World Company expects to operate at 80% of its productive capacity of 57,500 uni

Question

World Company expects to operate at 80% of its productive capacity of 57,500 units per month. At this planned level, the company expects to use 25,300 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 $70,840 fixed overhead cost and $298,540 variable overhead cost. In the current month, the company incurred $368,000 actual overhead and 22,300 actual labor hours while producing 43,000 units. (1) Compute the overhead volume variance. Compute the overhead controllable variance.

Explanation / Answer

Answer:

1) Overhead Volume Variance = Budgeted allowance based on standard hours allowed - Overhead charged to production

Budgeted allowance based on standard hours allowed :

Standard rate per hour = Budgeted Fixed overhead + Budgeted variable overheads

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Budgeted Hours

Therefore, Standard rate per hour = ( 70,840 + 298,540) / 23,300 = $14.6

Standard variable hour rate = 298,540 / 25300 = 11.8 per hour

Standard fixed hour rate = 70,840 / 25300 = 2.8 per hour

> Budgeted allowance based on standard hours allowed:

Standard Hours = (57,500 * 0.80) / 25,300 * 43,000 = 23,650 hours

Fixed Expenses = 70,840

Variable Expenses (Standard hours * Standard rate per hour i.e. 23,650 * 11.8) = 279,070

Total =   349,910

Overheads charged to production (23,650 * 14.6) = 345,290

Thus, Overhead Volume Variance = 4620 (Unfavorable)

2) Overhead Controllable Variance = Actual Overhead expenses - Budgeted allowance based on standard hours allowed

Actual Factory Overhead expenses = 368,000

Budgeted allowance based on standard Hours allowed: = 349,910

(From Part 1)

Therefore, Overhead controllable variance = 18,090 (Unfavorable)

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