OVERHEAD APPLICATION, OVERHEAD VARIANCES, JOURNAL ENTRIES
Iverson Company produces microwave ovens. Iverson’s plant in Buffalo uses a standard costing system. The standard costing system relies on direct labor hours to assign overhead costs to production. The direct labor standard indicates that four direct labor hours should be used for every microwave unit produced. (The Buffalo plant produces only one model.) The normal production volume is 120,000 units. The budgeted overhead for the coming year is as follows:
Iverson applies overhead on the basis of direct labor hours.
During the year, Iverson produced 119,000 units, worked 487,900 direct labor hours, and incurred actual fixed overhead costs of $1.3 million and actual variable overhead costs of $927,010.
1. Calculate the standard fixed overhead rate and the standard variable overhead rate.
2. Compute the applied fixed overhead and the applied variable overhead. What is the total fixed overhead variance? Total variable overhead variance?
3. Break down the total fixed overhead variance into a spending variance and a volume variance. Discuss the significance of each.
4. Compute the variable overhead spending and efficiency variances. Discuss the significance of each.
5. Now assume that Iverson’s cost accounting system reveals only the total actual overhead. In this case, a 3-variance analysis can be performed. Using the relationships between a 3- and 4-variance analysis, indicate the values for the three overhead variances.
6. Prepare the journal entries that would be related to fixed and variable overhead during the year and at the end of the year. Assume variances are closed to Cost of Goods Sold.
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