Question

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

Overhead Budget	Operating Level 80%
Production in units	8,000
Standard direct labor hours	32,000
Budgeted overhead
Variable overhead costs
Indirect materials	\(10,000
Indirect labor	16,000
Power	4,000
Maintenance	2,000
Total variable costs	32,000
Fixed overhead costs
Rent of factory building	12,000
Depreciation-Machinery	20,000
Taxes and Insurance	2,400
Supervisory salaries	13,600
Total fixed costs	48,000
Total overhead costs	\)80,000

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

Overhead costs (actual)
Indirect materials	\(10,000
Indirect labor	16,000
Power	4,500
Maintenance	3,000
Rent of factory building	12,000
Depreciation-Machinery	19,200
Taxes and Insurance	3,000
Supervisory salaries	14,000
Total actual overhead costs	\)81,700

1. Compute the overhead controllable variance.

2. Compute the overhead volume variance.

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

Short answer

1. The overhead controllable variance isunfavorable.

2. The overhead volume variance isfavorable.

3. The overhead variance report is in step 4.

Step-by-step solution

Meaning of Variance Report

In managerial accounting, a variance report is one of the analysis tools used by the managers to determine the discrepancies between desired and actual outcomes associated with particular activity or event of the business concern.

Computation of overhead controllable variance

Particulars	Amounts ($)
Total actual overheads	81,700
Less: Flexible budget overheads
Variable overheads	(32,000)
Fixed overheads	(48,000)
Overhead controllable variance	$1,700 (Unfavorable)

Computation of overhead volume variance

Particulars	Amounts ($)
Fixed overhead applied ($48,000/8,000*9,000)	54,000
Less: Budgeted fixed overhead	(48,000)
Overhead volume variance	$6,000 (Favorable)

Preparation of overhead variance report

Particulars	Flexible Budget ($)	Actual Results ($)	Variance ($)
Variable overhead cost
Indirect materials	10,000	10,000	-
Indirect labor	16,000	16,000	-
Power	4,000	4,500	500 (U)
Maintenance	2,000	3,000	1,000 (U)
Total variable costs	$32,000	$33,500	$1,500 (U)
Fixed overhead cost
Rent	12,000	12,000	-
Depreciation	20,000	19,200	800 (F)
Taxes and Insurance	2,400	3,000	600 (U)
Supervisory salaries	13,600	14,000	400 (U)
Total fixed cost	$48,000	$48,200	$200 (U)