Question

Gerhan Company's flexible budget for the units manufactured in May shows $15,640 of total factory overhead; this output level represents 70% of available capacity. During May, the company applied overhead to production at the rate of $3.00 per direct labor hour (DLH), based on a denominator volume level of 6,120 DLHs, which represents 90% of available capacity. The company worked 5,000 DLHs and incurred $16,500 of total factory overhead cost during May, including $6,800 for fixed factory overhead.

Under a three-variance breakdown (decomposition) of the total overhead variance, what is the total factory overhead spending variance (to the nearest whole dollar) for May?

a: N/A - this variance does not exist in a three-variance analysis of the total overhead variance.

b: $300 favorable

c: $380 unfavorable

d: $480 unfavorable

e: $1,160 unfavorable

Answer 1

Solution:

Total factory overhead spending variance = Budgeted Total Factory overhead at actual DLH - Actual Total Factory Overhead Cost

Here,

Budgeted Total Factory overhead at actual Production = (Actual DLH * Budgeted Variable Overhead rate) + Budgeted Fixed Overhead

= (5000 DLH* $2) + $6,120

= $16,120

Therefore,

Total factory overhead spending variance = $16,120 - $16,500

= - $380

= $380 Unfavorable

Hence, Option C is the correct answer.

Working

Calculation of Budgeted Variable Overhead Rate

As given in question,

Direct Labor Hours @90% Capcity = 6,120 DLH

Therefore, Direct Labor Hours @70% Capacity = (6,120 DLH / / 90%) * 70% = 4,760 DLHs

Total Factory Overhead @70% capacity = $15,640

Total Factory Overhead @90% Capacity = 6120 DLHs * $3 = $18,360

Therefore Variable Overhead rate per DLH = Difference in Total Factory Overhead / DIfference in DLH

= ($18,360 - $15,640) / (6,120 - 4,760)

= $2,720 / 1,360 DLH

= $2 Per Direct Labor Hour

Calculation of Budgeted fixed Factory Overhead

Budgeted Fixed Factory Overhead = Total Factory Overhead - Budgeted Variable Overhead

= $15,640 - (4,760 DLH * $2)

= $6,120