The data related to Shunda Enterprises Inc.’s factory overhead cost for the production of 100,000 units of product are as follows:

The data related to Shunda Enterprises Inc.’s factory overhead cost for the production of 100,000 units of product are as follows:

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)