World Company expects to operate at 80% of its productive capacity of 70,000 uni

Question

World Company expects to operate at 80% of its productive capacity of 70,000 units per month. At this planned level, the company expects to use 25,200 standard hours of direct labor. Overhead is allocated to products using a predetermined standard rate based on direct labor hours. At the 80% capacity level, the total budgeted cost includes $57,960 fixed overhead cost and $322,560 variable overhead cost. In the current month, the company incurred $386,000 actual overhead and 22,200 actual labor hours while producing 53,000 units. (1) Compute the overhead volume variance

Explanation / Answer

Solution.

Standard Fixed Overhead Rate = Budgeted Fixed Overhead / Budgeted Units

= $380,520 / 25,200 = 15.01

Overhead Volume Variance = (Actual Activity – Normal Activity) × Fixed Overhead Application Rate

Applied Overhead = 22,200 x $15.01 = $333,222

Overhead Volume Variance = $333,222 – $380,520 = $47,258 Unfavorable.

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