Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 24

Patel and Sons, Inc., uses a standard cost system to apply overhead costs to units produced. Practical capacity for the plant is defined as 50,000 machine hours per year, which represents 25,000 units of output. Annual budgeted fixed overhead costs are $250,000 and the budgeted variable overhead cost is $4 per unit. Factory overhead costs are applied on the basis of standard machine-hours allowed for units produced. Budgeted and actual output for the year was 20,000 units, which took 41,000 machine hours. Actual fixed overhead costs for the year amounted to $245,000 while the actual variable overhead cost per unit was $3.90. What was (a) the fixed overhead spending (budget) variance for the year, and (b) the overhead production-volume variance for the year?

Step 1 of 4

Overhead spending variance:

Overhead spending variance is the difference between the actual overhead expense incurred and the budgeted overhead expense. If the budgeted overhead is more than the actual overhead expense, then the variance is favorable variance and if, the budgeted overhead variance is less than the actual overhead expense, the variance will be unfavorable variance. The overhead spending variance is calculated as shown below:

Overhead production-volume variance:

Overhead production-volume variance is the difference between the budgeted overhead expense and the actual overhead expense calculated in terms of budgeted overhead rate. If the actual overhead calculated is more than the budgeted overhead expense, then it is unfavorable variance. If the actual overhead calculated is less than the budgeted overhead expense, then it is favorable variance. The overhead production-volume variance is calculated as shown below: