Grantt Textiles Inc. incurred actual variable overhead expenses of $50,000 in th

Question

Grantt Textiles Inc. incurred actual variable overhead expenses of $50,000 in the current year for the production of 6,000 units. Variable overhead was applied at a rate of $3.25 per direct labor hour and 2 direct labor hours were budgeted for each unit. the company used 16,000 direct labor hours for production.

Required: Compute each of the following variances. Indicate whether the variance is favorable or unfavorable.

A. Variable overhead spending variance

B. Variable overhead efficiency variance

Explanation / Answer

A/

VARIABLE OVERHEAD SPENDING VARIANCE IS NOTHING BUT THE DIFFRENCE BETWEEN THE ACTUAL VARIABLE OVERHEAD SPENDING AND THE BUDGETED OVERHEAD SPENDING.

SO VARIABLE OVERHEAD SPENDING VARIANCE= ACTUAL HOURS WORKED * (ACTUAL HOURLY RATE - STANDARD HORLY RATE)

ACTUAL HOUR WORKED=16000

ACTUAL HOURLY RATE=ACTUAL VARIABLE OVERHEAD EXPENSES / ACTUAL HOUR WORKED

=$50000 / 16000

   $3.125 PER DIRECT LABOUR HOUR

STANDARD HOURLY RATE=$3.25 PER DIRECT LABOUR HOUR

SO NOW VARIABLE OVERHEAD SPENDING VARIANCE= 16000 * ($3.125 - $3.25)

($750) ADVERSE

B/

VARIABLE OVERHEAD EFFICIENCY VARIANCE IS NOTHING BUT THE DIFFRENCE BETWEEN THE ACTUAL & STANDARD HOUR WORKED WHEN THEY APPLIED TO THE STANDARD VARIABLE OVERHEAD RATE.

VARIABLE OVERHEAD EFFICIENCY VARIANCE= STANDARD HOURLY RATE * (ACTUAL HOUR WORKED - STANDARD LABOUR HOUR)

STANDARD LABOUR HOUR= NO OF UNITS PRODUCED * DIRECT LABOUR HOUR PER UNIT

=6000 * 2

=12000 DIRECT LABOUR HOUR

SO NOW VARIABLE OVERHEAD EFFICIENCY VARIANCE= $3.25 * (16000 - 12000)

=$13000 FAVOURABLE

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