7. The following standards for variable overhead have been established for a com

Question

7. The following standards for variable overhead have been established for a company that makes only one product: Standard hours per unit of output Standard variable overhead rate 5.9 hours $14.00 per hour The following data pertain to operations for the last month: 9,400 hours Actual hours Actual total variable overhead cost Actual output $125,140 1,580 units Required a. What is the variable overhead rate variance for the month? (Input the amount as a positive value. Leave no cells blank be certain to enter "O" wherever required. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Omit the "$" sign in your response.) Variable overhead rate variance (Click to select) b. What is the variable overhead efficiency variance for the month? (Input the amount as a positive value. Leave no cells blank-be certain to enter "O" wherever required. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Omit the "$" sign in your response.) Variable overhead efficiency variance (Click to select)

Explanation / Answer

First let us see what do Variable overhead rate variance means - Variable overhead rate variance or expenditure variance is the product of actual units of the allocation base of variable overhead and the difference between standard variable overhead rate and actual variable overhead rate.

In other words, the difference between the amount of variable overhead that has been actually incurred & the variable overhead which should have been incurred for the actual hours that has been worked is known as the variable overhead expenditure variance.

The formula is:

                      Variable overhead rate variance = Actual variable overhead – Standard variable overhead

Where, Standard Overhead = (Actual hours * Standard rate per hour)

                        Or, Standard output of actual hours * Standard rate per unit.

SOLUTION (a)

Standard variable overhead rate $ 14.00 per hour

Actual variable overhead rate $ (125,140 / 9400 ) per hour = $ 13.32

Difference per hour =(Standard rate - Actual rate ) = $ 0.69 (positive )

Therefore, Variable overhead rate variance = Difference per hour * Actual hours

= $ (0.69 * 9400)

= $ 6,486

SOLUTION (b)

What do we mean by Variable Overhead Efficiency Variance - The difference between the amounts of variable overhead that has been recovered & the amount which would have been recovered had been the actual hours worked at standard efficiency.

The formula is:

Variable Overhead Efficiency Variance = Standard variable overhead rate per hour * (Actual hours – Standard hours of actual production )

            Or, Standard rate per unit * (Standard output - Actual output)

            Or, Variable overhead recovered – Standard variable overhead.

Here, Standard hours of actual production per unit 5.9 hours

Actual hours of actual production 9400 hours

From monthly data for 1580 units,

Therefore, variable overhead efficiency variance = 14 * ( 9400 - ( 1580 * 5.9 ) )

= 14 * ( 9400 - 9322 )

= $ 1,092.00

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