Earth Company expects to operate at 65% of its productive capacity of 46,000 uni

Question

Earth Company expects to operate at 65% of its productive capacity of 46,000 units per month. At this planned level, the company expects to use 23,000 standard hours of direct labor. Overhead is allocated to products using a predetermined standard rate based on direct labor hours. At the 65% capacity level, the total budgeted cost includes $36,800 fixed overhead cost and $264,500 variable overhead cost. In the current month, the company incurred $315,000 actual overhead and 29,029 actual labor hours while producing 37,700 units. What is the total overhead variance?

Explanation / Answer

Expected production = 46000 x 0.65 = 29900 units Overhead absorption rate for fixed overhead = 36800/23000 = $1.60 per direct labor hour Standard rate for variable overhead = 264500/23000 = $11.5 per direct labor hour Standard labor hour for 1 unit = 29900/23000 = 1.3 hours per unit Total overhead variance = 49010 x (1.6 + 11.5) - 315000 = = $327031 Favorable Hope this helps!

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