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
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 | 20,000 | ||
Budgeted overhead | |||
Variable overhead costs | |||
Indirect materials | $ | 15,000 | |
Indirect labor | 20,000 | ||
Power | 5,000 | ||
Maintenance | 2,000 | ||
Total variable costs | 42,000 | ||
Fixed overhead costs | |||
Rent of factory building | 15,000 | ||
DepreciationMachinery | 11,200 | ||
Supervisory salaries | 9,800 | ||
Total fixed costs | 36,000 | ||
Total overhead costs | $ | 78,000 | |
During May, the company operated at 90% capacity (11,250 units) and incurred the following actual overhead costs:
Overhead costs (actual) | |||
Indirect materials | $ | 15,000 | |
Indirect labor | 22,400 | ||
Power | 5,625 | ||
Maintenance | 3,050 | ||
Rent of factory building | 15,000 | ||
DepreciationMachinery | 11,200 | ||
Supervisory salaries | 12,500 | ||
Total actual overhead costs | $ | 84,775 | |
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.
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