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 fixed factory overhead spending variance (to the nearest whole dollar) in May for Gerhan Company?

• $300 favorable.

• $0.

• $680 unfavorable.

• $180 unfavorable.

• $480 unfavorable.

Answer 1

Given, Total manufacturing overhead(Fixed & Variable) is $ 15640 for 70% of available capacity.

During May, Budgeted overhead(Fixed & Variable) rate has been changed to $3 per direct labor hour for 6120 labour hours. (90%).

Actual fixed overhead=$6800.

For the purpose of calculating Fixed overhead variance, we need to eliminate the variable cost in the Budgeted overhead rate.

Total production capacity is 6800 labour hours. 6120*100/90

70% production capacity=6800*70%=4760 hours.

Variable cost per labour hour = ((6120*3)-15640)/(6120-4760)

Budgeted Fixed cost per labour hour=Total Budgeted overhead rate - Variable cost per labour hour

=$3-$2=$1/hr.

Fixed overhead spending variance = Budgeted fixed overhead-Actual Fixed overhead

= (6120hours*$1/hr)-$6800

= 680 unfavourable