Question

Gerhan Company's flexible budget for the units actually manufactured in May shows $15,640 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 6,120 DLHs, which represents 90% of available capacity. The company used 5,000 DLHs and incurred $16,500 of total factory overhead cost during May, including $6,800 for fixed factory overhead. What is the factory overhead production-volume variance for Gerhan Company in May?

$180 unfavorable.

$380 unfavorable.

$680 unfavorable.

$860 unfavorable.

$1,360 unfavorable.

Answer 1

Answer:

Correct answer is: $1,360 unfavorable

Explanation:

At 70% capacity budgeted overhead = $15,640

At 90% capacity, budgeted overhead = DLH * overhead rate per DLH = 6,120 * $3.00 = $18,360

Hence, Change in budgeted overhead on change of capacity level 70% to 90% = $18,360 - $15,640

= $2,720

90% capacity represents 6,120 DLH

Hence DLH at 70% capacity = (6,120 / 90%)* 70% = 4,760 hours

Change in DLH for change in capacity from 70% to 90% level = 6,120 - 4,760 = 1,360

Hence variable overhead rate = Change in budgeted overhead / Change in DLH = $2,720 / 1,360

= $2 per DLH

Hence,

Fixed overhead rate = Budgeted overhead rate - variable overhead rate = $3.00 - $2.00 = $1.00

Factory overhead volume variance consists of fixed expenses only and is =

(Normal capacity Hours - Standard hours allowed for actual production) * Fixed overhead rate

= (4,760 - 6,120) * 1.00

= $1,360 Unfavorable