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The Milling Department: Overhead Variances

The Milling Department uses standard machine hours to allocate overhead to products. Budgeted volume for the year was 36,000 machine hours. A flexible budget is used to set the overhead rate. Fixed overhead is budgeted to be $720,000 and variable overhead is estimated to be $10 per machine hour.

During the year, two products are milled. The following table summarizes operations.
Product 1 Product 2
Units milled 10,500 12,000
Standard machine per unit 2 1
Actual machine hours used 23,000 13,000
Actual overhead during the year was $1.1 million.

Calculate all the relevant overhead variances for the department, and write a memo that describes what each one means.

Solution Preview

See excel attached for diagram of variances.

The variable efficiency variances are a measure of the dollar impact on variable overhead of using more or less of the machine hours. Since machine hours use up variable overhead items (supplies, oil, maintenance parts and so forth), the more you use the machines, the more these supplies get used up (or ...

Solution Summary

This tutorial gives you a diagram to show how the variable overhead efficiency variance is computed, how the volume variance is computed and how the spending variance is computed. In addition, three paragraphs explain the variances (all of which are unfavorable).