Sonic Company set the following standard costs for one unit of its product for 2011.
Direct material (20 Ibs. @ $2.50 per Ib.) . . . . . . . . . . . . . . . . . . . $ 50.00
Direct labor (15 hrs. @ $8.00 per hr.) . . . . . . . . . . . . . . . . . . . . . 120.00
Factory variable overhead (15 hrs. @ $2.50 per hr.) . . . . . . . . . . 37.50
Factory fixed overhead (15 hrs. @ $0.50 per hr.) . . . . . . . . . . . . 7.50
Standard cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $215.00

The $3.00 ($2.50 + $0.50) total overhead rate per direct labor hour is based on an expected operating level equal to 75% of the factory€™s capacity of 50,000 units per month. The following monthly flexible budget information is also available.

During the current month, the company operated at 70% of capacity, employees worked 500,000 hours, and the following actual overhead costs were incurred.
Variable overhead costs . . . . . . . . $1,267,500
Fixed overhead costs . . . . . . . . . . 285,000
Total overhead costs . . . . . . . . . . . $1,552,500

(1) Show how the company computed its predetermined overhead application rate per hour for total overhead, variable overhead, and fixed overhead.
(2) Compute the variable and fixed overheadvariances.

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Operating Levels (% of capacity) 75% 37,500 562,500 70% 80% Budgeted output (units) Budgeted labor (standard hours) Budgeted overhead (dollars) 35,000 525,000 40,000 600,000 Variable overhead Fixed overhead Total overhead $1,312,500 $1,406,250 $1,500,000 281,250281,250 $1,687,500 $1,781,250 281,250 $1,593,750