Question

Gerhan Company's flexible budget for the units manufactured in May shows $15,750 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 5,940 DLHs, which represents 90% of available capacity. The company used 5,000 DLHs and incurred $16,200 of total factory overhead cost during May, including $6,800 of fixed factory overhead. What is the fixed overhead production-volume variance (to the nearest whole dollar) for Gerhan Company in May?

Answer 1

1. Total budgeted OH @ 90% capacity (the denominator volume level) = 5,940 DLHs x $3.00/DLH = $17,820.

2. Total budgeted OH @ 70% capacity = $15,750 (given).

3. Change in budgeted OH dollars, 90% vs. 70% of capacity = $17,820 - $15,750 = $2,070.

4. If 5,940 hours = 90% capacity, then [(5940/0.9) x 0.7] = 4,620 hours at 70% capacity.

5. Change in budgeted OH hours from 90% capacity to 70% capacity = 5,940 - 4,620 = 1,320 hours.

6. $2,070 change in dollars/1,320 change in hours = VOH rate $1.5682/DLH.

7. Total OH rate (given) = $3/DLH; Total OVH rate - VOH rate = Fixed OH rate = $1.4318/DLH.

8.1,320 unfavorable difference in hours x $1.4318 FOH rate = $1,890 unfavorable production - volume variance