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

Exercise 57

Four-Variance Analysis of Total Overhead Variance Franklin Glass Works has the capacity to manufacture 200,000 units for the year ended November 30, 2010. The standard cost sheet specifies two direct labor hours (DLHs) for each unit manufactured. Total factory overhead was budgeted at $900,000 for the year with a fixed overhead rate of $3 per unit. Both fixed and variable overhead are assigned to products on the basis of standard DLHs. The actual data for the year ended November 30, 2010, follow:

Units manufactured	198,000
Direct labor hours worked	440,000
Variable factory overhead incurred	$352,000
Fixed factory overhead incurred	$575,000

Required

1.  Determine the following for the year just completed:

a. Total standard hours allowed for the units manufactured.

b. Variable overhead efficiency variance.

c. Variable overhead spending variance.

d. Fixed overhead spending variance.

e. Total fixed overhead cost applied to units manufactured.

f. Production-volume variance.

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2. Prepare appropriate journal entries for the four-variance analysis. Assume the company uses only two

overhead accounts, one for variable overhead, the other for fixed overhead.

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3. Provide a concise explanation of each of the four overhead variances you calculated.

Step 1 of 10

Variance vs. Budgets:

In costing, variance is a difference occurred between planned, standard or budgeted cost and the actual cost incurred. These variances can be for both cost and revenue. These variances can be favourable or unfavourable.