Zeta, Inc., produces handwoven rugs. Budgeted production is 5,000 rugs per month
ID: 2573571 • Letter: Z
Question
Zeta, Inc., produces handwoven rugs. Budgeted production is 5,000 rugs per month and the standard direct labor required to make each rug is 2 hours. All overhead is allocated based on direct labor hours. Zeta's manager is interested in what caused the recent month's $3,000 unfavorable overhead variance. The following information was available to aid in the analysis:
1. What was the overhead spending variance for the month?
2. What was the overhead volume variance?
Production in units 5,000 4,500 Total labor hours 10,000 9,000 Total variable overhead $ 60,000 $ 55,000 Total fixed overhead 40,000 38,000 Total overhead $ 100,000 $ 93,000
1. What was the overhead spending variance for the month?
2. What was the overhead volume variance?
Explanation / Answer
1. overhead spending variance
actual factory overhead = 55000 + 38000 $ 93000
budgeted allowance based on actual hrs worked
fixed expense budgeted $ 40000
variable expense (9000 actual hrs worked * $ 6 variable OH rate) $54000 $94000
variance $ 1000 fav.
2. overhead volume variance
budgeted allowance based on standard hrs allowed:
fixed expense budgted $ 40000
variable expense (4500 *2 standard hrs allowed *$ 6 variable OH rate) $ 54000 $94000
overhead charged to production (4500*2 * (6+4)standard rate) $90000
variance $ 4000 (unfav.)
total variance = 1000 fav - 4000 unfav
= 3000 unfav.
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