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The Ferris Company applies manufacturing overhead costs to products on the basis of direct labour hours
The Ferris Company applies manufacturing overhead costs to products on the basis of direct labour hours. The standard cost card shows that 3 direct labour hours are required per unit of product. For August, the company budgeted to work 90,000 direct labour hours and to incur the following total manufacturing overhead costs:
Total Variable Overhead Costs $99,000
Total Fixed Overhead Costs $118,000
During August, the company completed 28,000 units of product, worked 86,000 direct labour hours, and incurred the following total manufacturing overhead costs:
Total Variable Overhead Costs $98,900
Total Fixed Overhead Costs $115,300
The denominator activity used for the predetermined overhead rate was 90,000 direct labour hours.
For August, what was the variable overhead spending variance?
Expert Solution
Computation of the variable overhead spending variance:-
Variable overhead spending variance = Actual hours worked * (Actual rate - Standard rate)
= 86,000 * (($98,900 / 86,000) - ($99,000 / 90,000))
= 86,000 * ($1.15 - $1.10)
= 86,000 * $0.05
= $4,300 (U)
Variable overhead spending variance is unfavorable because the actual rate is higher than the standard rate.
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