Question

The standard costs and actual costs for factory overhead for the manufacture of 2,500 units of actual production are as follows:

Standard Costs

Fixed overhead (based on 10,000 hours)3 hours per unit at $0.74 per hour

Variable overhead3 hours per unit at $1.93 per hour

Actual Costs

Total variable cost, $18,000

Total fixed cost, $8,200

The variable factory overhead controllable variance is

a.$2,820 favorable

b.$3,525 favorable

c.$3,525 unfavorable

d.$0

Answer 1

Solution to question

Cost Variance is basically comprised of two elements namely, Volume variance & Rate Variance. Volume Variance depends upon change in volume whereas rate variance depends upon change in budgeted & Actual Rate. A controllable variance depends on the rate portion.

Calculation of Variable Factory Overhead Controllable Variance: -

Note 1: - Analysis of data

            Budgeted: - 2500 Units @ 3 hrs. per unit at $ 1.93 per hour

              Actual: -     2500 Units for $ 18,000

Therefore, Variable factory overhead controllable variance =

            = Budgeted cost for Actual output – Actual Cost

            = (2500 Units x 3 hours per unit x $ 1.93) – $ 18,000

            = $ 14,475 - $ 18,000

            = $ 3525 A

            Where A = Adverse or unfavourable

Department managers are responsible for controlling variable factory overhead variance.