15.6 Overhead Variances Flashcards
Variable overhead is applied on the basis of standard direct labor hours. If, for a given period, the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be
A. Favorable
B. Unfavorable
C. Zero
D. The same amount as the direct labor efficiency variance
B. Unfavorable
If variable overhead is applied to production on the basis of direct labor hours, both the variable overhead efficiency variance and the direct labor efficiency variance will be calculated on the basis of the same number of hours. If the direct labor efficiency variance is unfavorable, the overhead efficiency variance will also be unfavorable because both variances are based on the difference between standard and actual direct labor hours worked.
A children’s dress manufacturer’s variable overhead costs are allocated on the basis of budgeted direct labor hours. According to the December budget, each dress takes 4 direct labor hours to produce. Budgeted variable manufacturing overhead cost per labor hour is $12, and the budgeted number of dresses to be made is 1,040. Actual variable manufacturing costs in December were $52,164 for 1,080 dresses produced. Actual direct labor hours were 4,536 hours. The variable overhead spending variance is
A. $2,592 favorable
B. $2,592 unfavorable
C. $2,268 favorable
D. $2,268 unfavorable
C. $2,268 favorable
1) Actual variable overhead: $52,164
2) Flexible budget: AQ x SP = 4536 x 12 = 54,432
3) Static Budget: SQ x SP = 4,320 x 12 = 51,840
Spending variance: 1) - 2) = 2268 favorable
Difference efficiency variance: 2) - 3) = 2,592 unfavorable
Which one of the following is not normally measured in a standard cost system?
A. Fixed overhead efficiency
B. Variable overhead spending
C. Variable overhead efficiency
D. Fixed overhead spending
A. Fixed overhead efficiency
In a standard cost system, the static budget lump-sum of fixed overhead is also the flexible budget amount over the relevant range of output. The efficiency of production does not affect the fixed overhead variances. Thus, a fixed overhead efficiency variance is normally not measured.
A manufacturing company uses a standard cost system that applies overhead based upon direct labor hours. The manufacturing budget for the production of 7,500 units for the month is shown below:
Direct labor (15,000 hours at $20 per hour): $300,000
Variable overhead: 50,000
Fixed overhead: 105,000
During the month, 8,000 units were produced, and the fixed overhead budget variance was $1,000 unfavorable. Fixed overhead during the month was
A. Underapplied by $6,000
B. Underapplied by $7,000
C. Overapplied by $7,000
D. Overapplied by $6,000
D. Overapplied by $6,000
The fixed overhead budget variance was $1,000 unfavorable, indicating that actual fixed overhead is $1,000 greater than budgeted fixed overhead. That is, actual fixed overhead is $106,000.
With budgeted fixed overhead of $105,000 and budgeted direct labor hours of 15,000, the budgeted application rate is $7 per direct labor hour. Each unit requires 2 direct labor hours to produce (15,000 / 7,500). Fixed overhead applied is thus $112,000 (8,000 x 2 x $7). With actual fixed overhead of $106,000 and applied fixed overhead of $112,000, fixed overhead during the month was overapplied by $6,000.
A company planned to produce 50,000 units with $500,000 of manufacturing overhead. The budgeted machine hours per unit is 2 hours. The company’s actual results indicated it spent $505,000 for manufacturing overhead, produced 49,000 units, and used 99,000 machine hours. Under a standard cost system that allocates overhead based upon machine hours, the manufacturing overhead traced to the products would total
A. $500,000
B. $490,000
C. $505,000
D. $495,000
B. $490,000
The standard cost of manufacturing overhead applied to each machine hour is $5 [500,000 / (50,000 units x 2 machine hours per unit]. The company actually created 49,000 units. The standard cost of manufacturing overhead applied to each unit is based on the standard cost per machine hour and the standard number of machine hours per unit. Thus, the manufacturing overhead traced to the products is $490,000 (49,000 units x $5 per machine hour x 2 machine hours per unit)
Which of these variances is least significant for cost control?
A. Variable O/H spending variance
B. Fixed O/H volume variance
C. Labor price variance
D. Materials quantity variance
B. Fixed O/H volume variance
The fixed O/H volume variance occurs when actual activity levels differ from anticipated levels. It is an excellent example of cost allocation as opposed to cost control. Unlike other variances, the volume variance does not directly reflect a difference between actual and budgeted expenditures. The economic substance of this variance lies in the costs or benefits of capacity usage or nonusage. For example, idle capacity results in the loss of the contribution margin from units not produced and sold.
A company has gathered the following information from a recent production run:
Standard variable overhead rate: $10
Actual variable overhead rate: 8
Standard process hours: 20
Actual process hours: 25
What is the company’s variable overhead spending variance?
A. $40 unfavorable
B. $50 favorable
C. $40 favorable
D. $50 unfavorable
B. $50 favorable
The variable overhead spending variance is equivalent to the materials price, or labor rate variance. It equals the actual quantity times the difference between the standard and actual rates.
The variable overhead spending variance is therefore $50 [25 hours x (10-8)]. The variance is favorable because the actual rate is less than the standard rate.
A company uses a standard cost system. On January 1 of the current year, the company budgeted fixed manufacturing overhead cost of $600,000 and production at 200,000 units. During the year, the firm produced 190,000 units and incurred fixed manufacturing overhead of $595,000. The production volume variance for the year was
A. $10,000 unfavorable
B. $25,000 unfavorable
C. $5,000 unfavorable
D. $30,000 unfavorable
D. $30,000 unfavorable
The application rate for fixed overhead is $3.00 per unit ($600,000 budgeted cost / 200,000 budgeted units). The actual amount applied was $570,000 (190,000 actual units x $3.00 application rate). The production volume variance was thus $30,000 unfavorable ($570,000 - $600,000).
A company produces and sells replacement parts for cotton processing equipment. Which one of the following cost variances are least likely to be controllable by the production manager?
A. Variable overhead spending variance
B. Labor efficiency variance
C. Materials quantity variance
D. Fixed overhead production volume variance
D. Fixed overhead production volume variance
The fixed overhead production volume variance is the difference between the static/flexible budget for fixed overhead and the amount allocated based on the budgeted collection rate and the driver level allowable for the actual production level achieved. None of these factors are under the control of the production manager.
Which of the following overhead variances would be helpful in bringing attention to a potential short-term problem in the control of overhead costs?
- Spending variance: yes/no
- Volume variance: yes/no
- Spending variance: yes
- Volume variance: no
The variable overhead spending variance is favorable or unfavorable if production spending is less or more, respectively, than the standard. The fixed overhead spending variance is attributable to more or less spending by the production. The spending variances can alert the production team that this is a problem with overhead costs. The production volume variance is only for fixed overhead, and it results from the difference between production capacity and capacity usage. It only uses standard cost as a base and would not be a good indicator of a short-term spending problem. In the long-term, both types of variances would be necessary to resolve an overhead costs problems.
A firm uses a standard cost system and applies factory overhead to products on the basis of direct labor hours. If the firm recently reported a favorable direct labor efficiency variance, then the
A. Direct labor rate variance must be unfavorable
B. Variable overhead spending variance must be favorable
C. Fixed overhead volume variance must be unfavorable
D. Variable overhead efficiency variance must be favorable
D. Variable overhead efficiency variance must be favorable
Highlight uses direct labor hours as the driver for variable overhead application. Thus, if the direct labor efficiency variance was favorable, the variable overhead efficiency variance must be favorable as well since the two variances are based on the same standard and actual hours.
Which one of the following variances is of least significance from a behavioral control perspective?
A. Unfavorable direct materials quantity variance amounting to 20% of the quantity allowed for the output attained
B. Fixed overhead volume variance resulting from management’s decision midway through the fiscal year to reduce its budgeted output by 20%
C. Unfavorable direct labor efficiency variance amounting to 10% more than the budgeted hours for the output attained
D. Favorable direct labor rate variance resulting from an inability to hire experienced workers to replace retiring workers
B. Fixed overhead volume variance resulting from management’s decision midway through the fiscal year to reduce its budgeted output by 20%.
Most variances are of significance to someone who is responsible for that variance. However, a fixed overhead volume variance is often not the responsibility of anyone other than top management. The fixed overhead volume variance equals the difference between budgeted fixed overhead and the amount applied (Standard input allowed for the actual output x Standard rate). It can be caused by economic downturns, labor strife, bad weather, or a change in planned output. Thus, a fixed overhead volume variance resulting from a top management decision to reduce output has fewer behavioral implications than other variances.
Which type of variance will reflect overtime premiums when the overall volume of work is greater than expected?
A. Labor efficiency
B. Yield
C. Overhead
D. Materials quantity
C. Overhead
Overtime premiums arising from a heavy overall volume of work rather than from the requirements of a specific job are deemed to apply to all production. Hence, they are treated as indirect costs and assigned to overhead.
The performance report indicated the following information for the past month.
- Actual total overhead: $1,600,000
- Budgeted fixed overhead: 1,500,000
- Applied fixed overhead at $3 per labor hour: 1,200,000
- Applied variable overhead at $.50 per labor hour: 200,000
- Actual labor hours: 430,000
Total overhead spending variance for the month was
A. $185,000 unfavorable
B. $100,000 favorable
C. $200,000 unfavorable
D. $115,000 favorable
D. $115,000 favorable
The total overhead applied was $1,400,000
($1,200,000 fixed + $200,000 variable)
Since the actual overhead was $1,600,000, the total overhead variance was $200,000 unfavorable. The $200,000 total variance would be explained by three elements: the fixed overhead volume variance, the variable overhead efficiency variance, and the total spending variance.
At $3 per hour, fixed overhead was applied on the basis of 400,000 hours ($1,200,000 applied fixed overhead / $3 per labor hour). But since the budget called for 500,000 hours (1,500,000 budgeted overhead / $3 per labor hour), there was an unfavorable volume variance of 100,000 hours at $3, or $300,000.
The variable overhead efficiency variance is calculated by multiplying the excess hours of 30,000 (430,000 - 400,000) time the variable application rate of $.50, or $15,000 unfavorable.
Therefore, when you combine the $300,000 unfavorable volume variance and the $15,000 unfavorable efficiency variance, you get $315,000 unfavorable. Since the total variance was only $200,000 unfavorable, the spending variance must be favorable in the amount of $115,000. Algebraically, this is solved as $300,000 U + 15,000 U - SV = 200,000 U
Thus SV = 115,000 F
A supervisor controls her department’s costs. The following data relate to her department for the month of June:
Variable factory overhead
* Budgeted based on actual input: 100,000
* Actual: 106,250
Fixed factory overhead
* Budgeted: $31,250
* Actual: 33,750
What was the department’s total spending variance for June?
A. $2,500 U
B. $6,250 U
C. $8,750 U
D. $3,750 F
C. $8,750 U
Spending variance = actual total overhead - (budgeted fixed overhead + variable overhead budgeted for the actual input).
The total actual overhead is $140,000 (106,250+33,750). The sum of budgeted fixed overhead and variable overhead budgeted for the actual input is $131,250 (100,000 + 31,250).
Thus, the total spending variance is $8,750 (140,000 - 131,250). The variance is unfavorable because the actual overhead exceeds the budgeted overhead.
