Question

Berlin Ltd. uses a combined overhead rate of $2.90 per machine hour to apply overhead to products. The rate was developed at an annual expected capacity of 264,000 machine hours; each unit of product requires two machine hours to produce. At 264,000 machine hours, expected fixed overhead for Munich Ltd. is $250,800.
During November, the company produced 11,960 units and used 24,700 machine hours. Actual variable overhead for the month was $ 47,100 and fixed overhead was $ 20,000. Calculate the overhead spending, efficiency, and volume variances for November.

Answer 1

Answer:

Berlin Ltd.

1. Overhead spending variance

= $4,530 F

2. Overhead efficiency variance

= $2,262 U

3. Overhead volume variance

= $741 U

Explanation:

a) Data and Calculations:

Combined overhead rate per machine hour = $2.90

Annual expected capacity = 264,000

Machine hours required per unit of product = 2 hours

Total combined expected overhead = $765,600 ($2.90 * 264,000)

Expected fixed overhead =                   $250,800

Expected variable overhead =               $514,800 ($765,600 - $250,800)

Fixed overhead per machine hour = $0.95 ($250,800/264,000)

Variable overhead per machine hour = $1.95 ($514,800/264,000)

November Usage and Production:

Production units = 11,960 units

Standard machine hours = 23,920 (11,960 * 2)

Actual machine hours used = 24,700

Actual variable overhead for the month = $47,100

Variable overhead per machine hour = $1.90688

Standard variable overhead cost = $48,165 ($1.95 * 24,700)

Actual fixed overhead = $20,000

Standard fixed overhead = $23,465 ($0.95 * 24,700)

1. Overhead spending variance = Standard overhead - Actual overhead

= ($2.90 * 24,700 - ($47,100 + $20,000))

= ($71,630 - $67,100

= $4,530 F

2. Overhead efficiency variance = (standard machine hours allowed for production – actual machine hours used) × standard overhead absorption rate per hour

= (23,920 - 24,700) * $2.90

= $2,262 U

3. Overhead volume variance = (Standard machine hours - Actual machine hours) * Standard Fixed Overhead Rate

= (23,920 - 24,700) * $0.95

= $741 U