EX 23-18 factory overhead variance corrections

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)