Requirement 1. Compute the overhead variances for the year: variable overhead cost variance, variable overhead efficiency variance, fixed overhead cost variance, and fixed overhead volume variance.
Begin with the variable overhead cost and efficiency variances. Select the required formulas, compute the variable overhead cost and efficiency variances, and identify whether each variance is favorable (F) or unfavorable (U).(You may need to simply the formula based on the data provided. Abbreviations used: AC = actual cost; AQ = actual quantity; FOH = fixed overhead; SC = standard cost; SQ = standard quantity; VOH = variable overhead.)
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Formula
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Variance
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VOH cost variance
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VOH efficiency variance
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Now compute the fixed overhead cost and volume variances. Select the required formulas, compute the fixed overhead cost and volume variances, and identify whether each variance is favorable (F) or unfavorable (U).(Abbreviations used: AC = actual cost; AQ = actual quantity; FOH = fixed overhead; SC = standard cost; SQ = standard quantity.)
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Formula
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Variance
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FOH cost variance
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FOH volume variance
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Requirement 2. Explain why the variances are favorable or unfavorable.
The variable overhead cost variance is
because management spent
than budgeted for the actual production.
The variable overhead efficiency variance is
because management used
direct labor hours than standard and variable overhead is applied (incurred) based on direct labor.
The fixed overhead cost variance is
because management spent
than the amount budgeted for fixed overhead.
The fixed overhead volume variance is
because management allocated
fixed overhead to jobs than was budgeted.