The standard factory overhead rate is $10 per direct labor hour ($8 for variable

Question

The standard factory overhead rate is $10 per direct labor hour ($8 for variable factory overhead and $2 for fixed factory overhead) based on 100% capacity of 30,000 direct labor hours. The standard cost and the actual cost of factory overhead for the production of 5,000 units during May were as follows: Standard: 25,000 hours at $10 $250,000 Actual: Variable factory overhead $202,500 Fixed factory overhead 60,000 What is the amount of the factory overhead controllable variance? Answer a. $2,500 favorable b. $2,500 unfavorable c. $10,000 unfavorable d. $10,000 favorable

Explanation / Answer

Controllable variances are variances that are controllable. Thus, fixed overhead shouldn't be included in calculation as they are generally allocated to department.

Thus, actual variable overhead = $202,500
Standard hours allowed for actual output x standard rate = 25000 x 8 = $200,000 (we only include variable rate)

OK, the difference is $2500. But now, should it be a favourable or unfavourable variance?

We look at the standard first: Standard only allow us to spend $200,000, but we spend beyond if: $202,500. THus it is an unfavourable variance.

Thus, (B) is the answer.

Hope this helps!

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