Question

Gerhan Company's flexible budget for the units manufactured in May shows $15,400 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 5,850 DLHs, which represents 90% of available capacity. The company used 6,000 DLHs and incurred $16,600 of total factory overhead cost during May, including $7,300 of fixed factory overhead.

What is the fixed overhead production-volume variance (to the nearest whole dollar) for Gerhan Company in May? (Round your intermediate calculation to 2 decimal places.)

Multiple Choice

• $575 unfavorable.

• $1,755 unfavorable.

• $1,255 unfavorable.

• $1,075 unfavorable.

• $775 unfavorable.

Answer 1

$ 1755 unfavorable

Total budgeted overhead at 90% capacity(denominator volume level) =5850*3=$ 17550

Total budgeted overhead at 70% capacity=$ 15400

Change on budgeted overhead 90% vs 70% of capacity= 17550-15400=$ 2150

If 5850 hours = 90% capacity then 5850/0.9*.7=4550 at 70% capacity

change on budgeted overhead hours from 90% to 70% = 5850-4550=1300 hrs.

change in dollars/change in hours= 2150/1300=variable overhead rate 1.653 per direct labour hour

Total overhead rate=$ 3(given)

Total overhead rate-variable overhead rate= fixed overhead rate

=$ 3 - $ 1.65= $ 1.35

1300 unfavorable difference in hours* fixed overhead rate= 1300*1.35=$ 1755 unfavorable fixed production-volume variance