Question

Gerhan Company's flexible budget for the units 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 variable factory overhead spending variance (to the nearest whole dollar) in May, assuming Gerhan uses a four-variance breakdown (decomposition) of the total overhead variance?

Multiple Choice

$300 favorable.

$480 unfavorable.

N/A—this variance is not defined under the four-way breakdown of the total OVH variance.

$180 unfavorable.

$380 unfavorable.

Answer 1

Ans: 180$ unfavourable

Working 1:

At 70% capacity budgeted overhead = $15,640

At 90% capacity, budgeted overhead = DLH * overhead rate per DLH

= 6,120hours * $3.00

= $18,360

Calculation of variable rate per hour out of semi variable cost

Change in cost /change in hours=18,360-15,640/6,120-4,760

$2,720/1,360hours

Standard variable overhead rate per hour=2$ per hour

Note:

90% capacity represents 6,120 DLH

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

Working 2:

Variable overhead spending Variance=standard expenditure-Actual expenditure

9,520-9,700=180$ unfavourable

Note:

Standard variable overhead cost=standard hours*standard rate per hour

4,760hours*2$=9,520$

Actual variable overhead cost=Total overhead cost-Fixed overhead cost

      i.e16,500-6,800=9,700$