James Corp. applies overhead on the basis of direct labor hours. For the month of May, the company planned production of 8,000 units (80% of its production capacity of 10,000 units) and prepared the following overhead budget: Operating Levels Overhead Budget 80% Production in units 8,000 Standard direct labor hours 24,000 Budgeted overhead Variable overhead costs Indirect materials $ 15,000 Indirect labor 24,000 Power 6,000 Maintenance 3,000 Total variable costs 48,000 Fixed overhead costs Rent of factory building 15,000 Depreciation—Machinery 10,000 Supervisory salaries 19,400 Total fixed costs 44,400 Total overhead costs $ 92,400 During May, the company operated at 90% capacity (9,000 units) and incurred the following actual overhead costs: Overhead costs (actual) Indirect materials $ 15,000 Indirect labor 26,500 Power 6,750 Maintenance 4,000 Rent of factory building 15,000 Depreciation—Machinery 10,000 Supervisory salaries 22,000 Total actual overhead costs $ 99,250 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 9,000 units.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
James Corp. applies overhead on the basis of direct labor hours. For the month of May, the company planned production of 8,000 units (80% of its production capacity of 10,000 units) and prepared the following overhead budget:
| Operating Levels | |||
| Overhead Budget | 80% | ||
| Production in units | 8,000 | ||
| Standard direct labor hours | 24,000 | ||
| Budgeted overhead | |||
| Variable overhead costs | |||
| Indirect materials | $ | 15,000 | |
| Indirect labor | 24,000 | ||
| Power | 6,000 | ||
| Maintenance | 3,000 | ||
| Total variable costs | 48,000 | ||
| Fixed overhead costs | |||
| Rent of factory building | 15,000 | ||
| 10,000 | |||
| Supervisory salaries | 19,400 | ||
| Total fixed costs | 44,400 | ||
| Total overhead costs | $ | 92,400 | |
During May, the company operated at 90% capacity (9,000 units) and incurred the following actual overhead costs:
| Overhead costs (actual) | |||
| Indirect materials | $ | 15,000 | |
| Indirect labor | 26,500 | ||
| Power | 6,750 | ||
| Maintenance | 4,000 | ||
| Rent of factory building | 15,000 | ||
| Depreciation—Machinery | 10,000 | ||
| Supervisory salaries | 22,000 | ||
| Total actual overhead costs | $ | 99,250 | |
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 9,000 units.
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