Redtop Co.uses a standard cost system and flexible budgets.The following flexible budget was prepared at the 80% operating level for the year:

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However,for purposes of calculating the fixed overhead application rate,the company defined the denominator volume as the 90% capacity level.The standard calls for four DLHs per unit manufactured.During the year,Redtop worked 33,600 DLHs to manufacture 8,500 units.The actual factory overhead was $12,000 greater than the flexible-budget amount for the units produced,of which $5,000 was due to fixed factory overhead.
Required:Calculate (and provide supporting details for)each of the following variances:
(a)The standard variable overhead application rate.
(b)The variable overhead efficiency variance.
(c)The factory overhead spending variance.
(d)The factory overhead production-volume variance.
(e)The variable overhead spending variance.
(f)Provide an interpretation for each of the above variances you calculated.
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 Feedback: 11ea6e70_bd3f_82d8_8f54_e9370d5e3d88_TB1699_00 (f)Interpretation of variances calculated above: 1.The variable overhead efficiency variance measures the impact on variable overhead costs of efficiency or inefficiency in the use of the activity variable (or cost driver)used to construct the flexible budget.Thus,for example,if the flexible budget is based on DLHs and DLHs are truly related to the incurrence of variable manufacturing overhead costs,then efficiencies or inefficiencies in the use of direct labor during a period have two effects: a labor efficiency variance and a variable overhead efficiency variance.This reinforces the need for exercising care in choosing the activity variable (or
variables)used to construct the control budget for variable overhead costs.2.The factory overhead spending variance is the difference between the actual overhead costs incurred during a period and the flexible budget for overhead,based on outputs (or,equivalently,based on standard resource inputs).As such,this variance consists of two components: a fixed overhead spending variance,and a variable overhead spending variance.The former is simply the difference between budgeted (i.e. ,lump-sum)fixed overhead and actual fixed overhead cost incurred.The latter is the difference between actual variable overhead cost incurred during the period and the variable overhead cost that should have been incurred given the actual level of the activity (e.g. ,DLHs,machine hours)during the period.3.The factory overhead production-volume variance represents the difference between budgeted fixed overhead for the period and the applied fixed overhead for actual units produced.That is,for product-costing purposes,we "unitize" budgeted fixed overhead costs by choosing a particular volume (called the denominator volume)over which those budgeted fixed costs are spread.If actual volume of activity differs from the denominator volume,a production-volume variance will arise.Note that the production-volume variance is also called the capacity variance,the idle-capacity variance,and the denominator-level variance.This variance has little to do with short-term cost control,however it can be viewed as a (rough)measure of capacity utilization.4.As noted above in 2,the variable overhead spending variance is a component of the total overhead spending variance.In formula form,it can be calculated as: AQ x (AP - SP),where AQ represents the actual quantity of the activity variable used to construct the flexible budget,AP = the actual VOH cost per unit of the activity variable,and SP = the standard VOH cost per unit of the activity variable.Because "spending" is a function of both price and quantity,the total VOH spending variance can conceptually be broken down further into price and quantity components for individual VOH costs.

Redtop CoUses a Standard Cost System and Flexible Budgets