Factory Overhead Variance Analysis:

The Osage Company uses a standard cost system. The factory overhead standard rate per

direct labor hour is:

Fixed: $4,500 / 5,000 hours = $0.90

Variable: $7,500 / 5,000 hours = $1.50
--------
$2.40

For October, actual factory overhead was $11,000 actual labor hours worked were 4,400

and the standard hours allowed for actual production were 4,500.

Required: Factory overhead variances using two, three and four variance methods.

Solution:
Two Variance Method:
Actual factory overhead $11,000
Budgeted allowance based on standard hours allowed:
Fixed expenses budgeted $4,500
Variable expenses (4,500 standard hours allowed × $1.50 variable overhead rate) $6,750
----------- $11,250
-----------
Favorable controllable variance $ (250) fav.
======
Budgeted allowance based on standard hours allowed $11,250
Overhead charged to production (4,500 standard hours allowed × $2.40 standard rate) $10,800
------------
Unfavorable volume variance $450 unfav.
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Three Variance Method:
Actual factory overhead $11,000
Budgeted allowance based on actual hours worked:
Fixed expenses budgeted $4,500
Variable expenses (4,400 actual hours worked × $1.50 variable overhead rate) $6,600
----------- $11,100
-----------
Favorable spending variance $ (100) fav.
======
Budgeted allowance based on actual hours worked $11,100
Actual hours worked × Standard overhead rate (4,400 hours × $2.40) $10,560
------------
Unfavorable spending variance $540 unfav.
======
Actual hours worked × Standard overhead rate (4,400 hours × $2.40) $10,560
Overhead charged to production (4,500 standard hours allowed × $2.40 standard rate) $10,800
-----------
Favorable efficiency variance $ (240) fav.
=====
Four Variance Method:
Actual factory overhead $11,000
Budgeted allowance based on actual hours worked:
Fixed expense budgeted $4,500
Variable expenses (4,400 actual hours worked × $1.50 variable overhead rate) $6,600
----------- $11,100
-----------
Favorable spending variance $ (100) fav.
======
Budgeted allowance based on actual hours worked $11,100
Budgeted allowance based on standard hours allowed $11,250
-----------
Favorable variable overhead efficiency variance $ (150) fav.
======
Actual hours × fixed overhead rate (4,400 actual hours × $0.90 fixed overhead rate) $3,960
Standard hours allowed × fixed overhead rate (4,500 actual hours × $0.90) 4,050
-----------
Favorable fixed overhead efficiency variance $ (90) fav.
======
Normal capacity hours (5000) × Fixed overhead rate ($0.90) $4,500
Actual hours worked (4,400) × Fixed overhead rate ($0.90) $3,960
------------
Unfavorable Idle capacity variance (600 hours × $0.90) $540 unfav.
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