World Company expects to operate at 80% of its productive capacity of 50,000 uni

Question

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 based on direct labor hours. 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. (Do not round your intermediate calculations.) Compute the overhead application rate for total overhead. Compute the total overhead variance.

Explanation / Answer

1) Variable overhead rate = 275000 / 25000 = $11 per DLH

Fixed overhead rate = 50000 / 25000 =$ 2 per DLH

2) Hours required per unit = 50000 /25000 = 2 per DLH

Actual production 35000 units Standard DL hours Overhead cost applied Actual results Variance F/UF Variable overhead cost 35000*2 = 70000 22000 * 11 = 242000 Fixed overhead cost 50000 Total overhead cost 292000 305000 13000 U

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