Gerhan Company's flexible budget for the units manufactured in May shows $15,800 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 5,940 DLHs, which represents 90% of available capacity. The company used 6,000 DLHs and incurred $16,400 of total factory overhead cost during May, including $7,700 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? (Round your intermediate calculation to 2 decimal places.)

What will be an ideal response?

$2,111 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) × 5,940 DLHs (given) = 4,620 DLHs.

4. Change in budgeted DLHs from 90% capacity to 70% capacity = 5,940 (given) ? 4,620 = 1,320 DLHs.

5. Total budgeted OH @ 90% capacity (the denominator volume level) = 5,940 DLHs × $3.00/DLH = $17,820.

6. Total budgeted OH @ 70% capacity = $15,800 (given).

7. Change in budgeted OH, 90% vs. 70% of capacity = $17,820 ? $15,800 = $2,020.

8. Variable OH rate/DLH = change in budgeted variable OH/change in DLHs = $2,020/1,320 DLHs = $1.53/DLH.

9. Therefore, OH efficiency variance = variable OH efficiency variance = $1.53/DLH × (6,000 ? 4,620) DLHs = $2,111U (to nearest whole dollar).

Note: the variance here is unfavorable (U) because actual DLHs worked during the period (6,000) > standard allowed DLHs (4,620) for the output level achieved during the period.