At the commencement of the financial year a business estimated that their overhe

Question

At the commencement of the financial year a business estimated that their overhead would be $720,000 and their direct labour costs would be $1.44 million.

At the end of the financial year the actual data reveals that the overhead was $770,000. Direct labour cost was calculated to be $1.54 million.

The business uses normal costing and applies overhead on the basis of direct labour cost. The cost of goods sold before making adjustments for any overhead variance is $856,000.

Calculate the overhead variance for the year and dispose of the overhead variance by adjusting the costs of goods sold.

Explanation / Answer

Budgeted overheads = $720,000

Actual Overheads = $770,000

Budgeted overheads would be applied and so it results in under absorption of $50,000.

Overhead Variance for the year = $50,000.

This under absorption of overheads will be added to cost of goods sold.

So the Cost of Goods sold after adjustment for overhead variance is $856,000 + $50,000 = $906,000.

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