A company has a total budgeted fixed overhead of £135,000 for the year.
Budgeted production is 15,000 units per year.Each unit takes 45 minutes.
Production and costs are spread evenly throughout the year.Overheads are absorbed on the basis of labour hours.
In one month,1,200 units are made and 800 hours are worked.The overhead cost is £10,000.
Which of the following statements are correct?
(i) The Budgeted Overhead Absorption Rate is £12.00 per hour
(ii) The Overhead Absorption Rate is £12.50
(iii) The Fixed Overhead Expenditure Variance is £1,250 Favourable
(iv) The Fixed Overhead Expenditure Variance is £400 Adverse
(v) The Fixed Overhead Volume Variance is £1,650 Adverse
(vi)The Fixed Overhead Volume Variance is £450 Adverse
A) (i), (iii) and (vi)
B) (ii), (iii) and (v)
C) (i) and (iv) only
D) None of them are correct

Question

Quizplus · Accepted Answer

Fixed Overheads are more awkward, as they are fixed, and the rate is set at the time of the budget and not flexed to production.In the above example, the £135,000 is spread over a planned 11,250 hours of work (Each of the 15,000 units takes 0.75 hours). This is £12 per labour hour. (i)In the month, the overhead is £10,000 against a budget of £11,250 and is therefore £1,250 favourable (iii).The volume variance is based on the standard hours for actual production. Not the actual hours. So 1,200 units should take 900 hours, and would absorb £10,800. This is £450 less than the budget.The Volume variance can be further broken down into efficiency and capacity - at this point we do use the actual hours worked. The workforce should have taken 900 hours, but took 800 therefore there is a favourable efficiency variance of £1,200. However the budget was £11,250 and so there is an adverse capacity variance of £1,650

A Company Has a Total Budgeted Fixed Overhead of £135,000