# 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 overhead 494,000 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—unfavorable 14,600 Total factory overhead cost variance—unfavorable$10,600 Identify the errors in the factory overhead cost variance analysis.

### Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

### Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

#### Solutions

Chapter
Section
Chapter 23, Problem 23.19EX
Textbook Problem

## 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 overhead 494,000 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—unfavorable 14,600 Total factory overhead cost variance—unfavorable$10,600  Identify the errors in the factory overhead cost variance analysis.

Expert Solution
To determine

The difference between the actual variable overhead costs and the standard overhead for actual production is known as the variable factory overhead controllable variances. The variable factory overhead controllable variance is computed as follows:

Factory overhead volume variances refers to the difference between the budgeted fixed overheads at 100% of normal capacity, and the standard fixed overheads for the actual units produced. The factory overhead volume variances can be calculated as follows:

Fixed factory overheadvolume variance}(Standard hours for 100% ofnormal capacityStandardhours for actual units produced)×(Fixed factory overhead rate)

To identify: The errors in the factory overhead cost variance analysis.

### Explanation of Solution

The errors in the factory overhead cost variance analysis are as follows:

• In the fixed factory overhead volume variance, instead of deducting an amount of $3.80 (4) as the standard hours for actual units produced, an amount of$7.30 was deducted from the standard hours for 100% of normal capacity by the chief cost accountant.
• This error resulted in the unfavorable fixed factory overhead volume variance of $14,600, instead of the correct favorable fixed factory overhead volume variance of$(7,600).
• This also resulted in an unfavorable total factory overhead cost variance of $10,600, instead of the correct favorable total factory overhead cost variance of$(11,600).

Working Notes:

Determine the correct variable factory overhead controllable variance.

Variable factory overheadcontrollable variance}(Actual variable factory overheadStandard variable factory overhead (2) )=$458,000$462,000=$(4,000) (1) Determine the standard variable factory overhead. Standard variablefactory overhead}=[Standard hours at actual production×Variable factory overhead rate]=$132,000×$3.50=$462,000

(2)

Determine the correct fixed factory overhead volume variance.

Fixed factory overheadvolume variance}(Standard hours for 100% ofnormal capacityStandard hoursfor actual units produced)×(Fixed factory overhead rate (4))=(130,000 hours132,000hours×\$3

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