Question

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		20,000
Budgeted overhead
Variable overhead costs
Indirect materials	$	15,000
Indirect labor		20,000
Power		5,000
Maintenance		2,000
Total variable costs		42,000
Fixed overhead costs
Rent of factory building		15,000
Depreciation—Machinery		11,200
Supervisory salaries		9,800
Total fixed costs		36,000
Total overhead costs	$	78,000

During May, the company operated at 90% capacity (11,250 units) and incurred the following actual overhead costs:

Overhead costs (actual)
Indirect materials	$	15,000
Indirect labor		22,400
Power		5,625
Maintenance		3,050
Rent of factory building		15,000
Depreciation—Machinery		11,200
Supervisory salaries		12,500
Total actual overhead costs	$	84,775

1. Compute the overhead controllable variance and classify it as favorable or unfavorable.
2. Compute the overhead volume variance and classify it as favorable or unfavorable.
3. Prepare an overhead variance report at the actual activity level of 11,250 units.

Answer 1

Solution 1 and 2:

Controllable Variance
Total actual overhead		$84,775.00
Flexible Budget Overhead
Fixed	$36,000.00
Variable	$47,250.00
Total		$83,250.00
Overhead controllable variance		$1,525.00	Unfavorable
Volume Variance
Total Budgeted Fixed overhead	$36,000.00
Total fixed overhead applied	$40,500.00
Volume Variance	$4,500.00	Favorable

SOlution 3:

James Corp
Overhead variance Report
For the month ended May 31
Expected production volume	80% of capacity
Production level achieved	90% of capacity
Volume variance	$4,500.00	Favorable
Controllable variance	Flexible budget	Actual results	Variances	Fav/Unfav.
Variable overhead costs:
Indirect material	$16,875.00	$15,000.00	$1,875.00	Favorable
Indirect labor	$22,500.00	$22,400.00	$100.00	Favorable
Power	$5,625.00	$5,625.00	$0.00	No Variance
Maintenance	$2,250.00	$3,050.00	$800.00	Unfavorable
Total variable costs	$47,250.00	$46,075.00	$1,175.00	Favorable
Fixed overhead costs:
Rent of factory building	$15,000.00	$15,000.00	$0.00	No Variance
Depreciation - Machinery	$11,200.00	$11,200.00	$0.00	No Variance
Supervisory salaries	$9,800.00	$12,500.00	$2,700.00	Unfavorable
Total fixed costs	$36,000.00	$38,700.00	$2,700.00	Unfavorable
Total overhead costs	$83,250.00	$84,775.00	$1,525.00	Unfavorable