Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 125,000 units requiring 500,000 direct labor hours. (Practical capacity is 520,000 hours.) Annual budgeted overhead costs total $820,000, of which $590,000 is fixed overhead. A total of 119,400 units using 498,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $262,000, and actual fixed overhead costs were $555,050. Required:
a. Compute the fixed overhead spending and volume variances.
b. Compute the variable overhead spending and efficiency variances.

Oerstman, Inc.

a. Fixed overhead spending variance

= $34,950 F

Fixed overhead volume variance

= $2,360 F

b. Variable overhead spending variance

= $32,868 U

Variable overhead efficiency variance

= $20,400 U

Explanation:

a) Data and Calculations:

Expected annual output = 125,000 units

Required direct labor hours = 500,000 hours

Standard direct labor hours per unit = 4 hours (500,000/125,000)

Practical capacity of direct labor hours = 520,000 hours

Annual budgeted overhead costs = $820,000

Fixed overhead = $590,000

Fixed overhead rate per dlh = $1.18 ($590,000/500,000)

Variable overhead = $230,000 ($820,000 - $590,000)

Variable overhead rate per dlh = $0.46 ($230,000/500,000)

Actual production = 119,400

Actual direct labor hours used = 498,000

Actual variable overhead costs = $262,000

Actual variable direct hours used per unit = 4.17 hours (498,000/119,400)

Actual variable overhead rate per dlh = $0.526 ($262,000/498,000)

Actual fixed overhead costs = $555,050

Actual fixed overhead rate per dlh = $1.115 ($555,050/498,000)

a. Fixed overhead spending variance = Actual fixed overhead Minus Budgeted fixed overhead

= $555,050 - $590,000

= $34,950 F

Fixed overhead volume variance = budgeted fixed overhead Minus applied fixed overhead costs

= standard rate * (500,000 - 498,000)

= $2,360 F

b. Variable overhead spending variance = Actual direct labor hours (Actual overhead rate - Standard overhead rate)

= 498,000 * ($0.526 - $0.46)

= 498,000 * $0.066

= $32,868 U

Variable overhead efficiency variance = (standard hours direct labor hours – actual direct labor hours) * standard variable overhead rate per hour

= (477,600 - 498,000) * $0.46

= $20,400 U

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