Actual: Variable factory overhead$458,000
Fixed factory overhead494,000
Standard: 132,000 hrs. at $7.30 ($3.50 for variable factory overhead) 963,600
Productive capacity at 100% of normal was 130,000 hours, and the factory overhead cost budgeted at the level of 132,000 standard hours was $956,000. Based on these data, the chief cost accountant prepared the following variance analysis:
Variable factory overhead controllable variance:
Actual variable factory overhead cost incurred $458,000
Budgeted variable factory overhead for 132,000 hours 462,000
Variance—favorable–$ 4,000
Fixed factory overhead volume variance:
Normal productive capacity at 100% 130,000 hrs.
Standard for amount produced 132,000
Productive capacity not used 2,000 hrs.
Standard variable factory overhead rate × $7.30
Variance—unfavorable14,600
Total factory overhead cost variance—unfavorable $10,600
Identify the errors in the factory overhead cost variance analysis.
Answer:
In determining the volume variance, the productive capacity overemployed (2,000 hours) should be multiplied by the standard fixed factory overhead rate of $3.80 ($7.30 – $3.50) to yield a favorable variance of $7,600. The variance analysis provided by the chief cost accountant incorrectly multiplied the 2,000 hours by the total factory overhead rate of $7.30 per hour and reported it as unfavorable.
A correct determination of the factory overhead cost variances is as follows:
Variable factory overhead controllable variance:
Actual variable factory overhead cost incurred…………………… $458,000
Budgeted variable factory overhead for 132,000
hours (132,000 × $3.50)……………………………………………… 462,000
Variance—favorable………………………………………………… $ (4,000)
Fixed factory overhead volume variance:
Productive capacity at 100%…………………………………………… 130,000
hrs.
Standard for amount produced……………………………………… 132,000 hrs.
Productive capacity overemployed………………………………… (2,000) hrs.
× Standard fixed factory overhead rate……………………………… × $3.80
Variance—favorable………………………………………………… (7,600)
Total factory overhead cost variance—favorable…………………… $(11,600)
