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A-1
APPENDIX C
FACTORY OVERHEAD VARIANCES
E-1
Variable factory overhead controllable variance:
Actual variable factory overhead cost incurred ...... $101,750
Budgeted variable factory overhead for 8,000 hrs.
[8,000 × ($31 – $18)] ............................................. (104,000)
Variance—favorable ............................................. $ (2,250)
Alternative Computation of Overhead Variances
Factory Overhead
Actual costs ($101,750 + $180,000) $281,750
Applied costs (8,000 hrs. × $31) (248,000)
Balance, underapplied factory overhead $ 33,750
Actual Factory Budgeted Factory Applied Factory
Overhead Overhead for Amount Overhead
E-2
a. Controllable variance:
Actual variable factory overhead
($1,428,000 – $300,000) .......................... $1,128,000
Standard variable factory overhead at
actual production:
Standard hours for actual production ....... 52,000
Variable factory overhead rate1 .................. × $22
Standard variable factory overhead .. (1,144,000)
Controllable variance—favorable .................... $(16,000)
2
Fixed factory overhead rate: hrs. 60,000
$300,000 = $5 per hr.
3
or $1,428,000 – [($22 + $5) × 52,000 hrs.] = $24,000
A-3
E-2, Concluded
Alternative Computation of Overhead Variances
Factory Overhead
Actual costs $ 1,428,000
Applied costs ($27 × 52,000 hrs.) (1,404,000)
Balance, underapplied factory overhead $ 24,000
Actual Factory Budgeted Factory Applied Factory
Overhead Overhead for Amount Overhead
E-3
In determining the volume variance, the productive capacity overemployed (5,000
hours) should be multiplied by the standard fixed factory overhead rate of $3.25
($9.00 – $5.75) to yield a favorable variance of $16,250. The variance analysis pro-
vided by the chief cost accountant incorrectly multiplied the 5,000 hours by the
total factory overhead rate of $9.00 per hour and reported it as unfavorable.
A correct determination of the factory overhead cost variances is as follows:
Total factory overhead cost variance—favorable ......... $(20,000)
Alternative Computation of Overhead Variances
Factory Overhead
Actual costs ($600,000 + $325,000) $925,000
Applied costs (105,000 hrs. × $9.00) (945,000)
Balance, overapplied factory overhead $ (20,000)
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E-4
A B C D E
1 TOPEKA PLASTICS INC.
2 Factory Overhead Cost Variance Report—Trim Department
3 For the Month Ended July 31
6
7 Budget
(at Actual
Production)
8 Variances
9 Actual Unfavorable Favorable
10 Variable factory overhead cost:*
11 Indirect factory labor $ 23,250 $ 22,400 $ 850
12 Power and light 20,000 20,160 $ (160)
13 Indirect materials 11,100 10,080 1,020
14 Total variable factory overhead
cost $ 54,350 $ 52,640
15 Fixed factory overhead cost:
16 Supervisory salaries $ 50,000 $ 50,000
17 Depreciation of plant and
*The budgeted variable factory overhead costs are determined by multiplying
28,000 hours by the variable factory overhead cost rate for each variable cost
category. These rates are determined by dividing each budgeted amount (esti-
mated at the beginning of the month) by the planned (budgeted) volume of
25,000 hours as shown below.
E-4, Concluded
Alternative Computation of Overhead Variances
Factory Overhead
Actual costs $148,850
Applied costs [28,000 × ($1.88* + $3.15)] (140,840)
Balance, underapplied factory overhead $ 8,010
Actual Factory Budgeted Factory Applied Factory
*$47,000 ÷ 25,000 hours budgeted at the beginning of the month
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P-1
A B C D E
1 SEABURY, INC.
2 Factory Overhead Cost Variance Report—Assembly Department
3 For the Month Ended October 31
4 Normal capacity for the month 25,000 hrs.
5 Actual production for the month 23,500 hrs.
6
7 Budget
8 (at Actual Variances
9 Actual Production) Unfavorable Favorable
10 Variable factory overhead costs:*
16 Supervisory salaries $125,000 $125,000
17 Depreciation of plant and
equipment 49,000 49,000
18 Insurance and property taxes 29,750 29,750
19 Total fixed cost $203,750 $203,750
20 Total factory overhead cost $388,070 $388,460
21 Total controllable variances $870 $ (1260)
*The budgeted variable costs are determined by multiplying the budgeted variable
costs per unit at planned production times the actual production for October. The
budgeted variable costs per unit are determined by dividing the budgeted variable
cost for October by the planned production for October. Thus, the budgeted
variable costs are determined as follows:
P-1, Concluded
Alternative Computation of Overhead Variances
Factory Overhead
Actual costs $388,070
Applied costs [23,500 hrs. × ($7.86* + $8.15**)] (376,235)
Balance, underapplied factory overhead $ 11,835
Total $388,460
$(390) F $12,225 U
Controllable Volume
Variance Variance
$11,835 U
Total Factory Overhead
Cost Variance
A-9
P-2
The plant manager is placing pressure on the controller because the controllable
variance is unfavorable. The claim is that these costs are not variable at all. This
claim is difficult to accept. This small company purchases its power from the out-
side. The power and light bill is variable to the amount of energy used in the
plant. Energy usage is likely a function of the number of units produced. Like-
wise, the supplies are likely variable to machine usage, which is also related to
the number of units produced. However, these two costs are not where the prob-
lem lies. The problem is with the indirect factory wages.
