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Question: Computation of volume and controllable overhead variances World Company expects to operate at 80%...

Computation of volume and controllable overhead variances

World Company expects to operate at 80% of its productive capacity of 60,000 units per month. At this planned level, the company expects to use 26,400 standard hours of direct labor. Overhead is allocated to products using a predetermined standard rate based on direct labor hours. At the 80% capacity level, the total budgeted cost includes $39,600 fixed overhead cost and $316,800 variable overhead cost. In the current month, the company incurred $353,000 actual overhead and 23,400 actual labor hours while producing 45,000 units.

(all input information is correct)

Explanation / Answer

At 80%, planned production = 80%*60000 = 48000 units

Budgeted fixed cost variance per DL hour = 39600/26400 = $1.5

Applied DL hours = (26400/48000)*45000 = 24750

Applied fixed overhead = 24750*1.5 = $37125

Volume (fixed overhead) variance = Budgeted fixed OH – Applied Fixed OH = 39600-37125

Volume (fixed overhead) variance = $2475

Budgeted variable OH cost per DL hour = 316800/26400 = $12

Total OH per DL hour = 12+1.5 = $13.5

Standard hour = 24750

So,

Total applied OH cost as per the budget = 13.5*24750 = $334125

Actual Total OH cost = $353000

Total OH variance = 353000 -334125 = $18875

Controllable OH variance = 18875 – 2475

Controllable OH variance = $16400

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