Pratt, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 100,000 units requiring 500,000 direct labor hours. Annual budgeted overhead costs total $437,500,of which $187,500 is fixed overhead. A total of 104,000 units using 540,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $260,000, and actual fixed overhead costs were $200,000.
Required:
Compute the fixed overhead spending and volume variances.
How would you interpret the spending variance? Discuss the possible interpretations of the volume variance. Which is most appropriate for this example?
Compute the variable overhead spending and efficiency variances.
How is the variable overhead spending variance like the price variances of direct labor and direct materials? How is it different? How is the variable overhead efficiency variance related to the direct labor efficiency variance?