Question

Shan Foods Pvt Ltd. factory overhead rate is Rs. 3 per hour. Budgeted overhead for 3000 hours per month is Rs.16000 and at 7000 hours is Rs.24000. Actual FOH for the month is Rs.18000 and actual volume is 5000 hours.
Required:

1. Variable overhead rate.

2. Budgeted fixed overhead.

3. Normal capacity hours.

4. Applied factory overhead.

5. Over or under applied factory overhead. What can be the possible reasons for the over or under applied FOH? And what measures should company take to overcome over applied FOH in future?

6. Spending Variance. What are the causes of unfavorable spending variance? And what measures should company take to reduce unfavorable spending variance in future?

7. Idle Capacity Variance. What are the causes of unfavorable idle capacity variance? And what measures should company take to reduce unfavorable idle capacity variance in future?

Answer 1

1)

	Budgeted cost	Budgeted activity
Highest activity	24000	7000
Lowest activity	16000	3000
change in cost /activity	24000-16000=8000	7000-3000=4000

Variable overhead rate =Change in cost /Chnage in hours

                           = 8000 /4000

                           = $ 2 per hour

2)Budgeted fixed overheas =$ 10000

	Budgeted cost	-	Total variable overhead	=	Fixed overhead
Highest activity	24000		2*7000=14000		10000
Lowest activity	16000		2*3000=6000		10000

3)

Budgeted factory overhead rate= Variable overhead rate +Fixed overhead rate at normal capacity

   3 = 2 + [10000/Normal hours ]

   3 - 2 = 10000/normal hours

   1 = 10000/normal hours

Normal hours = 10000/1

                      = 10000 hours

Normal capacity hours = 10000 hours

4)Applied overhead =Actual volume * overhead rate

                 = 5000 * 3

                 = 15000