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 it applied manufacturing overhead to products based on the 90% level.What was the company's fixed overhead volume variance for the year?
A) $6,000 favourable.
B) $6,000 unfavourable.
C) $12,000 favourable.
D) $12,000 unfavourable.

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 it applied manufacturing overhead to products based on the 90% level.What was the company's fixed overhead volume variance for the year?
A) $6,000 favourable. 
B) $6,000 unfavourable. 
C) $12,000 favourable. 
D) $12,000 unfavourable.

Quizplus · Accepted Answer

The fixed overhead volume variance measures the difference between the budgeted fixed overhead and the applied fixed overhead based on the difference in capacity levels. In this case, the company applied manufacturing overhead based on a 90% capacity level, while it actually operated at an 80% capacity level. This means that the company applied less fixed overhead than it budgeted for, resulting in a favorable variance. The formula to calculate the fixed overhead volume variance is:
Fixed Overhead Volume Variance = (Budgeted Fixed Overhead - Applied Fixed Overhead) x (Actual Hours - Budgeted Hours)
Using the information provided in the question, we can calculate:
Fixed Overhead Volume Variance = ($300,000 - $270,000) x (100,000 - 90,000)
Fixed Overhead Volume Variance = $30,000 x 10,000
Fixed Overhead Volume Variance = $300,000
Since the actual fixed overhead applied was less than the budgeted fixed overhead, the variance is favorable. Therefore, the correct answer is D, $12,000 unfavorable.

Patridge Company Uses a Standard Cost System in Which It