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Self-Study Problem 15-1 Analysis of the Total Overhead Cost Variance

Simpson Manufacturing has the following standard cost sheet for one of its products:

		Total
Direct materials	5 pounds at $2 per pound	$	10
Direct labor	2 hours at $25 per hour		50
Variable factory overhead	2 hours at $5 per hour		10
Fixed factory overhead	2 hours at $20 per hour		40
Cost per unit		$	110

The company uses a standard cost system and applies factory overhead cost based on direct labor hours and determines the factory overhead rate based on a practical capacity of 400 units of the product.

Simpson has the following actual operating results for the year just completed:

Units manufactured	374
Direct materials purchased and used	1,870	pounds		$	20,570
Direct labor incurred	820	hours			22,140
Variable factory overhead incurred					5,248
Fixed factory overhead incurred					15,800

Before closing the periodic accounts, the (standard cost) entries in selected accounts follow:

Account	Debit (total)				Credit (total)
Work-in-process inventory	$	174,000			$	141,640
Finished goods inventory		141,640				118,690
Cost of goods sold		118,690

Required:

3. Compute the following factory overhead cost variances using three-variance analysis:

a. Overhead spending variance.

b. Overhead efficiency variance.

c. Fixed overhead production volume variance.

4. Compute the total overhead flexible-budget variance and the fixed overhead production volume variance using a two-variance analysis.

5. Using a single overhead account (e.g., Factory Overhead), make proper journal entries for:

a. Incurrence of factory overhead costs.

b. Application of factory overhead costs to production.

c. Identification of overhead variances assuming that the firm uses the four-variance analysis identified in requirement 2.

d. Close all factory overhead cost items and their variances of the period if:

(1) The firm closes all variances to the Cost of Goods Sold account.

(2) The firm prorates variances to the inventory accounts and the Cost of Goods Sold account.

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