Denominatorhours Budgetedfixedoverheadrate =× $ 0.61=(330,000 – 300,000) × $0.61 = $18,300 F8-34 (20 min.) Variable overhead variance.1. Direct manufacturing labour variance analysis for the Art Supply CompanyActual Costs IncurredActual Input Qty. Budgeted RateFlexible Budget:Budgeted Input Qty. Allowed for Actual Output Budgeted Rate13,000 × 0.75 × 20.213,000 × 0.75 × 2013,000 × 0.5 × 20.0$196,950$195,000$130,000$1,950 U$65,000 URate varianceEfficiency variance2. Variable manufacturing overhead variance analysis for the Art Supply CompanyActual Costs IncurredActual Input Qty. Budgeted RateFlexible Budget:Budgeted Input Qty. Allowed for Actual Output Budgeted Rate13,000 × 0.75 × 9.7513,000 × 0.75 × 10.013,000 × 0.5 × 10.0
$95,062.5$97,500$65,000$2,437.5 F$32,500 URate varianceEfficiency variance3. The favourable rate variance for variable manufacturing overhead suggests that less costly items were used, which could have a negative impact on labour efficiency. But note that the workers were paid a higher rate than budgeted, which, if it indicates the hiring of more qualified employees, should lead to favourable labour efficiency variances. Moreover, both rate variances are verysmall, approximately 1% and 2.5% respectively, while the efficiency variances are very large, each equaling 50% of expected costs. It is clear therefore that the efficiency variances are related to factors other than the cost of the labour or overhead.4. If the variable overhead consisted only of costs that were related to direct manufacturing labour,then Sarah is correct—both the labour efficiency variance and the variable overhead efficiency variance would reflect real cost overruns due to the inefficient use of labour. However, a portion of variable overhead may be a function of factors other than direct labour (e.g., the costs of energy or the usage of indirect materials). In this case, allocating variable overhead using direct labour as the only base will inflate the effect of inefficient labour usage on the variable overhead efficiency variance. The real effect on firm profitability will be lower, and will likely be captured in a favourable rate variance for variable overhead.8-35(30 min.)Causes of indirect variances1.Variable overhead variance analysis for Heather’s Horse Spa for August 2015ActualActual inputBudgeted input allowed for Variable Overhead× Budgeted rate Actual output × Budgeted rate(525 × 38 × $0.4)(500 × 38 × $0.4)$7,500$7,980$7,600$480 F$380 URate varianceEfficiency variance
2. Fixed overhead variance analysis for Heather’s Horse Spa for August 2015ActualStatic Budget Budgeted input allowed forFixed OverheadFixed Overhead Actual output × Budgeted Rate(500 x 40 x $2.75)(500 × 38 × $2.75)$50,000$55,00052,250$5,000 F$2,750 URate varianceProduction-volume variance3.The variable overhead rate variance arises from the fact that the cost of horse feed, shampoo, ribbons and other supplies was higher, per weighted average horse-guest week, than expected ($7,500/(525 × 38) kg = $0.208/kg > $0.2/kg). Unlike the material and labour rate variances, which only reflect the prices paid, the rate variance could have both a cost and usage component. HHS would have a negative rate variance if they paid more for feed than expected or if the horses ate more feed than expected.