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Derf Company applies overhead on the basis of direct labor hours

Management

Derf Company applies overhead on the basis of direct labor hours. Two direct labor hours are required for each product unit. Planned production for the period was set at 9,000 units. Manufacturing overhead for the period is budgeted at $135,000, of which 20 percent is fixed. The 17,200 hours worked during the period resulted in production of 8,500 units. Manufacturing overhead cost incurred was $136,500.

 

 Required:

 

 Calculate the following three overhead variances:

 

 1. Overhead volume variance.

 2. Overhead efficiency variance.

 3. Overhead spending variance.  

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a) Computation of Overhead volume variance:

Overhead volume variance = Budgeted manufacturing overhead - Overhead charged to production

= $135,000 - $136,500

= $1,500

 

 

b) Computation of Overhead efficiency variance:

Overhead efficiency variance = (Actual labor hours - Standard labor hours allowed for actual production) * Standard variable overhead rate

= [17,200 - (2*9000)] * $6

= $6,000

 

Here, Standard Variable Overhead Rate = ($135,000*(1-20%))/(9,000 units * 2 hours) = $108,000/18,000 = $6

 

c) Computation of Overhead spending variance:

Actual overhead spending rate = Actual overhead costs - (Standars Rate * Actual hours of labor used)

= $136,500 - ($6 * 17,200)

= $33,300

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