Company XYZ has provided you with the following information and has asked you to determine the factory overhead variances using the two and three variance methods.

Actual factory overhead ......................................................$10,000

Actual labor hours worked.....................................................4400

Standard hours allowed for this job........................................4500

F.O. rates:

Fixed = $4500/5000[remember 5000 would then be the normal capacity] = $.90/hour

Variable = $7500/5000 = $1.50/hour

1. Determine the controllable and volume variances

2. Determine the spending, idle capacity, and efficiency variances.

MAKE SURE YOU LABEL EACH AS FAVORABLE OR UNFAVORABLE OR THEY ARE INCORRECT.

********************************************************************************

Follow the direction below for the solution

Two- Variance Method:

Actual factory overhead __________

Budget based on STANDARD hours

Fixed: _______

Variable: _____

Total Budget: __________

Applied

[st. hours x factory overhead rate] __________

Standard hours are determined by taking the amount of time it takes to make one item and multiplying that by the ACTUAL NUMBER PRODUCED FOR THAT TIME PERIOD.

Actual - budget = Controllable Variance [favorable if we spent less than the budget]

Budget - WIP = Volume Variance [favorable if actual hours are more than normal capacity] ---because we had many orders for work.

Three-Variance Method:

--------------------------------------

Actual factory overhead _________

Budget based on ACTUAL hours

Fixed: _____

Variable: _____

Total Budget: __________

Actual hours x standard rate __________

Applied [same as above] __________

Actual - budget = Spending Variance [favorable if we spent less]

Budget - [ah x sr] = Idle Capacity Variance [favorable if actual hours are greater than normal capacity]

[Ah x sr] - applied = Efficiency Variance [favorable when actual hours are less than standard.]

Overhead analysis is complicated. It comes in a variety of ways. One of the hardest things to determine is whether a variance is favorable or unfavorable.

Two-Variance Method:

CONTROLLABLE VARIANCE

Measures how we have controlled our factory overhead costs in relation to our F.O. budget.

VOLUME VARIANCE

Measures how active the factory was. Did we have enough orders to fill? It would be awful if we didn't have enough orders and we still went over budget

Three-Variance Method:

SPENDING VARIANCE

Measures the same thing as the controllable variance except that the budget is based upon actual rather than standard production

IDLE CAPACITY VARIANCE

Measures the same thing as the volume variance, but again is based upon actual rather than standard production.

EFFICIENCY VARIANCE

Compares actual hours against standard hours, example, was the job completed on time and how did that effect factory overhead.