The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs:$\begin{array}{lrr}
\text { Actual total factory overhead cost incurred } & \$ 24,000 \
\text { Actual fixed overhead cost incurred } & \$ 10,000 \
\text { Budgeted fixed overhead cost } & \$ 11,000 \
\text { Actual machine hours } & 5,000 \
\text { Standard machine hours allowed for the units manufactured } & 4,800 \
\text { Denominator volume-machine hours } & 5,500 \
\text { Standard variable overhead rate per machine hour } & \$ 3.00
\end{array}$Under a three-variance breakdown (decomposition) of the total factory overhead variance, the fixed factory overhead production-volume variance (to the nearest whole dollar) is:
A) $400 favorable.
B) $600 unfavorable.
C) $1,400 favorable.
D) $1,400 unfavorable.
E) $2,000 favorable.

Question

The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs:$\begin{array}{lrr}
\text { Actual total factory overhead cost incurred } & \$ 24,000 \
\text { Actual fixed overhead cost incurred } & \$ 10,000 \
\text { Budgeted fixed overhead cost } & \$ 11,000 \
\text { Actual machine hours } & 5,000 \
\text { Standard machine hours allowed for the units manufactured } & 4,800 \
\text { Denominator volume-machine hours } & 5,500 \
\text { Standard variable overhead rate per machine hour } & \$  3.00
\end{array}$Under a three-variance breakdown (decomposition) of the total factory overhead variance, the fixed factory overhead production-volume variance (to the nearest whole dollar) is:
A) $400 favorable.
B) $600 unfavorable.
C) $1,400 favorable.
D) $1,400 unfavorable.
E) $2,000 favorable.

Quizplus · Accepted Answer

The fixed factory overhead production-volume variance is calculated as the difference between the budgeted fixed overhead and the fixed overhead applied to production, based on the standard machine hours allowed. The formula is: $ \text{Fixed Overhead Production-Volume Variance} = (\text{Denominator volume - Standard machine hours allowed}) \times \text{Fixed overhead rate per machine hour} $. The fixed overhead rate per machine hour is $ \$11,000 / 5,500 = \$2 $ per machine hour. Thus, the variance is $ (5,500 - 4,800) \times \$2 = 700 \times \$2 = \$1,400 $ unfavorable, because the standard hours allowed (4,800) are less than the denominator volume (5,500), indicating less production than planned.

The Following Information for the Past Year Is Available from Thinnews