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 used 5,000 DLHs and incurred $16,500 of total factory overhead cost during May, including $6,800 for fixed factory overhead.
What is the variable factory overhead spending variance (to the nearest whole dollar) in May, assuming Gerhan uses a four-variance breakdown (decomposition) of the total overhead variance?
A) $180 unfavorable.
B) $300 favorable.
C) $380 unfavorable.
D) $480 unfavorable.
E) N/A—this variance is not defined under the four-way breakdown of the total OVH variance.

Question

Quizplus · Accepted Answer

The variable factory overhead spending variance is calculated as the difference between the actual variable overhead costs and the budgeted variable overhead costs based on actual hours worked. The budgeted variable overhead rate is $3.00 per DLH. The actual variable overhead cost is $16,500 - $6,800 (fixed overhead) = $9,700. The budgeted variable overhead cost for 5,000 DLHs is 5,000 DLHs * $3.00 = $15,000. The spending variance is $9,700 - $15,000 = $300 favorable.

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