Frekko Company collected the following information:
$\begin{array}{lr}
\text { Standard costs per unit: }\
\text { Variable overhead } & 4 \text { machine hours @\$6 per machine hour } \
\text { Fixed overhead } & 4 \text { machine hours } @ \$ 10 \text { per machine hour }
\end{array}$

$\begin{array}{l}
\text { Actual output }&20,000 \text { units } \
\text { Denominator (normal capacity) output } & 21,000 \text { units } \
\text { Actual machine hours } & 79,000 \text { machine hours } \
\text { Actual variable overhead cost } & \$ 540,000 \
\text { Actual fixed overhead cost } & \$ 810,000
\end{array}$
-Refer to the figure.Using the two variance method,what is the budget variance?
A)$30,000 (F)
B)$30,000 (U)
C)$70,000 (F)
D)$70,000 (U)

Question

Frekko Company collected the following information:
$\begin{array}{lr}
\text { Standard costs per unit: }\
\text { Variable overhead } & 4 \text { machine hours @\$6 per machine hour } \
\text { Fixed overhead } & 4 \text { machine hours } @ \$ 10 \text { per machine hour }
\end{array}$

$\begin{array}{l}
\text { Actual output }&20,000 \text { units } \
\text { Denominator (normal capacity) output } & 21,000 \text { units } \
\text { Actual machine hours } & 79,000 \text { machine hours } \
\text { Actual variable overhead cost } & \$ 540,000 \
\text { Actual fixed overhead cost } & \$ 810,000
\end{array}$
-Refer to the figure.Using the two variance method,what is the budget variance?
A)$30,000 (F)
B)$30,000 (U)
C)$70,000 (F)
D)$70,000 (U)

Quizplus · Accepted Answer

The budget variance for fixed overhead is calculated by comparing the budgeted fixed overhead costs to the actual fixed overhead costs. The budgeted fixed overhead is based on the denominator (normal capacity) output, which is 21,000 units at 4 machine hours per unit, times the fixed overhead rate of $10 per machine hour. This gives a budgeted fixed overhead of $21,000 \text{ units} \times 4 \text{ hours/unit} \times \$10/\text{hour} = \$840,000$. The actual fixed overhead cost is $810,000. Therefore, the budget variance is $ \$840,000 - \$810,000 = \$30,000 $ favorable (F), indicating that the actual fixed overhead costs were less than the budgeted amount. However, the correct interpretation based on the provided options is that the calculation described is for the fixed overhead volume variance, not the budget variance as typically defined in cost accounting, which involves both fixed and variable components. The correct approach for a budget variance specifically addressing the question's context would involve comparing actual expenses to budgeted expenses for both fixed and variable overheads, but the question's setup and options lead to confusion. Thus, the explanation provided aligns with the traditional calculation for a specific type of variance (fixed overhead volume variance) rather than a comprehensive budget variance involving all overhead costs.

Frekko Company Collected the Following Information -Refer to the Figure