[Controllable Variance = Actual factory overhead Budgeted

allowance based on standard hours allowed*]

[*Fixed expenses budgeted + variable expenses (standard hours allowed for actual production variable
overhead rate)]

EXAMPLE:
Following is the flexible budget of a department of a manufacturing company.
The data from this flexible budget is used to calculate all variances relating
to factory overhead.
Department 3
Monthly Flexible Budget

Capacity 80% 90% 100%

Standard production 800 1,000 1,200

Direct labor hours 3,200 4,000 4,800

Variable factory overhead:

Indirect labor $1,600 $2,000 $2,400 $0.50 / dlh

Indirect materials 960 1,200 1,440 $0.30

Supplies 640 800 960 $0.20

Repairs 480 600 720 $0.15

Power and light 160 200 240 $0.05

Total variable factory overhead $3,840 $4,800 $5,760 $1.20 per dlh

====== ====== ====== ======

Fixed factory overhead:

Supervisor $1,200 $1,200 $1,200

Depreciation on machinery 700 700 700

Insurance 250 250 250

Property tax 250 250 250

Power and light 400 400 400

Maintenance 400 400 400

 Total fixed factory overhead $3,200 $3,200 $3,200 $3,200 per month

======

$3,200 per month

Total factory overhead $7,040 $8,000 $8,960 + $1.20 per dlh

====== ====== ====== ======

Following data is also provided:

Actual factory overhead is $7,384. Actual production is 850 units of finished
product. Actual hours used are 3,475 hours. 4 standard hours are allowed to
complete a unit of finished product.
Required: Calculate factory overhead controllable variance.
CALCULATION OF STANDARD OVERHEAD RATE:
Assuming that 90% column represents normal capacity, the
standard overhead rate is computed as follows:
Total factory overhead / Direct labor hours
= $8,000 / 4,000
= $2 per standard direct labor hour
At 90% capacity level, the rate consists of:
Total variable factory overhead / Direct labor hours
= $4,800 / 4,000
= $1.20 variable factory overhead rate
Total fixed factory overhead / Direct labor hours
= $3,200 / 4,000
= $0.80 fixed factory overhead rate
Total factory overhead rate at normal capacity:
($1.20 + $0.80) = $2.00
CALCULATION OF CONTROLLABLE VARIANCE:
Actual factory overhead $7,384

Budgeted allowance based on standard hours allowed:

Fixed expenses budgeted $3,200

Variable expenses (3,400 standard hours allowed $1.20 variable overhead rate) 4,080

- 7,280

Controllable variance $104unfav.

======
Factory overhead controllable variance consists of variable expenses
only and can also be calculated as follows:
Actual variable expenses ($7,384 actual factory overhead $3,200 of fixed expenses budgeted) $4,184

Variable expenses for standard hours allowed $4,080

$104
Controllable variance unfav.