EXERCISE 10-15 (CONTINUED) ALTERNATIVE SOLUTION

90,000 hours × $2.80 per hour 75,000 hours* × $2.80 per hour $207,000 = $252,000 = $210,000 ↑ ↑ ↑Spending Variance, $45,000 F Efficiency Variance, $42,000 U Total Variance, $3,000 F *30,000 units × 2.5 hours per unit = 75,000 hours Alternative Solution: Variable overhead spending variance = AH × AR – AH × SR $207,000 – 90,000 hours × $2.80 per hour = $45,000 F Variable overhead efficiency variance = SR (AH – SH) $2.80 per hour (90,000 hours – 75,000 hours) = $42,000 U It is doubtful that a correlation still exists between direct labor and vari-able manufacturing overhead cost. Direct labor time is now largely a fixed cost. Variable manufacturing overhead, however, will tend to rise and fall with actual changes in production. If variable manufacturing overhead cost was indeed correlated with direct labor, then the actual variable manufacturing overhead cost for June should have been about $252,000 (90,000 hours × $2.80 per hour). But actual variable manu-facturing overhead cost was far below this figure, as shown by the large favorable spending variance for the month. Indeed, the actual variable manufacturing overhead cost of $207,000 is very near the $210,000 standard cost allowed for the month’s output. Thus, it appears that as production has been cut back, variable manufacturing overhead cost has also decreased, even though direct labor time has remained quite sta-ble. Problem 10-27 (continued)