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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 factory overhead efficiency variance (to the nearest whole dollar) for Gerhan Company in May, under the assumption that the company uses a two-variance breakdown (decomposition) of the total overhead variance

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Answer:

See below

Explanation:

Given the above information,

Budgeted overhead at 90% capacity = 6,120 × 3 = $18,360

Budgeted overhead at 70% capacity = $15,640

DLH at 70% capacity = 6,120/90% × 70% = 4,760 hours

Variable overhead rate = ($18,360 - $15,640) / (6,120 - 4,760) = $2 per DLH

Actual hours in May = 5,000 DLH

Variable overhead efficiency variance =

(4,750 - 5,000) × $2 = $480 unfavorable

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