Exercise 9.15 (Algorithmic) Overhead Variances, Four-Variance Analysis

Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 120,000 units requiring 480,000 direct labor hours. (Practical capacity is 500,000 hours.) Annual budgeted overhead costs total $772,800, of which $556,800 is fixed overhead. A total of 119,300 units using 478,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $260,400, and actual fixed overhead costs were $555,450.

Required:

1. Compute the fixed overhead spending and volume variances.

Fixed Overhead Spending Variance	$	- Select your answer -FavorableUnfavorableItem 2
Fixed Overhead Volume Variance	$	- Select your answer -FavorableUnfavorableItem 4

How would you interpret the spending variance? Discuss the possible interpretations of the volume variance. Which is most appropriate for this example?

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2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations

Variable Overhead Spending Variance	$	- Select your answer -FavorableUnfavorableItem 7
Variable Overhead Efficiency Variance	$	- Select your answer -FavorableUnfavorableItem 9

How is the variable overhead spending variance like the price variances of direct labor and direct materials? How is it different? How is the variable overhead efficiency variance related to the direct labor efficiency variance?

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