Question

In October, Pine Company reports 21,000 actual direct labor hours, and it incurs $118,000 of manufacturing overhead costs. Standard hours allowed for the work done is 20,600 hours. The predetermined overhead rate is $6.00 per direct labor hour. Compute the total overhead variance.

Answer 1

Answer: $5,600 Favorable

Explanation:

Total Overhead Variance is a method of measuring if the company is spending more than it is supposed to on overhead. It checks this by computing the difference between the Actual Overhead spent and the Budgeted/ Standard Overhead that it was supposed to spend.

If the Actual Overhead is more than the Standard Overhead the Variance is Negative, if the reverse is true then the Variance is Positive.

The formula for the Variance given the details in the question is,

Total Overhead Variance = Standard total Overhead - Actual Overhead

= (Standard hours * Pre-determined Overhead rate) - Actual Hours

= ( 20,600 * 6) - 118,000

= 123,600 - 118,000

= $5,600

The Standard Total Overhead is more than the Actual Total Overhead so the Variance is Positive as Pine Company spent less than it thought it would.