6. Peyton Company produces one product, a putter called PAR-putter. Peyton uses

Question

6. Peyton Company produces one product, a putter called PAR-putter. Peyton uses a standard cost system and determines that it should take one hour of direct labor to produce one PAR-putter. The normal production capacity for this putter is 100,000 units per year. The total budgeted overhead at normal capacity is $500,000 comprised of $200,000 of variable costs and $300,000 of fixed costs. Peyton applies overhead on the basis of direct labor hours. During the current year, Peyton produced 86,000 putters, worked 89,000 direct labor hours, and incurred variable overhead costs of $160,000 and fixed overhead costs of $300,000.

Instructions

(d) Compute the controllable overhead variance

(e) Compute the fixed overhead volume variance

Explanation / Answer

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

460000 - (86000*5) = 30000 U

standard variable cost = 200000/100000 = 2   standard fixed cost = 300000/100000 = 3

total standard cost = 3+ 2 = 5

fixed overhead volume variance

Fixed Overhead Volume Variance = (Actual Activity – Normal Activity) × Fixed Overhead Application Rate

(86000-100000)*3 = 42000 U

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