Question

Factory Overhead Variance Corrections

The data related to Shunda Enterprises Inc.’s factory overhead cost for the production of 20,000 units of product are as follows:

Actual:	Variable factory overhead	$121,800
	Fixed factory overhead	86,900
Standard:	30,000 hrs. at $7 ($4.10 for variable factory overhead)	210,000

Productive capacity at 100% of normal was 29,000 hours, and the factory overhead cost budgeted at the level of 30,000 standard hours was $208,700. Based on these data, the chief cost accountant prepared the following variance analysis:

Variable factory overhead controllable variance:
Actual variable factory overhead cost incurred	$121,800
Budgeted variable factory overhead for 30,000 hours	123,000
Variance—favorable			$(1,200)
Fixed factory overhead volume variance:
Normal productive capacity at 100%	29,000	hrs.
Standard for amount produced	30,000
Productive capacity not used	1,000	hrs.
Standard variable factory overhead rate	x $7
Variance—unfavorable			7,000
Total factory overhead cost variance—unfavorable			$5,800

Compute the following to assist you in identifying the errors in the factory overhead cost variance analysis. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number. Round your interim computations to the nearest cent, if required.

Variance	Amount	Favorable/Unfavorable
Variable Factory Overhead Controllable Variance	$
Fixed Factory Overhead Volume Variance	$
Total Factory Overhead Cost Variance	$

Answer 1

SOLUTION

1. Variable factory overhead controllable variance = Standard variable overhead - Actual variable overhead

= (Standard hours * Standard rate of variable overhead) - Actual variable overhead

= (30,000 * 4.10) - 121,800

= 123,000 - 121,800 = $1,200 F

2. Fixed factory overhead volume variance = Absorption rate of fixed overhead * ( Standard hours - Actual Hours)

=($7 - $4.10) * (30,000-29,000)

= 2.9 * 1,000 = $2,900 F

3. Total factory overhead cost variance = $1,200 F+ $2,900 F = $4,100 F