At the end of the year, Ilberg Company provided the following actual information:

Overhead $423,600

Direct labor cost 532,000

Ilberg uses normal costing and applies overhead at the rate of 80% of direct labor cost. At the end of the year, Cost of Goods Sold (before adjusting for any overhead variance) was $1,890,000.

Required:

a. Dispose of the overhead variance by adjusting Cost of Goods Sold.

b. Calculate the overhead variance for the year.

Adjusted cost of goods sold = $ 1,888,000

Overhead variance = 2,000 favorable

Explanation:

Overhead variance:

is the difference between the absorbed overhead and the actual overhead.

Absorbed overhead = OAR * direct labor cost

= 80% * 532,000 = $425,600

Over absorbed overhead = absorbed overhead - Actual overhead

= 425,600 - 423,600 = 2,000 over-absorbed

Overhead variance = 2,000 favorable

Adjusted cost of goods sold

= cost of goods sold - over absorbed overheads

= 1,890,000 - 2,000 = $ 1,888,000