Wendy Wall (WW) makes wall units. For the year, the following details have been budgeted. Output, 10,000 units; factory overheads $1,250,000, of which 60% is variable. Each wall unit should take 2.5 hours of direct labor to produce. WW produced 9,500 units with 24,000 DLH used and $1,175,000 actual overhead was incurred. Overhead is allocated based on direct labor hours (DLH). What is true of Wendy's overhead variances?

Question

Quizplus · Accepted Answer

The overhead spending variance is calculated as the difference between actual overhead and the budgeted overhead based on actual DLH. The budgeted variable overhead for actual DLH (24,000) is $750,000 (60% of $1,250,000 for 10,000 units, adjusted for 9,500 units). Adding fixed overhead ($500,000), the total budgeted overhead is $1,250,000. The actual overhead is $1,175,000, resulting in a $75,000 favorable variance. However, the spending variance is calculated as $1,175,000 - ($750,000 + $500,000) = $45,000 favorable.

Wendy Wall (WW) Makes Wall Units