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Example Addis Manufacturing uses a stardard costing system and its fiscal year ends on Hamle 30. Variable overhead for Hamle 1997 was budgeted at Br 4 per machine hour. Budgeted fixed overhead in Hamle 1997 was Br 240,000. Addis has budgeted 200,000 units of output for Hamle 1997. Machine hour is the allocation base for variable and fixed overhead costs. Machine hour is budgeted to be 0.50 bours per unit of output. The actual nunber of units produced for the month is 192,000 with a total machine hours of 57,600. The actual variable and fixed overhead costs for the month are Br 120,000 and Br 256,800, respectively. Transparency Required: Compute 1. VFOH Eiciency Variance 2. VFOH Spending Variance 3. FFOH Spending Variance 4. Production-Volume Variance

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To compute the variances for Addis Manufacturing's overhead costs, we will follow several steps:

Given Data:

  • Budgeted Variable Overhead Rate (VFOH rate) = Br 4 per machine hour
  • Budgeted Fixed Overhead (FFOH) = Br 240,000
  • Budgeted Output = 200,000 units
  • Budgeted Machine Hours per Unit = 0.50 hours
  • Actual Output = 192,000 units
  • Actual Machine Hours = 57,600 hours
  • Actual Variable Overhead = Br 120,000
  • Actual Fixed Overhead = Br 256,800

Step 1: Calculate the Budgeted Variable Overhead for Actual Output

  1. Budgeted machine hours for actual output: \[ \text{Budgeted Machine Hours} = \text{Actual Output} \times \text{Budgeted Machine Hours per Unit} = 192,000 \text{ units} \times 0.50 \text{ hours/unit} = 96,000 \text{ hours} \]

  2. Budgeted Variable Overhead for Actual Output: \[ \text{Budgeted Variable Overhead} = \text{Budgeted Machine Hours} \times \text{VFOH Rate} = 96,000 \text{ hours} \times Br 4/\text{hour} = Br 384,000 \]

Step 2: Calculate the Actual Variable Overhead

We already have the actual variable overhead costs:

  • Actual Variable Overhead = Br 120,000

VFOH Variances:

VFOH Efficiency Variance

\[ \text{VFOH Efficiency Variance} = (\text{Actual Machine Hours} - \text{Budgeted Machine Hours}) \times \text{VFOH Rate} \]

  • Actual Machine Hours = 57,600 hours
  • Budgeted Machine Hours = 96,000 hours \[ \text{VFOH Efficiency Variance} = (57,600 - 96,000) \times Br 4 = (-38,400) \times Br 4 = \text{Br} -153,600 \quad (\text{Unfavorable}) \]

VFOH Spending Variance

\[ \text{VFOH Spending Variance} = \text{Actual Variable Overhead} - \text{Budgeted Variable Overhead based on Actual Hours} \]

  • Here, we need to calculate the budgeted variable overhead based on actual machine hours: \[ \text{Budgeted Variable Overhead} = \text{Actual Machine Hours} \times \text{VFOH rate} = 57,600 \times Br 4 = Br 230,400 \] \[ \text{VFOH Spending Variance} = Br 120,000 - Br 230,400 = \text{Br} -110,400 \quad (\text{Favorable}) \]

Step 3: Calculate the FFOH Variance

FFOH Spending Variance

\[ \text{FFOH Spending Variance} = \text{Actual Fixed Overhead} - \text{Budgeted Fixed Overhead} \] \[ \text{FFOH Spending Variance} = Br 256,800 - Br 240,000 = \text{Br} 16,800 \quad (\text{Unfavorable}) \]

Step 4: Calculate the Production-Volume Variance

\[ \text{Production-Volume Variance} = \text{Budgeted Fixed Overhead} - \text{Fixed Overhead applied (based on actual output)} \]

  • Fixed Overhead applied based on actual output can be calculated as: \[ \text{Fixed Overhead Applied} = \text{Budgeted Fixed Overhead} \times \frac{\text{Actual Output}}{\text{Budgeted Output}} = Br 240,000 \times \frac{192,000}{200,000} = Br 230,400 \] \[ \text{Production-Volume Variance} = Br 240,000 - Br 230,400 = \text{Br} 9,600 \quad (\text{Unfavorable}) \]

Summary of Variances:

  1. VFOH Efficiency Variance: Br -153,600 (Unfavorable)
  2. VFOH Spending Variance: Br 110,400 (Favorable)
  3. FFOH Spending Variance: Br 16,800 (Unfavorable)
  4. Production-Volume Variance: Br 9,600 (Unfavorable)

Make sure to consider the signs and interpretations of these variances carefully in reporting and analysis!