01.07.2022 - 20:19

Lamp Light Limited (LLL) manufactures lampshades. It applies variable overhead on the basis of direct labor hours. Information from LLL’s standard cost card follows: During August, LLL had the follow

Question:

 Lamp Light Limited (LLL) manufactures lampshades. It applies variable overhead on the basis of direct labor hours. Information from LLL's standard cost card follows:

Standard Quantity Standard Rate Standard Unit Cost
Variable manufacturing overhead 0.6 $0.80$0.48

 During August, LLL had the following actual results:

 Units produced and sold 25,200 Actual variable overhead $9,510 Actual direct labor hours 16,200  Required:  Compute LLL's variable overhead rate variance, variable overhead efficiency variance, and over or underapplied variable overhead. (Do not round intermediate calculations. Indicate the effect of each variance by selecting 'F' for favorable/Overapplied and 'U' for unfavorable/underapplied.)  Variable Overhead Rate Variance$ Variable Overhead Efficiency Variance $Variable Overhead Spending Variance$
Variable Overhead Rate Variance: The formula for variable overhead rate variance is (actual rate - standard rate) x actual hours. In this case, the actual variable overhead rate is $9,510 / 16,200 hours =$0.587 per hour. The standard rate is $0.80 per hour. So the variable overhead rate variance is ($0.587 - $0.80) x 16,200 = -$3,438.96. This means the variance is unfavorable/underapplied because the actual rate was lower than the standard rate. Variable Overhead Efficiency Variance: The formula for variable overhead efficiency variance is (actual hours - standard hours) x standard rate. In this case, the standard rate is $0.80 per hour and the standard hours is 0.6 hours per unit. So the standard hours for 25,200 units is 25,200 x 0.6 = 15,120 hours. The actual hours is 16,200 hours. So the variable overhead efficiency variance is (16,200 - 15,120) x$0.80 = $864. This means the variance is favorable/overapplied because less hours were used than planned. Variable Overhead Spending Variance: The formula for variable overhead spending variance is (actual cost - expected cost) In this case, the expected cost is 25,200 x 0.6 x$0.80 = $12,096. The actual cost is$9,510. So the variable overhead spending variance is $9,510 -$12,096 = -$2,586. This means the variance is unfavorable/underapplied because the actual cost was lower than expected. Overall, the total variable overhead variance is favorable/overapplied by$864 - $2,586 = -$1,722.