Chapter 8, Problem 21E

Exercise 21-21 Overhead controllable and volume variances; overhead variance report P3

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.

Overhead Budget

Operating Level

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.