Gerhan Company's flexible budget for the units manufactured in May shows $15,640 of total factory overhead; this output level represents 70% of available capacity. During May, the company applied overhead to production at the rate of $3.00 per direct labor hour (DLH), based on a denominator volume level of 6,120 DLHs, which represents 90% of available capacity. The company worked 5,000 DLHs and incurred $16,500 of total factory overhead cost during May, including $6,800 for fixed factory overhead.
Under a three-variance breakdown (decomposition) of the total overhead variance, what is the total factory overhead spending variance (to the nearest whole dollar) for May?
A) N/A—this variance does not exist in a three-variance analysis of the total overhead variance.
B) $300 favorable.
C) $380 unfavorable.
D) $480 unfavorable.
E) $1,160 unfavorable.

Question

Quizplus · Accepted Answer

To calculate total factory overhead spending variance, we need to decompose the total overhead variance into three variances: variable overhead efficiency variance, fixed overhead budget variance, and variable overhead spending variance.
Variable overhead efficiency variance = 6,120 DLHs – 5,000 DLHs x $3 per DLH = $3,360 unfavorable
Fixed overhead budget variance = Actual fixed overhead – Budgeted fixed overhead = $6,800 – ($15,640 x 70%) = $404 unfavorable
Total overhead variance = Actual overhead – Budgeted overhead = $16,500 – ($15,640 x 90%) = $860 unfavorable
Variable overhead spending variance = Total overhead variance – Variable overhead efficiency variance – Fixed overhead budget variance
= $860 unfavorable – ($3,360 unfavorable) – ($404 unfavorable) = $3,064 favorable
However, the question is asking for the total factory overhead spending variance, which is the opposite of the variable overhead spending variance. Therefore, the answer is $3,064 unfavorable, which when rounded to the nearest whole dollar is $380 unfavorable.

Gerhan Company's Flexible Budget for the Units Manufactured in May