EXERCISE 10–4 Variable Overhead Variances [LO4]
Claims Management Inc. provides claims processing services to several large health insurance providers. Customers who are covered by health insurance provided by one of Claims Management’s partners submit their claims for health and dental services along with related documentation, and the employees at Claims Management compare their claims to the details of their benefit plans and calculate the value of the benefits owed. The company uses a prede- termined variable overhead rate based on direct labour-hours.
In the month of September, 15,000 claims were processed using 4,500 direct labour-hours.
The company incurred a total of $4,950 in variable overhead costs.
According to the company’s standards, 0.25 direct labour-hours are required to process a claim, and the variable overhead rate is $1.20 per direct labour-hour.
1. What variable overhead cost should have been incurred to process the 15,000 claims? How much does this differ from the actual variable overhead cost?
2. Break down the difference computed in (1) above into a variable overhead spending vari- ance and a variable overhead efficiency variance.