Question

World Company expects to operate at 70% of its productive capacity of 38,000 units per month. At this planned level, the company expects to use 16,625 standard hours of direct labor. Overhead is allocated to products using a predetermined standard rate of 0.625 direct labor hour per unit. At the 70% capacity level, the total budgeted cost includes $66,500 fixed overhead cost and $182,875 variable overhead cost. In the current month, the company incurred $421,625 actual overhead and 16,405 actual labor hours while producing 44,600 units.

Required:
a. Compute the predetermined standard overhead rate for total overhead.
b. Compute the total overhead variance.

Answer 1

a. Predetermined Overhead Rate

Rate = Overhead cost / standard hours of direct labor

Variable Overhead Costs Rate = 182875 / 16625 = 11

Fixed Overhead Costs Rate= 66500 / 16625 = 4

Total Overhead Costs Rate = Variable Overhead Costs + Fixed Overhead Costs

= 11 + 4

= 15

b. Total overhead variance

Overhead costs applied= Overhead * Standard Direct Labor Hours

When Standard Direct Labor Hours= (16625 / 38000 * 70%) * 44600

= (16625 / 26600) * 44600.

= 0.625 * 44600

= 27875 Hours.

i. Variable Overhead Costs = 11 * 27875 = 306625

ii. Fixed Overhead Costs = 4 * 27875 = 111500

iii. Total Overhead Costs = 15 * 27875 = 418125

The company incurred $421,625 actual overhead which is the Actual overhead.

Hence, Total overhead variance= Total Overhead - Costs Actual overhead

= $418,125 - $421,625

= -3500 (Unfavorable)