Chapter 23, Problem 20E

To determine

Controllable Variance:

The overall variance which comprises of variable overhead spending and efficiency variance and the fixed overhead spending and volume variance is called the controllable variance. It is basically the combination of variable and fixed overhead which the management of a company can influence.

Volume Variance:

The variance which arises due to difference in the budgeted level of activity and the actual level is called volume variance. The sole reason for this kind of variance is the variation in the level of activity.

Computation of Variances and classification of favorable or unfavorable

1. Overhead volume variance

2. Overhead controllable variance

Answer to Problem 20E

Solution:

1. Overhead Volume Variance is $6,250 and it is unfavorable.

2. Overhead Controllable Variance is $20,000 and it is favorable.

Explanation of Solution

1. Overhead Volume Variance

  $\begin{array}{l}OverheadVolumeVariance=BudgetedFixedOverheadCost–AppliedFixedOverheadCost\hfill \\ =\left(PFORXStandardHours\right)–\left(PFORXStandardHoursApplied\right)\hfill \\ =\left(\$2.00X25,000hours\right)–\left(\$2.00X21,875hours\right)\hfill \\ =\$50,000-\$43,750\hfill \\ =\$6,250 Unfavorable\hfill \end{array}$

2. Overhead Controllable Variance

  $\begin{array}{l}ControllableVariance=ActualOverheadCost–BudgetedOverheadCost\hfill \\ =\$305,000–\left(\$50,000+\$275,000\right)\hfill \\ =\$20,000 Favorable\hfill \end{array}$

Conclusion

World Company had unfavorable variance of $6,250 in volume variance and favorable variance of $20,000 in the controllable variance.