Question

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

	Operating Levels
Overhead Budget	80%
Production in units		10,000
Standard direct labor hours		20,000
Budgeted overhead
Variable overhead costs
Indirect materials	$	21,000
Indirect labor		25,000
Power		6,800
Maintenance		5,200
Total variable costs		58,000
Fixed overhead costs
Rent of factory building		24,000
Depreciation—Machinery		28,000
Taxes and insurance		3,800
Supervisory salaries		12,200
Total fixed costs		68,000
Total overhead costs	$	126,000

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

Overhead costs (actual)
Indirect materials	$	21,000
Indirect labor		25,000
Power		7,650
Maintenance		6,580
Rent of factory building		24,000
Depreciation—Machinery		25,000
Taxes and insurance		4,650
Supervisory salaries		15,350
Total actual overhead costs	$	129,230

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.

Required 1 Required 2 Required 3 Compute the overhead controllable variance. Classify as favorable or unfavorable. (Indicate the effect of each variance by selecting for favorable, unfavorable, and no variance. Do not round intermediate calculations.) Controllable Variance Total actual overhead Flexible budget overhead Variable Fixed Total 0 Overhead controllable variance

Answer 1

1)

Controllable Variance
Total actual overhead variance		$129230
Flexible budget overhead
Variable ($58000*90%/80%)	65250
Fixed	68000
Total		133250
Overhead controllable variance		$4020	Favorable

2)

Volume Variance
Total fixed overhead applied	$76500
Total budget fixed OH	68000
Volume variance	$8500	Favorable

Calculation of Total fixed overhead applied

Standard rate= Budgeted fixed overhead/Budgeted direct labor hours

= $68000/20000= $3.40

Actual hours= 20000*90%/80%= 22500

Total fixed overhead applied= 22500*$3.40= $76500

3)

BLAZE CORP.
Overhead Variance Report
For Month Ended March 31
Expected production volume	80% of capacity
Production level achieved	90% of capacity
Volume variance	$8500	Favorable
Controllable Variance	Flexible Budget	Actual Results	Variance	Fav./Unfav.
Variable overhead costs:
Indirect materials	$23625	$21000	(23625-21000)= 2625	Favorable
Indirect labor	28125	25000	(28125-25000)= 3125	Favorable
Power	7650	7650	0	No variance
Maintenance	5850	6580	(5850-6580)= 730	Unfavorable
Total variable costs	65250	60230	5020	Favorable
Fixed overhead costs:
Rent of factory building	24000	24000	0	No variance
Depreciation- Machinery	28000	25000	(28000-25000)= 3000	Favorable
Taxes and insurance	3800	4650	(3800-4650)= 850	Unfavorable
Supervisory salaries	12200	15350	(12200-15350)= 3150	Unfavorable
Total fixed costs	68000	69000	1000	Unfavorable
Total overhead costs	$133250	$129230	$4020	Favorable

Calculation of Variable overhead costs

Indirect materials= $21000*90%/80%= $23625

Indirect labor= $25000*90%/80%= $28125

Power= $6800*90%/80%= $7650

Maintenance= $5200*90%/80%= $5850