Pratt, Inc., uses a standard cost system and develops its overhead rates from the current an¬

nual budget. The budget is based on an expected annual output of 100,000 units requiring 500,000 direct labor hours. (Practical capacity is 550,000 hours.) Annual budgeted overhead costs total $437,500, of which $187,500 is fixed overhead. A total of 104,000 units using 540,000 direct labor hours was produced during the year. Actual variable overhead costs for the year were $260,000, and actual fixed overhead costs were $200,000.

Required:
1. Compute the fixed overhead spending and volume variances. How would you inter¬
pret the spending variance? Discuss the possible interpretations of the volume variance.
Which is most appropriate for this example?
2. Compute the variable overhead spending and efficiency variances. How is the variable overhead spending variance like the price variances of labor and materials? How is it different? How is the variable overhead efficiency variance related to the labor effi¬
ciency variance?