Question

Laughlin, Inc., uses a standard costing system. The predetermined overhead rates are calculated using practical capacity. Practical capacity for a year is defined as 1,000,000 units requiring 200,000 standard direct labor hours. Budgeted overhead for the year is $750,000, of which $300,000 is fixed overhead. During the year, 900,000 units were produced using 190,000 direct labor hours. Actual annual overhead costs totaled $800,000, of which $294,700 is fixed overhead.
Required:
1. Calculate the fixed overhead spending and volume variances Explain the meaning of the volume variance to the manager of Laughlin.
2.Calculate the variable overhead spending and efficiency variances. Is the spending variance the same as the direct materials price variance? If not. explain how it differs.
3. Prepare the journal entries that reflect the following.
1)Assignment of overhead to production
2)Recognition of the incurrence of actual overhead
3)Recognition of overhead variances
4) Closing out overhead variances, assuming they are not material

Answer 1

Answer:

(1) $5,300 F; $30,000

(2) $77,800 U; $22,500 U

Explanation:

1. Fixed Overhead Spending variance:

= Budgeted Fixed Overhead - Actual Fixed Overhead

= 300,000 -294,700

= $5,300 Favorable

Fixed Overhead Volume variance:

= (Standard Output -Actual Output ) × Fixed Overhead absorption rate per unit of output

= (1,000,000 - 900,000) × (300,000 ÷ 1,000,000)

= 30,000 Unfavorable

2. Actual Hours = 190,000

Actual variable Overhead = 800,000 -294,700

                                           = 505,300

Standard variable Overhead rate = (750,000 - 300,000) ÷ 200,000

                                                       = 2.25

Variable Overhead Spending Variance:

= (Actual hours × Standard variable overhead rate per hour) - Actual manufacturing overhead

= (190,000 × 2.25) - 505,300

= 77,800 unfavorable

Variable overhead Efficiency variance:

= (Standard Hour - Actual Hour) × Standard variable Overhead rate

= [(200,000 ÷ 1,000,000) × 900000 - 190,000] × 2.25

= $22,500 Unfavorable

3. The Journal entries are as follows:

WIP inventory A/C                               Dr.  $727,500

To Fixed manufacturing Overhead                            $300,000

To Variable manufacturing Overhead                       $427,500

(To record fixed and variable manufacturing overhead)

Workings:

Variable manufacturing Overhead = 190,000 × 2.25

                                                         = $427,500

Fixed manufacturing Overhead A/c    Dr. $5,300

WIP Inventory A/C                                 Dr. $72,500

To Variable manufacturing Overhead                         $77,800

(To record Closing out overhead variances)