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 May under the assumption that Gerhan uses a four-variance breakdown (decomposition) of the total overhead variance?

$480 unfavorable


1. Factory OH efficiency variance = variable OH efficiency variance.

2. Variable OH efficiency variance = Standard variable OH rate/DLH × (actual ? allowed) DLHs.

3. Standard DLHs @ 70% of capacity (i.e., at actual output) = (7/9) × 6,120 DLHs (given) = 4,760 DLHs.

4. Change in budgeted DLHs from 90% capacity to 70% capacity = 6,120 (given) ? 4,760 = 1,360 DLHs.

5. Total budgeted OH @ 90% capacity (the denominator volume level) = 6,120 DLHs × $3.00/DLH = $18,360.

6. Total budgeted OH @ 70% capacity = $15,640 (given).

7. Change in budgeted OH, 90% vs. 70% of capacity = $18,360 ? $15,640 = $2,720.

8. Variable OH rate/DLH = change in budgeted variable OH/change in DLHs = $2,720/1,360 DLHs = $2.00/DLH.

9. Therefore, OH efficiency variance = variable OH efficiency variance = $2.00/DLH × (5,000 ? 4,760) DLHs = $480U (to nearest whole dollar).

Note: the variance here is unfavorable (U) because actual DLHs worked during the period (5,000) > standard allowed DLHs (4,760) for the output level achieved during the period.