Tannin Products Inc. prepared the following factory overhead cost budget for the Trim Department for July 2014, during which it expected to use 20,000 hours for production

Tannin Products Inc. prepared the following factory overhead cost budget for the Trim Department for July 2014, during which it expected to use 20,000 hours for production:

Variable overhead cost:

Indirect factory labor $46,000

Power and light12,000

Indirect materials   20,000

Total variable overhead cost $ 78,000

Fixed overhead cost:

Supervisory salaries $54,500

Depreciation of plant and equipment 40,000

Insurance and property taxes    35,500

Total fixed overhead cost130,000

Total factory overhead cost$208,000

Tannin has available 25,000 hours of monthly productive capacity in the Trim Department under normal business conditions. During July, the Trim Department actually used 22,000 hours for production. The actual fixed costs were as budgeted. The actual variable overhead for July was as follows:

Actual variable factory overhead cost:

Indirect factory labor        $49,700

Power and light.               13,000

Indirect materials             24,000

Total variable cost           $86,700

Construct a factory overhead cost variance report for the Trim Department for July.

Answer:

TANNIN PRODUCTS INC. 

Factory Overhead Cost Variance Report—Trim Department 

For the Month Ended July 31, 2014 

Productive capacity for the month 25,000  hrs. 

Actual productive capacity used for the month 22,000  hrs. 

    B

udget 

(at actual 

production) 

 

Actual 

    

Indirect factory labor $  50,600 $  49,700 $   (900)  

Power and light 13,200 13,000 (200)  

Indirect materials 22,000 24,000  $  2,000 

Total variable factory     

overhead cost $ 85,800 $ 86,700   

Fixed factory overhead costs:     

Supervisory salaries $  54,500 $  54,500   

Depreciation of plant and     

equipment 40,000 40,000   

Insurance and property taxes 35,500 35,500   

Total fixed factory     

overhead cost $130,000 $130,000   

Total factory overhead cost $215,800 $216,700   

Total controllable variances   $(1,100) $ 2,000 

     

Net controllable variance—unfavorable    $ 900 

Volume variance—unfavorable:     

Idle hours at the standard rate for fixed factory overhead

2

:   

(25,000 hrs. – 22,000 hrs.) × $5.20    15,600 

Total factory overhead cost variance—unfavorable   $16,500 

     

The budgeted variable factory overhead costs are determined by multiplying 

22,000 hours by the variable factory overhead cost rate for each variable cost 

category. These rates are determined by dividing each budgeted amount 

(estimated at the beginning of the month) by the planned (budgeted) volume 

$50,600 = ($46,000 ÷ 20,000 hrs.) × 22,000 hrs. 

$13,200 = ($12,000 ÷ 20,000 hrs.) × 22,000 hrs. 

$22,000 = ($20,000 ÷ 20,000 hrs.) × 22,000 hrs. 

$130,000 

25,000 hrs. 

= $5.20 per hr. 

Alternative Computation of Overhead Variances 

Factory Overhead 

Actual costs 216,700 Applied costs 200,200 

Balance (underapplied)   16,500 [22,000 × ($3.90* + $5.20)] 

Actual 

Factory 

Overhead 

Budgeted Factory 

Overhead for Amount 

Produced 

$216,700 Variable cost (22,000 × $3.90)……………   $ 85,800 $200,200 

Fixed cost…………………………………   130,000 

Total………………………………………… $215,800 

$900 U $15,600 U 

Controllable   Volume 

Variance Variance 

$16,500 U 

Total Factory Overhead 

Cost Variance 

*$78,000 ÷ 20,000 hours budgeted at the beginning of the month