James Corp. applies overhead on the basis of direct labor hours. For the month o
ID: 2341598 • Letter: J
Question
James Corp. applies overhead on the basis of direct labor hours. For the month of May, the company planned production of 10,000 units (80% of its production capacity of 12,500 units) and prepared the following overhead budget:
During May, the company operated at 90% capacity (11,250 units) and incurred the following actual overhead costs:
2. Compute the overhead volume variance.
3. Prepare an overhead variance report at the actual activity level of 11,250 units.
Explanation / Answer
Ans.1: Computation of Overhead volume variance
Particulars
Plant Capacity
Budget Variance
Remarks
Overhead Budget
80%
90%
Production Units
10000
11250
-1250
i.e., For 80% = 10000 units then for 90% = 10000/0.80 X 0.90 = 11250 units
Standard Direct Labour hours
27000
30375
-3375
For 10000 units = 27000 hrs then Direct labour hour per unit = 27000/10000 = 2.70 hr
Hence, for 11250 units i.e., 90% = 11250 X 2.70 = 30375 hrs
Budget Overhead
Variable Overhead costs
Indirect Materials
16,200.00
18,225.00
-2025
For 10000 units = $16,200, Hence 11,250 units = $16,200/10000 X 11250
Indirect Labour
27,000.00
30,375.00
-3375
Labour directly attributable to no.of hours worked, for 27000 hrs = $27000 labour cost;
then cost per labour hour = $ 27000/27000 hrs = $1 per labour hour, hence for 30,375 hrs X $1 = $30,375
Power
5,400.00
6,075.00
-675
Power costs directly attributable to no.of man hours worked, for 27000 labour hrs = $5,400 power cost;
then cost per labour hour = $ 5,400/27000 hrs = $0.20 per labour hour, hence for 30,375 hrs X $0.20 = $6,075
Maintenance
5,400.00
6,075.00
-675
Maintenance costs directly attributable to no.of man hours worked, for 27000 labour hrs = $5,400 maintenance costs;
then cost per labour hour = $ 5,400/27000 hrs = $0.20 per labour hour, hence for 30,375 hrs X $0.20 = $6,075
Total Overhead Costs
54,000.00
60,750.00
(6,750.00)
Fixed overhead costs
Rent of Factory Building
23,000.00
23,000.00
-
Building rent remain same and no additional costs despite of increase in production.
Depreciation - Machinery
10,800.00
10,800.00
-
Plant working in its normal capacity, hence there is no additional wear and tear
Supervisory Salaries
14,800.00
14,800.00
-
This costs shall not be effect despite of increase or decrease in production.
Total Fixed Costs
48,600.00
48,600.00
-
Total Overhead costs
102,600.00
109,350.00
(6,750.00)
Ans.2: Overhead variance report at the actual activity level of 11,250 units
Particulars
Plant Capacity
Variance
Explanation
Overhead Budget
Budget
Actual
Production Units
11250
11250
-
Overheads
Variable Overhead costs
Indirect Materials
18,225.00
16,200.00
(2,025.00)
Decrease in material costs
Indirect Labour
30,375.00
29,875.00
(500.00)
Decrease in labour costs
Power
6,075.00
6,075.00
-
Nil
Maintenance
6,075.00
6,710.00
635.00
Increase in Maintenance costs
Total Overhead Costs
60,750.00
58,860.00
(1,890.00)
Fixed overhead costs
Rent of Factory Building
23,000.00
23,000.00
-
Nil
Depreciation - Machinery
10,800.00
10,800.00
-
Nil
Supervisory Salaries
14,800.00
18,200.00
(3,400.00)
Increase in supervisory salaries
Total Fixed Costs
48,600.00
52,000.00
(3,400.00)
Total Overhead costs
109,350.00
110,860.00
(5,290.00)
Ans.1: Computation of Overhead volume variance
Particulars
Plant Capacity
Budget Variance
Remarks
Overhead Budget
80%
90%
Production Units
10000
11250
-1250
i.e., For 80% = 10000 units then for 90% = 10000/0.80 X 0.90 = 11250 units
Standard Direct Labour hours
27000
30375
-3375
For 10000 units = 27000 hrs then Direct labour hour per unit = 27000/10000 = 2.70 hr
Hence, for 11250 units i.e., 90% = 11250 X 2.70 = 30375 hrs
Budget Overhead
Variable Overhead costs
Indirect Materials
16,200.00
18,225.00
-2025
For 10000 units = $16,200, Hence 11,250 units = $16,200/10000 X 11250
Indirect Labour
27,000.00
30,375.00
-3375
Labour directly attributable to no.of hours worked, for 27000 hrs = $27000 labour cost;
then cost per labour hour = $ 27000/27000 hrs = $1 per labour hour, hence for 30,375 hrs X $1 = $30,375
Power
5,400.00
6,075.00
-675
Power costs directly attributable to no.of man hours worked, for 27000 labour hrs = $5,400 power cost;
then cost per labour hour = $ 5,400/27000 hrs = $0.20 per labour hour, hence for 30,375 hrs X $0.20 = $6,075
Maintenance
5,400.00
6,075.00
-675
Maintenance costs directly attributable to no.of man hours worked, for 27000 labour hrs = $5,400 maintenance costs;
then cost per labour hour = $ 5,400/27000 hrs = $0.20 per labour hour, hence for 30,375 hrs X $0.20 = $6,075
Total Overhead Costs
54,000.00
60,750.00
(6,750.00)
Fixed overhead costs
Rent of Factory Building
23,000.00
23,000.00
-
Building rent remain same and no additional costs despite of increase in production.
Depreciation - Machinery
10,800.00
10,800.00
-
Plant working in its normal capacity, hence there is no additional wear and tear
Supervisory Salaries
14,800.00
14,800.00
-
This costs shall not be effect despite of increase or decrease in production.
Total Fixed Costs
48,600.00
48,600.00
-
Total Overhead costs
102,600.00
109,350.00
(6,750.00)
Ans.2: Overhead variance report at the actual activity level of 11,250 units
Particulars
Plant Capacity
Variance
Explanation
Overhead Budget
Budget
Actual
Production Units
11250
11250
-
Overheads
Variable Overhead costs
Indirect Materials
18,225.00
16,200.00
(2,025.00)
Decrease in material costs
Indirect Labour
30,375.00
29,875.00
(500.00)
Decrease in labour costs
Power
6,075.00
6,075.00
-
Nil
Maintenance
6,075.00
6,710.00
635.00
Increase in Maintenance costs
Total Overhead Costs
60,750.00
58,860.00
(1,890.00)
Fixed overhead costs
Rent of Factory Building
23,000.00
23,000.00
-
Nil
Depreciation - Machinery
10,800.00
10,800.00
-
Nil
Supervisory Salaries
14,800.00
18,200.00
(3,400.00)
Increase in supervisory salaries
Total Fixed Costs
48,600.00
52,000.00
(3,400.00)
Total Overhead costs
109,350.00
110,860.00
(5,290.00)
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