Question

Exercise 23-20 Computation of volume and controllable overhead variances LO P3 World Company expects to operate at 80% of its productive capacity of 50,000 units per month. At this planned level, the company expects to use 25,000 standard hours of direct labor. Overhead is allocated to products using a predetermined standard rate of 0.625 direct labor hours per unit. At the 80% capacity level, the total budgeted cost includes $50,000 fixed overhead cost and $275,000 variable overhead cost. In the current month, the company incurred $305,000 actual overhead and 22,000 actual labor hours while producing 35,000 units. (1) Compute the overhead volume variance. (2) Compute the overhead controllable variance.

Answer 1

World Company's budget assumed the production of 40,000 units (80% of 50,000 units).

Standard = 0.625 direct labor hours per unit (25,000 hours / 40,000 units)

Variable OH rate	275000/25000	11	per DLH
Fixed OH rate	50000/25000	2	per DLH
Total OH rate	3250000	13	per DLH

The standard hours to produce 35,000 units = 21,875 (35,000 units x 0.625 hours per unit.)

overhead volume variance

Applied Fixed overhead$2.00 *21,875 =$43,750

BudgetedFixed overhead =$50,000

overhead volume variance=50000-43750=$6,250 Unfavorable

Total overhead Applied =$13.00* 21,875 =$284,375

Less Actual overhead =$305,000

Tota overhead Variance =305000-284375=$20,625 Unfavorable

overhead controllable variance =Tota overhead Variance-overhead volume variance

overhead controllable variance=$20,625-$6,250 =$14,375 Unfavorable