Channel One Industries uses a standard costing system to apply manufacturing costs to its production process. In May, Channel One anticipated producing 2,450 units with fixed manufacturing overhead costs allocated at $7.40 per direct labor hour with a standard of 1.5 direct labor hours per unit. In May, actual production was 3,200 units and actual fixed manufacturing overhead costs were $23,000. What was Channel One's fixed manufacturing overhead volume variance for May?

Question

Quizplus · Accepted Answer

Fixed manufacturing overhead volume variance is the difference between the budgeted fixed overhead cost based on the expected level of activity and the actual fixed overhead cost incurred for the actual level of activity.

The standard fixed overhead cost per unit is calculated as follows:

Standard fixed overhead cost per unit = Fixed overhead cost / Expected number of direct labor hours 
= ($7.40 × 1.5) = $11.10

The expected fixed overhead cost for 2,450 units is:
Expected fixed overhead cost = Budgeted labor hours × Fixed overhead rate per direct labor hour 
= (2,450 × 1.5) × $7.40 = $27,007.50

The actual fixed overhead cost for the production of 3,200 units is $23,000.

Therefore, the fixed overhead volume variance can be calculated as:

Fixed overhead volume variance = Expected fixed overhead cost - Actual fixed overhead cost 
= $27,007.50 - $23,000 
= $4,007.50

Thus, the fixed overhead volume variance is $4,007.50 or $8,325 favorable (since the actual fixed overhead cost is less than expected, the variance is favorable).

The best choice is C.

Channel One Industries Uses a Standard Costing System to Apply