OVERHEAD VARIANCE ANALYSIS
The Lubbock plant of Morril's Small Motor Division produces a major subassembly for a 6.0 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:
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Direct materials (6.0 lbs. @ $5.00)
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$30.00
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Direct labor (1.6 hrs. @ $12.00)
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19.20
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Variable overhead (1.6 hrs. @ $10.00)
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16.00
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Fixed overhead (1.6 hrs. @ $6.00)
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9.60
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Standard unit cost
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$74.80
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During the year, the Lubbock plant had the following actual production activity:
a. Production of motors totaled 50,000 units.
b. The company used 82,000 direct labor hours at a total cost of $1,066,000.
c. Actual fixed overhead totaled $556,000.
d. Actual variable overhead totaled $860,000.
The Lubbock plant's practical activity is 60,000 units per year. Standard overhead rates are computed based on practical activity measured in standard direct labor hours.
Required:
1. Compute the variable overhead spending and efficiency variances.
2. Compute the fixed overhead spending and volume variances. Interpret the volume variance. What can be done to reduce this variance?