Overhead Variances, Four-Variance Analysis, Journal Entries

Laughlin, Inc., uses a standard costing system. The predetermined overhead rates are calculated using practical capacity. Practical capacity for a year is defined as 1,000,000 units requiring 200,000 standard direct labor hours. Budgeted overhead for the year is $750,000, of which $300,000 is fixed overhead. During the year, 900,000 units were produced using 190,000 direct labor hours. Actual annual overhead costs totaled $800,000, of which $294,700 is fixed overhead.

Required:

1. Calculate the fixed overhead spending and volume variances.

Fixed Overhead Spending Variance	$	Favorable
Fixed Overhead Volume Variance	$	Unfavorable

2. Calculate the variable overhead spending and efficiency variances.

Variable Overhead Spending Variance	$	Unfavorable
Variable Overhead Efficiency Variance	$	Unfavorable

Feedback

1. The formula for computing the fixed overhead variances are as follows (AFOH = Actual fixed overhead and BFOH = Budgeted fixed overhead): Fixed OH spending variance = AFOH -BFOH, and the volume variance = Budgeted fixed OH Applied fixed OH.

2. Variable overhead spending variance = (Actual variable OH rate (AVOR) (SVOR) Standard variable OH rate) x AH. Variable overhead efficiency variance = (AH SH) x SVOR.

3. Prepare the journal entries that reflect the following:

1. Assignment of overhead to production
2. Recognition of the incurrence of actual overhead
3. Recognition of overhead variances
4. Closing out overhead variances, assuming they are not material

Note: Close the variances with a debit balance first. For compound entries, if an amount box does not require an entry, leave it blank or enter "0".

a.	Work in Process
	Variable Overhead Control
	Fixed Overhead Control
b.	Variable Overhead Control
	Fixed Overhead Control
	Miscellaneous Accounts
c.	Fixed Overhead Volume Variance
	Variable Overhead Spending Variance
	Variable Overhead Efficiency Variance
	Fixed Overhead Spending Variance
	Fixed Overhead Control
	Variable Overhead Control
d.	Cost of Goods Sold
	Fixed Overhead Volume Variance
	Variable Overhead Spending Variance
	Variable Overhead Efficiency Variance
	Fixed Overhead Spending Variance		blank
	Cost of Goods Sold	blank