World company expects to operate at 80% of its product capacity at 56,250 units

Question

World company expects to operate at 80% of its product capacity at 56,250 units per month. At this planned level, the company expects to use 22,500 standard houyrs of diret labor. Oerhead is allocated to products using a predetermined standar rate based on direct labor hours. At the 80% capacity level, the total budgeted cost included 60,750 fixed overhead cost and 263,250 variable overhead cost. In the current month, the company incurred 350,000 actual overhead and 20,000 actual labor hours while producting 44,000 units. Compute the overhead applicate rate for total overhead and compute the totl overhead variance

Explanation / Answer

Overhead application rate for total overhead = total overhead / Standard labor hours

= ( 60750 + 263250) / 22500 = 14.4

Total overhead variance = Actual total overhead Incured - Budgeted total overhead

= 350000 - ( 20000 * 14.40) = 350000 - 288000 = 62000

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