Accounting for Decision Making and Control 8th Edition by Jerold Zimmerman

Exercise 14

Anpax, Inc.
Anpax, Inc., manufactures two products: L7 and Q2. Overhead is allocated to products based on machine hours. Management uses a flexible budget to forecast overhead. For the current year, fixed factory overhead is projected to be $2.75 million and variable factory overhead is budgeted at $20 per machine hour. At the beginning of the year, management developed the following standards for each product and made the following production forecasts for the year:
There were no beginning or ending inventories. Actual production for the year was 20,000 units of L7 and 40,000 units of Q2. Other data summarizing actual operations for the year are:
Required:
a. Calculate the overhead rate for the current year.
b. Calculate materials and labor variances. Report quantity (efficiency) variances and price variances.
c. Calculate the volume, spending, and efficiency overhead variances.
d. Your boss (a nonaccountant) asks you to explain in nontechnical terms the meaning of each overhead variance.