In: Accounting
James Corp. applies overhead on the basis of direct labor hours.
For the month of May, the company planned production of 10,000
units (80% of its production capacity of 12,500 units) and prepared
the following overhead budget:
Operating Levels | |||
Overhead Budget | 80% | ||
Production in units | 10,000 | ||
Standard direct labor hours | 36,000 | ||
Budgeted overhead | |||
Variable overhead costs | |||
Indirect materials | $ | 21,600 | |
Indirect labor | 36,000 | ||
Power | 7,200 | ||
Maintenance | 3,600 | ||
Total variable costs | 68,400 | ||
Fixed overhead costs | |||
Rent of factory building | 20,000 | ||
Depreciation—Machinery | 11,700 | ||
Supervisory salaries | 29,500 | ||
Total fixed costs | 61,200 | ||
Total overhead costs | $ | 129,600 | |
During May, the company operated at 90% capacity (11,250 units)
and incurred the following actual overhead costs:
Overhead Costs | |||
Indirect materials | $ | 21,600 | |
Indirect labor | 40,150 | ||
Power | 8,100 | ||
Maintenance | 4,875 | ||
Rent of factory building | 20,000 | ||
Depreciation—Machinery | 11,700 | ||
Supervisory salaries | 32,700 | ||
Total actual overhead costs | $ | 139,125 | |
1. Compute the overhead volume variance.
2. Prepare an overhead variance report at the
actual activity level of 11,250 units.
Solution 1:
Budgeted fixed overhead = $61,200
Fixed overhead rate= $61200 / 36000 = $1.70 per direct labor hour
Standard hours per unit = 36000 / 10000 = 3.60 hours per unit
Fixed overhead applied = SH * SR = (11250*3.60) * $1.70 = $68,850
Overhead volume variance = Fixed overhead applied - Budgeted fixed overhad = $68,850 - $61,200 = $7,650 Favorable
Solution 2:
James Corp. | ||||
Factory Overhead Cost Variance Report | ||||
For the Month Ended May 31 | ||||
Productive capacity for the month 36,000 hrs. | ||||
Actual productive capacity used for the month 40,500 hrs. | ||||
Particulars | Budget (At actual prodcution) | Actual | Favorable variances | Unfavorable Variances |
Variable factory overhead costs: | ||||
Indirect materials | $24,300.00 | $21,600.00 | $2,700.00 | $0.00 |
Indirect labor | $40,500.00 | $40,150.00 | $350.00 | $0.00 |
Power | $8,100.00 | $8,100.00 | $0.00 | $0.00 |
Maintenance | $4,050.00 | $4,875.00 | $0.00 | $825.00 |
Total variable factory overhead cost | $76,950.00 | $74,725.00 | $3,050.00 | $825.00 |
Fixed factory overhead costs: | ||||
Rent for factory Building | $20,000.00 | $20,000.00 | $0.00 | $0.00 |
Depreciation - Machinery | $11,700.00 | $11,700.00 | $0.00 | $0.00 |
Supervisory Salaries | $29,500.00 | $32,700.00 | $0.00 | $3,200.00 |
Total fixed factory overhead cost | $61,200.00 | $64,400.00 | $0.00 | $3,200.00 |
Total factory overhead cost | $138,150.00 | $139,125.00 | $3,050.00 | $4,025.00 |
Total controllable variances | $3,050.00 | $4,025.00 | ||
Net controllable variance-unfavorable | $975.00 | |||
Volume variance-Fafavorable | $7,650.00 | |||
Total factory overhead cost variance-favorable | $6,675.00 |