World Company expects to operate at 80% of its productive capacity of 66,250 units per month. At this planned level, the company expects to use 26,500 standard hours of direct labor. Overhead is allocated to products using a predetermined standard rate of 0.500 direct labor hours per unit. At the 80% capacity level, the total budgeted cost includes $53,000 fixed overhead cost and $331,250 variable overhead cost. In the current month, the company incurred $389,000 actual overhead and 23,500 actual labor hours while producing 50,000 units. (1) Compute the overhead volume variance. (2) Compute the overhead controllable variance.

Overhead volume variance = $3,000 Unfavorable

Overhead controllable variance = $26,500 unfavorable

Explanation:

As per the data given in the question,

a)

Number of units produced = 80% × 66,250

= 53,000  units

Standard = 26,500 hours ÷ 53,000 units

= 0.5 direct labor hour per unit

Particulars                        a                 b               Direct labor hour(a ÷ b)

Variable overhead rate $331,250      26,500        $12.5 per hour

Fixed overhead rate       $53,000       26,500        $2 per hour

Total overhead rate      $384,250                          $15 per hour

The standard hours to produce 50,000 units = 25,000 (50,000 units × 0.50 hours per unit.)

Applied fixed overhead = $2 × 25,000

= $50,000

Overhead fixed volume variance is

= $53,000 - $50,000

= 3,000 unfavorable

Now

b) Standard hour = 50,000 units × 0.5 direct labor hour per unit

= 25,000

Overhead rate(a) Standard hours(b) Applied overhead(a × b) Actual variance

Variable overhead $12.5 25,000 $312,500

Fixed overhead $2 25,000 $50,000

Total overhead $14.5               25,000           $362,500       $389,000

= $362,500 - $389,000

$26,500 unfavorable

If the actual cost is more than the standard one than the variance should be unfavorable and If the actual cost is less than the standard one than the variance should be favorable

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