Overhead Application, Overhead Variances

Tavera Company uses a standard cost system. The direct labour standard indicates that five direct labour hours should be used for every unit produced. Tavera produces one product. The normal production volume is 120,000 units of this product. The budgeted overhead for the coming year is as follows:

Tavera applies overhead on the basis of direct labour hours.

Fixed overhead $2,160,000

Variable overhead $1,440,000 (at normal volume) During the year, Tavera produced 118,600 units, worked 592,300 direct labour hours, and incurred actual fixed overhead costs of $2,150,400 and actual variable overhead costs of $1,422,800.

Required:

1. Conceptual Connection: Compute the variable overhead spending and efficiency variances.

Spending variance $

Efficiency variance $

2. Prepare the journal entries for overhead variances were not discussed in this chapter. Typically, the overhead variance entries happen at the end of the year. Assume that applied fixed (variable) overhead is accumulated on the credit side of the fixed (variable) overhead control account. Actual fixed (variable) overhead costs are accumulated on the debit side of the respective control accounts. At the end of the year, the balance in each control account is the total fixed (variable) variance. Create accounts for each of the four overhead variances and close out the total variances to each of these four variance accounts. These four variance accounts are then usually disposed of by closing them to Cost of Goods Sold.

a) entry - record VOH efficiency adn spending variance

b) entry - record FOH volume and spending variance

3. Prepare the journal entries that close these variances to Cost of Goods Sold. If an amount box does not require an entry, leave it blank.

a) entry - transfer VOH spending and FOH volume variances to COGS

b) entry - transfer FOH spending and VOH efficiency variance to to COGS