Question

James Corp. applies overhead on the basis of direct labor hours. For the month of May, the company planned production of 10,000 units (80% of its production capacity of 12,500 units) and prepared the following overhead budget:

	Operating Levels
Overhead Budget	80%
Production in units		10,000
Standard direct labor hours		25,000
Budgeted overhead
Variable overhead costs
Indirect materials	$	18,000
Indirect labor		25,000
Power		5,000
Maintenance		2,000
Total variable costs		50,000
Fixed overhead costs
Rent of factory building		18,000
Depreciation—Machinery		11,500
Supervisory salaries		15,500
Total fixed costs		45,000
Total overhead costs	$	95,000

During May, the company operated at 90% capacity (11,250 units) and incurred the following actual overhead costs:

Overhead costs (actual)
Indirect materials	$	18,000
Indirect labor		27,875
Power		5,625
Maintenance		3,065
Rent of factory building		18,000
Depreciation—Machinery		11,500
Supervisory salaries		18,500
Total actual overhead costs	$	102,565

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 11,250 units.

Compute the overhead controllable variance and classify it as favorable or unfavorable. (Indicate the effect of each variance by selecting for favorable, unfavorable, and no variance.)

	Controllable variance Total actual overhead $102,565 Flexible budget overhead Fixed $45,000 Variable Total 45,000 Overhead controllable variance

Compute the overhead volume variance and classify it as favorable or unfavorable. (Indicate the effect of each variance by selecting for favorable, unfavorable, and no variance. Do not round intermediate calculations.)

	Volume Variance Volume variance

Prepare an overhead variance report at the actual activity level of 11,250 units. Classify as favorable or unfavorable. (Indicate the effect of each variance by selecting for favorable, unfavorable, and no variance. Do not round intermediate calculations.)

	JAMES CORP. Overhead Variance Report For Month Ended May 31 Expected production volume Production level achieved Volume variance Controllable Variance Flexible Budget Actual Results Variances Fav./Unfav. Variable overhead costs: Fixed overhead costs: Total overhead costs

Answer 1

Solution

1.

Controllable Variance Total actual overhead $102,565 Flexible budget overhead Variable (note 1) $56,250 Fixed $45,000 Total $101,250 Overhead controllable variance $1,315 UnFavorable

Note 1: Variable Flexible Budget Overhead:

Budgeted Variable Overhead Cost / Budgeted Operating Capacity * Actual Operating Capacity

= $50000 / 80% x 90% = $ 56,250

2.

Volume Variance
Total Budgeted Fixed OH	$45,000
Total fixed Overhead applied(Note 2)	$50,625
Volume Variance	$5,625	Favorable

Note 2: Total fixed overhead applied

= Predetermined rate x Actual output

= $45000 /$ 10000 x 11250

= $50625

3.

JAMES CORP.
OVERHEAD VARIANCE REPORT
FOR MONTH ENDED MAY 31
Expected Production Volume 80% of Capacity      
Production Level Achieved 90% of Capacity      
Volume Variance   $5,625   Favorable

      
Controllable Variance   Flexible Budget   Actual Result   Variances   Fav. / Unfav
Variable Overhead Costs              
Indirect Materials $20,250 $18,000 $2,250 Favorable
Indirect Labor $28,125   $27,875 $250 Favorable
Power $5,625 $ 5,625 - No variance
Maintenance $2,250 $ 3,065 $815 UnFavorable
Total Variable Cost $56,250 $54,565 $1,685    Favorable

Fixed Overhead Cost              
Rent of Factory Building $18,000 $18,000 - No Variance
Depreciation- Machinery $11,500 $11,500 - No variance
Supervisory Sales $15,500 $18,500 $3,000 Unfavorable
Total Fixed Costs $45,000 $48,000 $3,000 Unfavorable
Total Overhead Costs $101,250 $102,565 $1,315    Unfavorable

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