Question

World Company expects to operate at 80% of its productive capacity of 61,250 units per month. At this planned level, the company expects to use 29,400 standard hours of direct labor. Overhead is allocated to products using a predetermined standard rate based on direct labor hours. At the 80% capacity level, the total budgeted cost includes $47,040 fixed overhead cost and $355,740 variable overhead cost. In the current month, the company incurred $390,000 actual overhead and 26,400 actual labor hours while producing 46,000 units.
Compute the overhead volume variance.

Answer 1

Answer:

$2,880 unfavorable

Explanation:

A difference between the actual and estimated (budgeted) quantity of consumption of a product at standard rate

Formula for volume variance

Volume variance = (Actual quantity - budgeted Quantity) x Standard Rate

Budgeted Fixed overhead rate = $47,040 / $29,400 = $1.60 per direct labor hour

Budgeted Variable overhead rate = 355740/29400 = $12.10 per direct labor hour

Standard direct labor hour = ( 29,400 / 49,000) x 46,000 = 27600 direct labor hour

Fixed OH applied = 27,600 hours x $1.6 per direct labor hour = $44,160

Variable OH applied = 27,600 x $12.10 per direct labor hour = $333.960  

Total overhead applied = $44,160 + $333,960 = $378,120

Budgeted Overhead = $47,040 + $333,960 = $381,000

Volume variance = Budgeted overhead - Total overhead applied  

= 381,000 - $378,120 = $2,880 unfavorable

As actual production used more labor hours than estimated, so the volume variance is unfavorable.