Megan, Inc. uses the following standard costs per unit for one of its products: Direct labor (2.0 hrs. @ $5.00/hr.) = $10.00; overhead (2.0 hrs. @ $2.50/hr.) = $5.00. The flexible budget for overhead is $120,000 plus $1.00 per direct labor hour (DLH). Actual data for the past month show total overhead costs of $225,000, total fixed overhead of $123,000, 85,000 hours worked, and 40,000 units produced.

The variable overhead spending variance for the past month for Megan, Inc., to the nearest whole dollar, was:
A) $0.
B) $3,000 unfavorable.
C) $5,000 unfavorable.
D) $17,000 unfavorable.
E) Cannot be determined without additional information.

Question

Megan, Inc. uses the following standard costs per unit for one of its products: Direct labor (2.0 hrs. @ $5.00/hr.) = $10.00; overhead (2.0 hrs. @ $2.50/hr.) = $5.00. The flexible budget for overhead is $120,000 plus $1.00 per direct labor hour (DLH) . Actual data for the past month show total overhead costs of $225,000, total fixed overhead of $123,000, 85,000 hours worked, and 40,000 units produced.

The variable overhead spending variance for the past month for Megan, Inc., to the nearest whole dollar, was:

The variable overhead spending variance for the past month for Megan, Inc., to the nearest whole dollar, was:
A) $0.
B) $3,000 unfavorable.
C) $5,000 unfavorable.
D) $17,000 unfavorable.
E) Cannot be determined without additional information.

Quizplus · Accepted Answer

The variable overhead spending variance is calculated as the difference between the actual variable overhead costs and the budgeted variable overhead costs. The budgeted variable overhead costs are calculated as the flexible budget rate of $1.00 per DLH multiplied by the actual DLHs worked of 85,000 hours, which equals $85,000. The actual variable overhead costs are calculated as the total overhead costs of $225,000 minus the fixed overhead costs of $123,000, which equals $102,000. Therefore, the variable overhead spending variance is $102,000 - $85,000 = $17,000 unfavorable.