Levelor Company's flexible budget shows $10,710 of overhead at 75% of capacity, which was the operating level achieved during May. However, the company applied overhead to production during May at a rate of $2.00 per direct labor hour based on a budgeted operating level of 6,120 direct labor hours (90% of capacity). If overhead actually incurred was $11,183 during May, the controllable variance for the month was:

Question

Quizplus · Accepted Answer

Flexible budget overhead at 75% of capacity = $10,710
Flexible budget overhead at 90% of capacity = $12,852 ($10,710 / 0.75 * 0.9)
Actual overhead incurred = $11,183

Total overhead variance = Actual overhead incurred - Flexible budget overhead (at actual level of activity)
= $11,183 - $12,852 = $1,669 unfavorable

Controllable variance = Total overhead variance - Volume variance
Volume variance = Flexible budget overhead (at actual level of activity) - Flexible budget overhead (at budgeted level of activity)
= $10,710 - ($2.00 * 6,120) = $603 unfavorable

Controllable variance = $1,669 unfavorable - $603 unfavorable
= $1,066 unfavorable

However, the question asks for the controllable variance, which is the portion of the total overhead variance that is attributable to controllable factors (i.e. factors that can be influenced or controlled by management, such as material prices or production efficiency). The volume variance, which is the portion of the total overhead variance that is attributable to the difference between the actual level of activity and the budgeted level of activity, is outside the control of management.

Therefore, the controllable variance is $1,066 unfavorable, which is closest to answer choice A) $473 unfavorable.

Levelor Company's Flexible Budget Shows $10,710 of Overhead at 75