@ 2012, Cengage Learning Performance Evaluation Using Variances from Standard Costs LO 4 – Computing Factory Overhead Variances

Factory Overhead Variances  Factory overhead costs are more difficult to analyze than direct labor and materials costs. This is because factory overhead costs have fixed and variable cost elements. LO 4

Factory Overhead Flexible Budget LO 4

Factory Overhead Flexible Budget LO 4 Factory Overhead Rate Budgeted Factory Overhead at Normal Capacity Normal Productive Capacity = $30,000 5,000 direct labor hours Factory Overhead Rate = Factory Overhead Rate $6.00 per direct labor hour =

Variable Factory Overhead Rate = Budgeted Variable Overhead at Normal Capacity Normal Productive Capacity Variable Factory Overhead Rate = $3.60 per direct labor hour Factory Overhead Flexible Budget LO 4 $18,000 5,000 direct labor hours Variable Factory Overhead Rate =

Fixed Factory Overhead Rate = Budgeted Fixed Overhead at Normal Capacity Normal Productive Capacity Fixed Factory Overhead Rate = $2.40 per direct labor hour Factory Overhead Flexible Budget LO 4 $12,000 5,000 direct labor hours Fixed Factory Overhead Rate =

Factory Overhead Variances  Variances from standard for factory overhead cost result from: 1.Actual variable factory overhead cost greater or less than budgeted variable factory overhead for actual production 2.Actual production at a level above or below 100% of normal capacity LO 4

Variable Factory Overhead Controllable Variance Actual Variable Factory Overhead = Budgeted Variable Factory Overhead – Variable Factory Overhead Controllable Variance Standard Hours for Actual Units Produced Variable Factory Overhead Rate x LO 4

Budgeted Variable Factory Overhead $14,400 Variable Factory Overhead Controllable Variance LO 4 = Variable Factory Overhead Controllable Variance $10,400 – $14,400 Actual Variable Factory Overhead = – Variable Factory Overhead Controllable Variance = – $4,000 Favorable Variance 4,000 direct labor hours x $3.60

Factory Overhead Volume Variance  The fixed factory overhead volume variance is the difference between the budgeted fixed overhead at 100% of normal capacity, and the standard fixed overhead for the actual production achieved during the period. LO 4

Fixed Factory Overhead Volume Variance Standard Hours for 100% of Normal Capacity = Standard Hours for Actual Units Produced Fixed Factory Overhead Volume Variance – Fixed Factory Overhead Rate x = Fixed Factory Overhead Volume Variance 5,000 direct labor hours 4,000 direct labor hours x $2.40– = Fixed Factory Overhead Volume Variance $2,400 Unfavorable Variance LO 4

Fixed Factory Overhead Volume Variance

Total actual factory overhead$22,400 Factory overhead applied (4,000 hours x $6 per hour) 24,000 Total factory overhead cost variance (favorable) $ (1,600) F LO 4 Reporting Factory Overhead Variances

 An unfavorable volume variance may be due to factors such as the following:  Failure to maintain an even flow of work  Machine breakdowns  Work stoppages caused by lack of materials or skilled labor  Lack of enough sales orders to keep the factory operating at normal capacity LO 4 Fixed Factory Overhead Volume Variance

Reporting Factory Overhead Variances LO 4

Factory Overhead $10,400 + $12,000 Applied factory overhead24,000 4,000 hours x $6.00 per hour Actual factory overhead22,400 Factory Overhead Account

LO 4 Overapplied factory overhead Factory Overhead Applied factory overhead24,000 Actual factory overhead22,400 Balance, June 301,600

Factory Overhead Account LO 4 Controllable Variance Applied Factory Overhead $24,000 Volume Variance Budgeted Factory Overhead for Amount Produced Variable factory OH$14,400 Fixed factory OH 12,000 Total$26,400 Actual factory overhead $22,400 – $4,000 F $2,400 U Actual Factory Overhead $22,400 Applied factory overhead $24,000

Factory Overhead Account LO 4 Applied Factory Overhead $24,000 Budgeted Factory Overhead for Amount Produced Variable factory OH$14,400 Fixed factory OH 12,000 Total$26,400 Actual factory overhead $22,400 Applied factory overhead $24,000 Total Factory Overhead Cost Variance – $1,600 F Actual Factory Overhead $22,400