working standard. We can see that the sum of the variable overhead spending variance and the variable overhead efficiency variance does equal the total variable overhead variance ($1,000 Favorable + $600 Unfavorable = $400 Favorable) The fixed overhead variances are the fixed overhead spending variance and the fixed overhead volume variance. The fixed overhead spending variance compares actual fixed overhead with budgeted fixed overhead. Remember, fixed overhead is fixed, it depend on the number of units produced or the number of direct labor hours worked. Fixed overhead spending variance = Actual fixed overhead - Budgeted fixed overhead Fixed overhead spending variance = $70,000 - $69,000 = $1,000 Unfavorable Thus, $1,000 was spent on fixed overhead items than was budgeted. The volume variance occurs when actual production does not equal budgeted production. This is because fixed overhead is applied to production using standard direct labor hours allowed for actual production. If more units are produced than planned, there will be more standard direct labor hours and more fixed overhead applied to production. On the other hand, if fewer units are produced than planned, then there are fewer units over which to spread the budgeted fixed overhead. Fixed overhead volume variance = Budgeted fixed overhead - (Fixed overhead rate x Standard hours) Fixed overhead volume variance = $69,000 - $4.60 x 14,000) = $69,000 - $64,400 = $4,600 Unfavorable The overhead fixed overhead variance is $5,600 underapplied (or unfavorable). This is composed of the $1,000 Unfavorable fixed overhead spending variance and the $4,600 Unfavorable volume variance. Suppose Adler Company had made 15,200 units. The volume variance would have been is $

Answer & Explanation Solved by verified expert

See Answer