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Exercise 17-20: Prorating Variable Overhead Cost Variances (LO 17-1)

Volte Corporation produces small electric appliances. The following information is available for the most recent period of operations. Volte never has any work-in-process inventories and began the year with no finished goods inventory.

**Required:**

a. What was the variable overhead price variance for the period?
b. What was the variable overhead efficiency variance for the period?
- Note: Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.

c. Assume that Volte writes off all variances to Cost of Goods Sold. Prepare the entries Volte would make to record and close out the variances.
- Journal entry worksheet: Record the purchase and use of variable overhead resources at an actual cost of $140,000 and the transfer to work in process at a standard cost of $3.45 per direct labor-hour.
- Note: Enter debits before credits. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.

d. Assume that Volte prorates all variances to appropriate accounts. Prepare the entries Volte would make to record and close out the variances.
- Journal entry worksheet: Record the closure of variable overhead cost variances to Cost of Goods Sold.
- Note: Enter debits before credits. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.

Answer :

The variable overhead price variance is calculated by subtracting the standard variable overhead rate from the actual variable overhead rate and multiplying it by the actual hours. The variable overhead efficiency variance is calculated by subtracting the actual variable overhead rate from the standard variable overhead rate and multiplying it by the standard hours.

To record and close out the variances, Volte would debit Cost of Goods Sold and credit Variable Overhead Price Variance for the amount of the price variance, and debit Cost of Goods Sold and credit Variable Overhead Efficiency Variance for the amount of the efficiency variance. If Volte prorates all variances to appropriate accounts, the journal entries would depend on the specific accounts affected.

The variable overhead price variance and the variable overhead efficiency variance for the period can be calculated as follows:

Variable Overhead Price Variance = (Actual Variable Overhead Rate - Standard Variable Overhead Rate) x Actual Hours

Variable Overhead Efficiency Variance = (Standard Variable Overhead Rate - Actual Variable Overhead Rate) x Standard Hours

To record and close out the variances, Volte would make the following entries:

  1. Debit Cost of Goods Sold and credit Variable Overhead Price Variance for the amount of the price variance
  2. Debit Cost of Goods Sold and credit Variable Overhead Efficiency Variance for the amount of the efficiency variance

If Volte prorates all variances to appropriate accounts, the journal entries to record and close out the variances would depend on the specific accounts affected by the variances.

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