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Budgeted overhead for Cinnabar Industries at normal capacity of 30000 direct labor hours is $6 per hour variable and $4 per hour fixed. In May $310000 of overhead was incurred in working 31500 hours when 32000 standard hours were allowed.
-The overhead controllable variance is
A) $5000 favorable.
B) $2000 favorable.
C) $10000 favorable.
D) $10000 unfavorable.

Question

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Budgeted overhead for Cinnabar Industries at normal capacity of 30000 direct labor hours is $6 per hour variable and $4 per hour fixed. In May $310000 of overhead was incurred in working 31500 hours when 32000 standard hours were allowed.
-The overhead controllable variance is
A) $5000 favorable.
B) $2000 favorable.
C) $10000 favorable.
D) $10000 unfavorable.

Quizplus · Accepted Answer

The budgeted overhead for 31500 direct labor hours would be:
$6 variable overhead per hour × 31500 direct labor hours = $189000 variable overhead
$4 fixed overhead per hour × 30000 normal capacity hours = $120000 fixed overhead
Total budgeted overhead = $309000

Since actual overhead incurred was $310000, the total overhead variance is $1000 unfavorable.

The controllable variance is the portion of the total overhead variance that is controllable by management. Fixed overhead is not controllable in the short run, so the controllable variance only applies to the variable overhead.

The flexible budget for 31500 direct labor hours would be:
$6 variable overhead per hour × 31500 direct labor hours = $189000 variable overhead
$4 fixed overhead per hour × 31500 direct labor hours = $126000 fixed overhead
Total flexible budget = $315000

The variable overhead spending variance is:
Actual variable overhead – (Actual hours × Variable overhead rate)
= $310000 – (31500 × $6)
= $310000 – $189000
= $121000 unfavorable

Therefore, the controllable variance is:
Total overhead variance – Fixed overhead variance – Variable overhead spending variance
= $1000 unfavorable – $6000 favorable – $121000 unfavorable
= $128000 unfavorable

However, the question asks for the overhead controllable variance, not the total controllable variance. The variable overhead spending variance is the only part of the total controllable variance that is controllable, so the overhead controllable variance is the same as the variable overhead spending variance:

Overhead controllable variance = Variable overhead spending variance
= $121000 unfavorable – $6000 favorable
= $115000 unfavorable

Since the question asks for the variance amount, the answer is the unfavorable controllable variance of $115000, which is option (B).

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