Patridge Company uses a standard cost system in which it applies manufacturing overhead to units of product on the basis of direct labour-hours.The information below is taken from the company's flexible budget for manufacturing overhead: During the year,the company operated at exactly 80% of capacity,but applied manufacturing overhead to products based on the 90% level.The company's fixed overhead volume variance for the year was:
A) $6,000 unfavourable.
B) $6,000 favourable.
C) $12,000 unfavourable.
D) $12,000 favourable.

Question

Patridge Company uses a standard cost system in which it applies manufacturing overhead to units of product on the basis of direct labour-hours.The information below is taken from the company's flexible budget for manufacturing overhead:  During the year,the company operated at exactly 80% of capacity,but applied manufacturing overhead to products based on the 90% level.The company's fixed overhead volume variance for the year was:
A) $6,000 unfavourable. 
B) $6,000 favourable. 
C) $12,000 unfavourable. 
D) $12,000 favourable.

Quizplus · Accepted Answer

The fixed overhead volume variance is calculated as the difference between the standard cost applied at the level of activity that was expected and the actual fixed overhead costs incurred.

In this case, the standard cost applied was based on the 90% level of activity, but the company only operated at 80% of capacity. This means that the company applied too much fixed overhead to the products, resulting in a higher cost than expected.

Therefore, the fixed overhead volume variance is unfavorable, and the amount of the variance is equal to the difference between the standard cost at 90% capacity and the actual fixed overhead costs incurred at 80% capacity. This is calculated as follows:

Standard cost at 90% capacity = $300,000 
Actual fixed overhead costs at 80% capacity = $312,000

Fixed overhead volume variance = $300,000 - $312,000 = $12,000 unfavorable.

Thus, the correct answer is C) $12,000 unfavorable.

Patridge Company Uses a Standard Cost System in Which It