OVERHEAD APPLICATION, OVERHEAD VARIANCES

Tavera Company uses a standard cost system. The direct labor standard indicates that six direct labor hours should be used for every unit produced. Tavera produces one product. The normal production volume is 120,000 units of this product. The budgeted over- head for the coming year is as follows:

Fixed overhead       $2,160,000*
Variable overhead     1,440,000

* At normal volume.

Tavera applies overhead on the basis of direct labor hours.

During the year, Tavera produced 119,000 units, worked 731,850 direct labor hours, and incurred actual fixed overhead costs of $2.25 million and actual variable overhead costs of $1.425 million.

Required:

1. Calculate the standard fixed overhead rate and the standard variable overhead rate.

2. Compute the applied fixed overhead and the applied variable overhead. What is the total fixed overhead variance? Total variable overhead variance?

3. Break down the total fixed overhead variance into a spending variance and a volume variance. Discuss the significance of each.

4. Compute the variable overhead spending and efficiency variances. Discuss the significance of each.

5. Journal entries for overhead variances were not discussed in this chapter. Typically, the overhead variance entries happen at the end of the year. Assume that applied fixed (variable) overhead is accumulated on the credit side of the fixed (variable over- head) control account. Actual fixed (variable) overhead costs are accumulated on the debit side of the respective control accounts. At the end of the year, the balance in each control account is the total (fixed) variable variance. Create accounts for each of the four overhead variances and close out the total variances to each of these four variance accounts. These four variance accounts are then usually disposed of by clos- ing them to Cost of Goods Sold.

Form a group with two to four other students, and prepare the journal entries that isolate the four variances. Finally, prepare the journal entries that close these variances to Cost of Goods Sold.