Standard Combined Variable and Fixed Overhead Application Rate - Case Study Example

Note that the standard labor hours per unit = are $ 5.75. Therefore, with respect to the application rate of the combined variable and fixed cost, the standard number of hours allowable = (5.75*4,100) = 23,575. Since we have the price of overhead per hour ($ 29.37), the standard combined variable and fixed overhead rate = (29.37*23,575) = $ 692,398.

The variable and fixed portion of the above-noted predetermined overhead rate

            The predetermined total overhead cost per hour = is $ 29.37. The variable cost per hour = is $ 8.10. Therefore, the fixed cost per hour = (29.37 – 8.10) = $ 21.27. The variable portion of the overhead = (8.1*23,575) = $ 190,957.5 Consequently, the fixed portion of the predetermined overhead = (21.37*23,575) = $ 501,440.25.

The numerator and the denominator amounts are used in the calculation of the overhead rate

            The denominator volume = 23,575 whereas, the numerator volume = 22,425.

The balance of the factory overhead control account before the adjustment

January

Actual total (V & F) overhead

$ 676,900

Actual direct labor hours allowed

24,000

Overhead:

Price/ spending (v & f)

(676,900/4,100)

$ 165.1

Labor hours per unit

(24,000/4,100)

5.85

The flexible budget for overhead in January

Items

Amount

Overhead rate

$ 692,398

Labor hours

24,000

Labor hours/unit

5.85

List of overhead variances for January

Standard

Actual

Variance

Price/ spending (v&f)

$ 168.88

$ 165.1

3.78

Efficiency

5.75

5.85

-0.1

Prdctn volume (denominator)

23,575

24,000

-425

Total variance

-421.32

            The variance with the (-) sign denotes the unfavorable deviations in the above exhibit. Some of the potential risks identified is a possible case of surplus or deficit unit production. Another imminent risk is the failure to completely cover the overhead costs. These variances occur due to less focus on the prediction of future conditions. A possible way forward is to predict possible changes and include a certain margin to cover for any uncertain unfavorable variance. The organization can implement the use of linear programming or regression analysis to establish an inclusive variable prediction (Berger, 2011).