Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 35

Fixed Cost Variances

Stoker Corporation applies fixed overhead at the rate of $0.50 per unit. For May, budgeted fixed overhead was $403,000. The production volume variance amounted to $3,000 unfavorable, and the price variance was $10,000 unfavorable.

Required

a. What was the budgeted volume in units for May?

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b. What was the actual volume of units produced in May?

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c. What was the actual fixed overhead incurred for May?

Step 1 of 4

Cost accounting

This system is designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Production volume variance

Under variable costing standard cost are applied as period cost in the period when incurred. Under absorption costing, fixed costs are converted into standard unit cost and applied to product costs. Application of fixed cost to product cost results in variances.

Standard unit cost is calculated by dividing the budgeted fixed manufacturing overheads cost amount with budgeted activity level i.e. budgeted production volume.

Fixed cost is applied to products by multiplying the actual number units produced with standard cost per unit. Actual number of units produced may be different from budgeted production volume.

Production volume variance is difference between budgeted fixed manufacturing cost and applied fixed manufacturing cost which arises due to change in production activity level between budgeted and actual.

Production volume variance is unfavorable, if actual overheads are applied less than the budgeted overhead amount.