Rudd Clothiers is a small company that manufactures tall-men’s suits. The compan

Question

Rudd Clothiers is a small company that manufactures tall-men’s suits. The company has used a standard cost accounting system. In May 2017, 11,250 suits were produced. The following standard and actual cost data applied to the month of May when normal capacity was 14,000 direct labor hours. All materials purchased were used.

Cost Element

Standard (per unit)

Actual

Overhead is applied on the basis of direct labor hours. At normal capacity, budgeted fixed overhead costs were $49,000, and budgeted variable overhead was $36,400.

Compute the overhead controllable variance and the overhead volume variance. (Round answers to 0 decimal places, e.g. 125.)

Cost Element

Standard (per unit)

Actual

Direct materials 8 yards at $4.40 per yard $375,575 for 90,500 yards ($4.15 per yard) Direct labor 1.20 hours at $13.40 per hour $200,925 for 14,250 hours ($14.10 per hour) Overhead 1.20 hours at $6.10 per hour (fixed $3.50; variable $2.60) $49,000 fixed overhead $37,000 variable overhead

Explanation / Answer

Overhead Controllable Variance:

The controllable variance is the difference between actual expenses incurred and the budget allowance based on standard hours allowed for work performed. This variance may be favorable or unfavorable.

If the actual factory overhead is more than the budget allowance based on standard hours allowed for work performed, the variance is called unfavorable controllable variance.

If the actual factory overhead is less than the budget allowance based on standard hours allowed for work performed, the variance is called favorable controllable variance.

Overhead controllable variance is calculated when overall or net overhead variance is further analyzed using two variance method. Other variance that is calculated in two variance method is volume variance.

Following formula is used for the calculation of this variance:

Controllable variance = Actual Factory Overhead - Budgeted Allowance Based on Standard Hours Allowed

Question-a

Actual Overhead expenses

86000

Less:

Budgeted allowance based on standard hours allowed:

     Fixed expenses budgeted

49000

     Variable expenses (14,000* standard hours allowed × $2.6 variable overhead rate)

36400

Controllable variance   - Unfavorable

600

Here Actual expenses more than the standard cost allowed

so controllable variance is unfavorable

Fixed Overhead Volume Variance

The fixed overhead volume variance is the difference between the amount of fixed overhead actually applied to produced goods based on production volume, and the amount that was budgeted to be applied to produced goods. This variance is reviewed as part of the period-end cost accounting reporting package.

Here Budgeted and actual fixed over head are $ 49,000 so no Variance between them.

Variable Overhead volume variance

A volume variance is the difference between the actual quantity sold or consumed and the budgeted amount expected to be sold or consumed, multiplied by the standard price per unit. This variance is used as a general measure of whether a business is generating the amount of unit volume for which it had planned.

If the volume variance relates to direct labor, the variance is called the labor efficiency variance, and the formula is:

(Actual labor hours - Budgeted labor hours) x Budgeted cost per hour

Variable overhead volume variance =

14250 actual hours – 14000 budgeted hours * 2.6 budgeted cost per unit

= 250 * 2.6

= 650 Unfavorable

Here actual hours are more than the standard hours so variance is Unfavorable

Controllable variance = Actual Factory Overhead - Budgeted Allowance Based on Standard Hours Allowed

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