Gerhan Company's Flexible Budget for the Units Manufactured in May

question 158

Multiple Choice

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 Gerhan Company in May, under the assumption that the company uses a two-variance breakdown (decomposition) of the total overhead variance?

• A) N/A—this variance does not exist under a two-variance breakdown of the total overhead variance.
• B) $180 unfavorable.
• C) $300 favorable.
• D) $480 unfavorable.
• E) $680 unfavorable.

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Definitions:

Short Run

A period in which at least one factor of production is fixed and cannot be fully adjusted.

AVC Curve

The average variable cost curve, which shows how the unit variable cost of production changes with the level of output.

Profit-Maximizing

The process or strategy of adjusting production and pricing to achieve the highest possible profit margins for a business or firm.

Firm

A business organization that sells goods or services in order to make a profit.