Answered Essay: World Company expects to operate at 80% of its productive capacity of 70,000 units per month. At this planned level, the comp

World Company expects to operate at 80% of its productive capacity of 70,000 units per month. At this planned level, the company expects to use 25,200 standard hours of direct labor. Overhead is allocated to products using a predetermined standard rate based on direct labor hours. At the 80% capacity level, the total budgeted cost includes $57,960 fixed overhead cost and $322,560 variable overhead cost. In the current month, the company incurred $386,000 actual overhead and 22,200 actual labor hours while producing 53,000 units.

(1) Compute the overhead volume variance. (Round all your intermediate calculations to 2 decimal places.)

(2) Compute the overhead controllable variance.

Expert Answer

 

Variable overhad = 322560

Fixed overhead = 57960

Productive capacity = 70,000 units

Variable Overhead rate = variable overhead cost / standard hours

= 322,560 / 25,200

= 12.80

Fixed overhead rate =  Fixed overhead cost / standard hours

= $57960 / 25200

= 2.3

Total overhead rate = 12.80 +2.30 = 15.10

Assumed the budgeted production = 56000 units

Standard direct labor hour per unit = 25200/56000 = 0.45

Standard hours to product 53000 units = 53000 * .45= 23850

OH applied 53000 units OH rate Std Hrs Applied OH Budget Volume variance
Fixed overhead 2.3 23850 54855 57960 3105 Unfavourable

2)

OH rate Std Hrs Applied OH Budget Total OH variance
Total Overhead 15.1 23850 360135 386000 25865 Unfavourable

Total OH variance = 25865 unfavourable

Volume variance = 3105 unfavaurable

OH controllable variance = 22760 unfavourable

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