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Exercise 9.15 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 $787,200, of which $556,800 is fixed overhead. A total of 119,400 units using 478,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $230,600, and actual fixed overhead costs were $556,250.1. Compute the fixed overhead spending volume variances. How would you interpret the spending variance? Discuss the possible interpretations of the volume variance. Which is the most appropriate for this example?2. Compute the variable overhead spending efficiency variables. 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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Answer:

1.a $ - 550 (F)

1.b $ -2784 (U)

2.a $ 1,160 (U)

2.b $ 192(U)

Explanation:

1a)Fixed overhead spending variance = Actual fixed overhead -Budgeted fixed overhead

                                                      = 556250 -556800

                                                     = $ - 550 (F)

b)Fixed overhead volume variance= standard cost for actual output - budgeted cost

                                              = (4.64*119400)-556800

                                               = 554016-556800

                                              =$ -2784 (U)

**standard fixed cost = 556800/120000 = 4.64

2a)Variable overhead spending variance= Actual variable cost - standard cost for actual output

                                                    = 230600 - (.48*478000)

                                                 = 230600 -229440

                                                  = $ 1,160 (U)

**standard variable rate = (787200-556800)/480000=.48 per hour

b)variable overhead efficiency variance = Actual Hours*Standard rate per hour -standard hours *standard rate per hour

                                               = (478000*.48) -(477600*.48)

                                               = 229440-229248

                                              = 192(U)

**standard rate per hour =Budgeted variable overhead /Standard hours

                                    = (787200-556800)/480000

                                   = 230400/480000

                                  = .48 per hour

**Standard hours for actual output-If 480000 hours are required to produce to make 120000 units then to make 119400 units , 480000*119400/120000 = 477600 hours required

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