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Overhead Variances

Alberta Apparel Company, located in Calgary, uses a standard-costing system. The firm estimates that it will operate its manufacturing facilities at 800,000 machine hours for the year. The estimate for total budgeted overhead is $2,000,000. The standard variable-overhead rate is estimated to be $2 per machine hour or $6 per unit. The actual data for the year follow.

Actual finished units 250,000
Actual machine hours 764,000.00
Actual variable overhead 1,690,000.00
Actual fixed overhead 391,000.00

1. Compute the following variances. Indicate whether each is favorable or unfavorable where appropriate.
1. Variable-overhead spending variance.
2. Variable-overhead efficiency variance.
3. Fixed-overhead budget variance.
4. Fixed-overhead volume variance.

Solution Preview

1. Variable-overhead spending variance.

Variable overhead spending variance = actual variable overhead costs - (standard variable rate x actual hours of machine used)
Actual variable overhead = 1,690,000
Standard variable rate = $2 per machine hour
Actual machine hours = 764,000
Variable overhead spending variance = 1,690,000-2X764,000 = $162,000 Unfavorable since the actual cost is higher

2. Variable-overhead efficiency variance.

Variable overhead efficiency variance = ...

Solution Summary

The solution explains the calculation of various overhead variances