Froelech Company has developed capacity standards.Information is as follows: The unused capacity variance is
A) $20,000 favorable.
B) $30,000 favorable.
C) $50,000 favorable.
D) There is no variance.

Question

Froelech Company has developed capacity standards.Information is as follows:  The unused capacity variance is
A) $20,000 favorable. 
B) $30,000 favorable. 
C) $50,000 favorable. 
D) There is no variance.

Quizplus · Accepted Answer

The standard capacity for the year is 240,000 direct labor hours (DLH); however, only 220,000 DLH were used. This means the company had 20,000 DLH of unused capacity (240,000 - 220,000). The budgeted cost rate per DLH is $80, and the actual cost rate per DLH is $75. Therefore, the unused capacity variance is calculated as follows: 
Unused Capacity Variance = (Budgeted Cost Rate - Actual Cost Rate) x Unused Capacity 
Unused Capacity Variance = ($80 - $75) x 20,000 
Unused Capacity Variance = $100,000 favorable 
Therefore, the best choice is B, with a $30,000 favorable variance being incorrect.

Froelech Company Has Developed Capacity Standards