Question

James Corp. applies overhead on the basis of direct labor hours. For the month of May, the company planned production of 8,000 units (80% of its production capacity of 10,000 units) and prepared the following overhead budget.

Overhead Budget	Operating Level 80%
Production in units	8,000
Standard direct labor hours	24,000
Budgeted overheads
Variable overhead costs
Indirect materials	\(15,000
Indirect labor	24,000
Power	6,000
Maintenance	3,000
Total variable costs	48,000
Fixed overhead costs
Rent of factory building	15,000
Depreciation-Machinery	10,000
Supervisory salaries	19,400
Total fixed costs	44,400
Total overhead costs	\)92,400

During May, the company operated at 90% capacity (9,000 units) and incurred the following actual overhead costs.

Overhead costs (actual)
Indirect materials	\(15,000
Indirect labor	26,500
Power	6,750
Maintenance	4,000
Rent of factory building	15,000
Depreciation-Machinery	10,000
Supervisory salaries	22,000
Total actual overhead costs	\)99,250

1. Compute the overhead controllable variance and classify it as favorable or unfavorable.

2. Compute the overhead volume variance and classify it as favorable or unfavorable.

3. Prepare an overhead variance report at the actual activity level of 9,000 units.

Short answer

1. The overhead controllable variance is unfavorable.

2. The overhead volume variance is favorable.

3. The overhead variance report is in step 4.

Step-by-step solution

Meaning of Variance Report

A variance report refers to a statement prepared by the managers to ascertain the differences between budgeted and actual results. The administration prepares such a report to resolve the obstacles to achieving goals.

Computation of overhead controllable variance

$$\begin{gathered} \mathbf{\text{Overheadcontrollablevariance=Totalbudgetedoverheads-Totalactualoverheads}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{\text{=\$98,400-\$99,250}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{}\mathbf{\text{\$850(Unfavorable)}} \end{gathered}$$

Working Notes:

$$\begin{gathered} \mathbf{\text{Totalbudgetedoverheads=Variableoverheads+Fixedbedgetedoverheads}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{\text{=(27,000×\$2)+\$44,400}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{}\mathbf{\text{\$98,400}} \\ \mathbf{\text{Variableoverheadrateperhour=}}\frac{\mathbf{\text{Totalvariablecost}}}{\mathbf{\text{Standarddirectlaborhours}}} \\ \mathbf{\text{=}}\frac{\mathbf{\text{\$48,000}}}{\mathbf{\text{24,000}}} \\ \mathbf{\text{=\$2perhour}} \end{gathered}$$

Computation of overhead volume variance

$$\begin{gathered} \mathbf{\text{Overheadvolumevariance=Totalabsorvedfixedoverheads-Totalbudgetedfixedoverheads}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\text{\$49,950-\$44,400}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\text{5,550(Favorable)}} \end{gathered}$$

Working Notes:

$$\begin{gathered} \mathbf{\text{Fixedoverheadrate=}}\frac{\mathbf{\text{Totalfixedcosts}}}{\mathbf{\text{Standarddirectlaborhours}}} \\ \mathbf{\text{=}}\frac{\mathbf{\text{\$44,400}}}{\mathbf{\text{24,000}}} \\ \mathbf{\text{=\$1.85perhour}} \\ \mathbf{\text{Totalabsorvedfixedoverheads=Actualhours×Rateperhour}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\text{27,000×\$1.85}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{}\mathbf{\text{\$49,950}} \end{gathered}$$

Preparation of overhead variance report

Particulars	Flexible Budget ($)	Actual Results ($)	Variance ($)
Variable overhead cost
Indirect materials	16,875	15,000	1,875 (F)
Indirect labor	27,000	26,500	500 (F)
Power	6,750	6,750	-
Maintenance	3,375	4,000	625 (U)
Total variable cost	54,000	52,250	1,750 (F)
Fixed overhead cost
Rent	15,000	15,000
Depreciation	10,000	10,000
Supervisory salaries	19,400	22,000	2,600 (U)
Total fixed costs	44,400	47,000	2,600 (U)
Total overhead cost	98,400	99,250	850 (U)