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		27,000
Budgeted overhead
Variable overhead costs
Indirect materials	$	16,200
Indirect labor		27,000
Power		5,400
Maintenance		5,400
Total variable costs		54,000
Fixed overhead costs
Rent of factory building		23,000
Depreciation—Machinery		10,800
Supervisory salaries		14,800
Total fixed costs		48,600
Total overhead costs	$	102,600

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

Overhead Costs
Indirect materials	$	16,200
Indirect labor		29,875
Power		6,075
Maintenance		6,710
Rent of factory building		23,000
Depreciation—Machinery		10,800
Supervisory salaries		18,200
Total actual overhead costs	$	110,860

2. Compute the overhead volume variance.
3. Prepare an overhead variance report at the actual activity level of 11,250 units.

Answer 1

Ans.1: Computation of Overhead volume variance
Particulars	Plant Capacity		Budget Variance	Remarks
Overhead Budget	80%	90%
Production Units	10000	11250	-1250	i.e., For 80% = 10000 units then for 90% = 10000/0.80 X 0.90 = 11250 units
Standard Direct Labour hours	27000	30375	-3375	For 10000 units = 27000 hrs then Direct labour hour per unit = 27000/10000 = 2.70 hr Hence, for 11250 units i.e., 90% = 11250 X 2.70 = 30375 hrs
Budget Overhead
Variable Overhead costs
Indirect Materials	16,200.00	18,225.00	-2025	For 10000 units = $16,200, Hence 11,250 units = $16,200/10000 X 11250
Indirect Labour	27,000.00	30,375.00	-3375	Labour directly attributable to no.of hours worked, for 27000 hrs = $27000 labour cost; then cost per labour hour = $ 27000/27000 hrs = $1 per labour hour, hence for 30,375 hrs X $1 = $30,375
Power	5,400.00	6,075.00	-675	Power costs directly attributable to no.of man hours worked, for 27000 labour hrs = $5,400 power cost; then cost per labour hour = $ 5,400/27000 hrs = $0.20 per labour hour, hence for 30,375 hrs X $0.20 = $6,075
Maintenance	5,400.00	6,075.00	-675	Maintenance costs directly attributable to no.of man hours worked, for 27000 labour hrs = $5,400 maintenance costs; then cost per labour hour = $ 5,400/27000 hrs = $0.20 per labour hour, hence for 30,375 hrs X $0.20 = $6,075
Total Overhead Costs	54,000.00	60,750.00	(6,750.00)
Fixed overhead costs
Rent of Factory Building	23,000.00	23,000.00	-	Building rent remain same and no additional costs despite of increase in production.
Depreciation - Machinery	10,800.00	10,800.00	-	Plant working in its normal capacity, hence there is no additional wear and tear
Supervisory Salaries	14,800.00	14,800.00	-	This costs shall not be effect despite of increase or decrease in production.
Total Fixed Costs	48,600.00	48,600.00	-
Total Overhead costs	102,600.00	109,350.00	(6,750.00)
Ans.2: Overhead variance report at the actual activity level of 11,250 units
Particulars	Plant Capacity		Variance	Explanation
Overhead Budget	Budget	Actual
Production Units	11250	11250	-
Overheads
Variable Overhead costs
Indirect Materials	18,225.00	16,200.00	(2,025.00)	Decrease in material costs
Indirect Labour	30,375.00	29,875.00	(500.00)	Decrease in labour costs
Power	6,075.00	6,075.00	-	Nil
Maintenance	6,075.00	6,710.00	635.00	Increase in Maintenance costs
Total Overhead Costs	60,750.00	58,860.00	(1,890.00)
Fixed overhead costs
Rent of Factory Building	23,000.00	23,000.00	-	Nil
Depreciation - Machinery	10,800.00	10,800.00	-	Nil
Supervisory Salaries	14,800.00	18,200.00	(3,400.00)	Increase in supervisory salaries
Total Fixed Costs	48,600.00	52,000.00	(3,400.00)
Total Overhead costs	109,350.00	110,860.00	(5,290.00)