The Claus Company makes and sells a single product and uses standard costing. During January, the company actually used 8,700 direct labour hours (DLHs) and produced 3,000 units of product. The standard cost card for one unit of product includes the following:

Variable Factory Overhead: 3.0 DLHs @ $4.00 per DLH.
Fixed Factory Overhead: 3.0 DLHs. @ $3.50 per DLH.

For January, the company incurred $22,000 of actual fixed overhead costs and recorded an $875 favourable volume variance.

-What was the denominator level of activity in direct labour hours (DLHs)used by Claus in setting the predetermined overhead rate for January?
A) 8,750 DLHs.
B) 9,250 DLHs.
C) 9,500 DLHs.
D) 10,500 DLHs.

Question

The Claus Company makes and sells a single product and uses standard costing. During January, the company actually used 8,700 direct labour hours (DLHs) and produced 3,000 units of product. The standard cost card for one unit of product includes the following:

Variable Factory Overhead: 3.0 DLHs @ $4.00 per DLH.
Fixed Factory Overhead: 3.0 DLHs. @ $3.50 per DLH.

For January, the company incurred $22,000 of actual fixed overhead costs and recorded an $875 favourable volume variance.

-What was the denominator level of activity in direct labour hours (DLHs)used by Claus in setting the predetermined overhead rate for January?
A) 8,750 DLHs.
B) 9,250 DLHs.
C) 9,500 DLHs.
D) 10,500 DLHs.

Quizplus · Accepted Answer

The volume variance for fixed overhead is calculated as the difference between the budgeted fixed overhead and the applied fixed overhead. The formula for the volume variance is: (Actual Volume - Standard Volume) * Fixed Overhead Rate. Given a favourable volume variance of $875 and a fixed overhead rate of $3.50 per DLH, we can calculate the denominator level of activity. The favourable variance suggests that the actual volume of activity was higher than the standard (or budgeted) volume of activity. To find the standard volume of activity, we rearrange the formula to solve for the standard volume: $875 / $3.50 per DLH = 250 DLHs. Since the actual volume was 8,700 DLHs, and the variance indicates an additional 250 DLHs were expected (8,700 + 250), the denominator level of activity used in setting the predetermined overhead rate was 8,750 DLHs.

The Claus Company Makes and Sells a Single Product and Uses