King Company estimated that it would operate its manufacturing facilities at 800,000 direct labour hours for the year, which served as the denominator activity in the predetermined overhead rate. The total budgeted manufacturing overhead for the year was $2,000,000, of which $1,600,000 was variable and $400,000 was fixed. The standard variable overhead rate was $2 per direct labour hour. The standard direct labour time was 3 direct labour hours per unit. The actual results for the year are presented below:
$\begin{array} { | l | r | }
\hline \text { Actual Finished Units } & 250,000 \
\hline \text { Actual Direct Labour Hours } & 764,000 \
\hline \text { Actual Variable Overhead } & \$ 1,610,000 \
\hline \text { Actual Fixed Overhead } & \$ 392,000 \
\hline
\end{array}$

-What was the fixed overhead volume variance for the year?
A) $7,000 unfavourable.
B) $18,000 favourable.
C) $25,000 unfavourable.
D) $41,667 unfavourable.

Question

King Company estimated that it would operate its manufacturing facilities at 800,000 direct labour hours for the year, which served as the denominator activity in the predetermined overhead rate. The total budgeted manufacturing overhead for the year was $2,000,000, of which $1,600,000 was variable and $400,000 was fixed. The standard variable overhead rate was $2 per direct labour hour. The standard direct labour time was 3 direct labour hours per unit. The actual results for the year are presented below:
$\begin{array} { | l | r | } 
\hline \text { Actual Finished Units } & 250,000 \
\hline \text { Actual Direct Labour Hours } & 764,000 \
\hline \text { Actual Variable Overhead } & \$ 1,610,000 \
\hline \text { Actual Fixed Overhead } & \$ 392,000 \
\hline
\end{array}$

-What was the fixed overhead volume variance for the year?
A) $7,000 unfavourable.
B) $18,000 favourable.
C) $25,000 unfavourable.
D) $41,667 unfavourable.

Quizplus · Accepted Answer

The fixed overhead volume variance is calculated as the difference between the budgeted fixed overhead and the applied fixed overhead based on actual production. The budgeted fixed overhead is $400,000. The applied fixed overhead is calculated based on the standard hours allowed for the actual production, which is 3 hours per unit for 250,000 units, resulting in 750,000 standard hours. The predetermined overhead rate (including both variable and fixed) is $2,500,000 total budgeted overhead / 800,000 hours = $2.50 per hour. However, for fixed overhead, we use the fixed portion of the rate, which is $400,000 / 800,000 hours = $0.50 per hour. Applied fixed overhead is then 750,000 hours * $0.50 = $375,000. The variance is $400,000 (budgeted) - $375,000 (applied) = $25,000 unfavourable.

King Company Estimated That It Would Operate Its Manufacturing Facilities