Megan, Inc. uses the following standard costs per unit for one of its products: Direct labor (2.0 hrs. @ $5.00/hr.) = $10.00; overhead (2.0 hrs. @ $2.50/hr.) = $5.00. The flexible budget for overhead is $120,000 plus $1.00 per direct labor hour (DLH). Actual data for the past month show total overhead costs of $225,000, total fixed overhead of $123,000, 85,000 hours worked, and 40,000 units produced.

The fixed overhead production volume variance for Megan, Inc. for the past month (to the nearest whole dollar) was:
A) $0.
B) $3,000 unfavorable.
C) $5,000 unfavorable.
D) $20,000 unfavorable.
E) Cannot be determined without additional information.

Question

Megan, Inc. uses the following standard costs per unit for one of its products: Direct labor (2.0 hrs. @ $5.00/hr.) = $10.00; overhead (2.0 hrs. @ $2.50/hr.) = $5.00. The flexible budget for overhead is $120,000 plus $1.00 per direct labor hour (DLH) . Actual data for the past month show total overhead costs of $225,000, total fixed overhead of $123,000, 85,000 hours worked, and 40,000 units produced.

The fixed overhead production volume variance for Megan, Inc. for the past month (to the nearest whole dollar) was:

The fixed overhead production volume variance for Megan, Inc. for the past month (to the nearest whole dollar) was:
A) $0.
B) $3,000 unfavorable.
C) $5,000 unfavorable.
D) $20,000 unfavorable.
E) Cannot be determined without additional information.

Quizplus · Accepted Answer

The fixed overhead production volume variance is calculated as the difference between the budgeted fixed overhead and the applied fixed overhead. In this case, the budgeted fixed overhead is given as $120,000, and the actual fixed overhead is $123,000. However, the variance we are asked to calculate is the production volume variance, which is concerned with the volume of production in relation to the budgeted volume, not the difference in overhead costs. Since the question does not provide information on the budgeted production volume or how the fixed overhead is applied to units produced, we cannot directly calculate the production volume variance from the given data. However, the fixed overhead cost is given as a total amount ($120,000 plus $1.00 per DLH), not a per-unit or per-hour amount that would vary with production volume. Therefore, without specific information on budgeted production volumes or a method to apply fixed overhead to production, we cannot determine a variance based on production volume. The correct interpretation is that the question as posed does not provide a direct way to calculate a production volume variance for fixed overhead, leading to the answer that the variance is $0 because we are not given any information that would indicate a deviation in production volume from a standard or budgeted amount.