15-47 Four-Variance Analysis of Total Overhead Variance (60-75 minutes)
Variable factory overhead
Flexible Budget (FB) based FB Based on Output
on Inputs (i.e., hrs. worked) (i.e., allowed hours)
Actual (AQ × SP)
$352,000 440,000 × SP
(SQ
SQ
×
×
SP)
SP
Spending Variance Efficiency Variance
Fixed factory overhead
Actual
Budget Applied
(“Lump-Sum”)
200,000 units × $3/unit
(SQ × SP)
$575,000 = $600,000 396,000 × SP
Spending Variance Production Volume
Variance
1. a. Total units manufactured
Standard hours allowed per unit manufactured
Total standard hours for the units manufactured
198,000
× 2
396,000 b. Standard variable factory overhead rate per hour
Total budgeted factory overhead
Denominator activity (capacity level)
Fixed factory overhead rate per unit
Total budgeted fixed factory overhead
Total budgeted variable factory overhead
Total direct labor hours @ capacity (200,000 × 2)
Standard variable factory overhead rate per hour
∴ Variable factory overhead efficiency variance
200,000
× $ 3.00
= (440,000 − 396,000) DLHs × $0.75/DLH =
$900,000
$600,000
$300,000
÷ 400,000
$0.75
$33,000U

c. Variable factory overhead incurred (given)
FB based on Inputs = 440,000 DLHs × $0.75/DLH
Variable overhead spending variance d. Fixed factory overhead incurred (given)
Budgeted fixed factory overhead
Fixed factory overhead spending variance e. Total standard hours allowed for units manufactured
Standard fixed overhead rate/DLH = $3.00 ÷ 2
Total fixed factory overhead applied to production
Alternative computation:
Units manufactured (given)
Standard fixed factory overhead rate/unit (given)
Total fixed overhead applied f. Total budgeted fixed factory overhead
=
=
=
=
=
=
$352,000
330,000
$ 22,000U
$575,000
600,000
$ 25,000F
396,000
$1.50
$594,000
198,000
× $3.00
$594,000
$600,000
Total applied fixed factory overhead
Fixed factory overhead production volume variance
$594,000
$ 6,000U
(2) Journal entries:
Dr. Variable Overhead
Cr. Accounts payable, etc.
352,000
To record actual variable overhead costs for the period.
Dr. WIP Inventory ($0.75 × 396,000)
Cr. Variable Overhead
297,000
297,000
To apply standard variable overhead costs to production for the period.
Dr. Variable Overhead Spending Variance
Dr. Variable Overhead Efficiency Variance
Cr. Variable Overhead
To record variable overhead variances for the period.
22,000
33,000
352,000
55,000

Dr. Fixed Factory Overhead
Cr. Accumulated depreciation, etc.
To record actual fixed overhead costs for the period.
575,000
575,000
Dr. WIP Inventory (396,000 × $1.50) 594,000
Cr. Fixed Factory Overhead 594,000
To apply standard fixed overhead costs to production for the period.
Dr. Production Volume Variance
Dr. Fixed Factory Overhead
Cr. Fixed Overhead Spending Variance
To record fixed overhead variances for the period.
6,000
19,000
25,000
(3) One view of the production volume variance is an artifact of the product-costing purpose of standard costing. To “unitize” budgeted fixed overhead for productcosting purposes, a “denominator activity level” must be chosen over which the budgeted fixed overhead costs can be spread. If the actual level of activity differs from the level chosen to establish the fixed overhead application rate, a production volume variance will occur. From a cost-control standpoint, the production volume variance, particularly when the denominator activity level is defined as “practical capacity,” can be thought of as representing the “cost of unused capacity.” As such, this variance information can be monitored over time to help better manage the supply of capacity-level resources.
The fixed overhead spending variance represents the difference between planned
(budgeted) fixed overhead costs and actual fixed overhead costs for the period. If management desires, this total variance can be broken down on a line-item basis.
The variable overhead spending variance is partly attributable to the fact that the measure(s) chosen to budget variable overhead costs are imperfect. In the present case, a single activity measure, DLHs, is used to construct the flexible budget for variable overhead cost. We know that such a simplification introduces error into the variance-determination process. This variance is also attributable to spending on overhead items being different from expectations. These variances (e.g., spending on electricity) can theoretically be decomposed into price and quantity components, much the same as we did in chapter 14 for direct manufacturing costs.

The variable overhead efficiency variance refers to the impact of manufacturing overhead of efficiency or inefficiency in the use of the activity measure(s) used to construct the flexible-budget for variable overhead. It is a misnomer, therefore, to interpret this variance as measuring the effect of efficiencies/inefficiencies associated with the consumption of individual variable overhead components. Note, too, that this variance is affected by the strength of the relationship between variable overhead cost and the activity measure(s) used to budget these costs for control purposes. That is, a “clean” interpretation of this variance exists only if the relationship between cost and activity is perfect.