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Overhead Variance Analysis

The Chatham plant of Morril's Small Motor Division produces a major subassembly for a $6\mathrm{.}0$ horsepower motor for lawn mowers. The plant uses a standard costing system for production costing and control. The standard cost sheet for the subassembly follows:

Direct materials $(6\mathrm{.}0$ kg

@ $$5$ $$5$

$$30\mathrm{.}00$

Direct labour $(1\mathrm{.}6$ hrs$.$ @ $$12)$

$19\mathrm{.}20$

Variable overhead $(1\mathrm{.}6$ hrs$.$ @ $$10)$

$16\mathrm{.}00$

Fixed overhead $(1\mathrm{.}6$ hrs$.$ @ $$6)$

$9\mathrm{.}60$

Standard unit cost

$$74\mathrm{.}80$

During the year, the Chatham plant had the following actual production activity:

a$.$ Production of motors totalled $50,000$ units.

b$.$ The company used $82,000$ direct labour hours at a total cost of $$1,066,000.$

c$.$ Actual fixed overhead totalled $$556,000.$

d$.$ Actual variable overhead totalled $$860,000.$

The Chatham plant's practical activity is $60,000$ units per year.

Standard overhead rates are computed based on practical activity measured in standard direct labour hours.

Required:

Compute the variable overhead spending and efficiency variances.

Spending variance $$

$$

Efficiency variance $$ C $$

$2.$ Conceptual Connection: Compute the fixed overhead spending and volume variances.

Spending variance $$

$$

Volume variance

$ $$

$$

Interpret the volume variance. What can be done to reduce this variance?

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