Budgeted overhead for Haft Inc. at normal capacity of 60000 direct labor hours is $3 per hour variable and $2 per hour fixed. In May $310000 of overhead was incurred in working 63000 hours when 64000 standard hours were allowed.
- The overhead volume variance is
A) $8000 favorable.
B) $11000 favorable.
C) $5000 favorable.
D) $10000 favorable.

Question

Budgeted overhead for Haft Inc. at normal capacity of 60000 direct labor hours is $3 per hour variable and $2 per hour fixed. In May $310000 of overhead was incurred in working 63000 hours when 64000 standard hours were allowed. 
- The overhead volume variance is
A) $8000 favorable.
B) $11000 favorable.
C) $5000 favorable.
D) $10000 favorable.

Quizplus · Accepted Answer

The overhead volume variance is calculated as the difference between the budgeted overhead at normal capacity and the applied overhead at actual hours worked. Since the fixed overhead rate is $2 per hour and the normal capacity is 60,000 hours, the budgeted fixed overhead is $120,000 (60,000 hours * $2/hour). The volume variance focuses on the fixed overhead component. With 64,000 standard hours allowed for the actual production, the applied fixed overhead would be $128,000 (64,000 hours * $2/hour). The volume variance is thus $128,000 (applied) - $120,000 (budgeted) = $8,000 favorable, because the applied fixed overhead is higher than the budgeted, indicating a higher level of production activity than anticipated.

Budgeted Overhead for Haft Inc