Zennick Fashion Products uses standard costs for their manufacturing division. Standards specify 3.0 direct labor hours per unit of product. At the beginning of the year, the static budget for variable overhead costs included the following data:
$$\begin{array}{l}
\begin{array} { l l }
\text { Production volume: } & 1,000 \text { units } \
\text { Estimated variable overhead costs: } & \$ 120,000 \
\text { Estimated direct labor hours: } & 3,000 \text { hours }
\end{array}\
\text { At the end of the year, actual data were as follows: }\
\begin{array} { l l }
\text { Production volume: } & 1,500 \text { units } \
\text { Actual variable overhead costs: } & \$ 174,300 \
\text { Actual direct labor hours: } & 4,200 \text { hours }
\end{array}
\end{array}$$
-
At the end of the year, the spending (price) variance for variable overhead is favorable.

Question

Zennick Fashion Products uses standard costs for their manufacturing division. Standards specify 3.0 direct labor hours per unit of product. At the beginning of the year, the static budget for variable overhead costs included the following data:
 $$\begin{array}{l}
\begin{array} { l l } 
\text { Production volume: } & 1,000 \text { units } \
\text { Estimated variable overhead costs: } & \$ 120,000 \
\text { Estimated direct labor hours: } & 3,000 \text { hours }
\end{array}\
\text { At the end of the year, actual data were as follows: }\
\begin{array} { l l } 
\text { Production volume: } & 1,500 \text { units } \
\text { Actual variable overhead costs: } & \$ 174,300 \
\text { Actual direct labor hours: } & 4,200 \text { hours }
\end{array}
\end{array}$$ 
-
At the end of the year, the spending (price) variance for variable overhead is favorable.

Quizplus · Accepted Answer

The spending (price) variance for variable overhead is calculated by comparing the actual costs to the expected costs based on the actual activity level. The expected variable overhead costs for the actual direct labor hours (4,200 hours) would be calculated based on the standard cost per hour (\$120,000 / 3,000 hours = \$40 per hour). Thus, expected costs for 4,200 hours would be 4,200 hours * \$40/hour = \$168,000. Since the actual variable overhead costs were \$174,300, which is higher than the expected \$168,000, the variance is unfavorable, not favorable.

Zennick Fashion Products Uses Standard Costs for Their Manufacturing Division