A manufacturer of playground equipment has a standard costing system based on machine hours (MHs) as the measure of activity. Data from the company's flexible budget for manufacturing overhead are given below:
$\begin{array}{|l|r|}
\hline \text { Denominator Level of Activity } & 3,000 \mathrm{MHs} \
\hline \text { Fixed Overhead Cost } & \$ 40,650 \
\hline
\end{array}$
The following data pertain to operations for the most recent period:
$\begin{array}{|l|r|}
\hline \text { Actual Hours } & 3,400 \mathrm{MHs} \
\hline \text { Standard Hours Allowed for the Actual Output } & 3,172 \mathrm{MHs} \
\hline \text { Actual Total Fixed Overhead Cost } & \$ 41,600 \
\hline
\end{array}$
-What was the fixed overhead volume variance for the period,rounded to the nearest dollar?
A) $2,256 favourable.
B) $2,331 favourable.
C) $3,089 unfavourable.
D) $5,420 favourable.

Question

Quizplus · Accepted Answer

The fixed overhead volume variance is calculated as the difference between the budgeted fixed overhead and the fixed overhead applied to production, based on the standard hours allowed for the actual output. The budgeted fixed overhead is $40,650. The fixed overhead rate per machine hour (MH) is $40,650 / 3,000 MHs = $13.55 per MH. The standard hours allowed for the actual output is 3,172 MHs, so the applied fixed overhead is 3,172 MHs * $13.55/MH = $42,981. The volume variance is $40,650 (budgeted) - $42,981 (applied) = -$2,331, which is a favourable variance because the applied fixed overhead is greater than the budgeted amount.

A Manufacturer of Playground Equipment Has a Standard Costing System