Henley Company uses a standard cost system that applies manufacturing overhead to units of product on the basis of direct labour hours.For the month of January,the fixed manufacturing overhead volume variance was $2,220 favourable.The company uses a fixed manufacturing overhead rate of $1.85 per direct labour hour.What were the standard direct labour hours allowed for the month's output in January?
A) They exceeded the denominator hours by 1,000.
B) They fell short of the denominator hours by 1,000.
C) They exceeded the denominator hours by 1,200.
D) They fell short of the denominator hours by 1,200.

Question

Quizplus · Accepted Answer

The fixed manufacturing overhead volume variance is calculated as follows:

Actual Hours – Denominator Hours x Fixed Overhead Rate

Since the variance is favourable, it means that actual hours are less than the denominator hours.

$2,220 = Actual Hours – Denominator Hours x $1.85

Solving for the denominator hours:

Denominator Hours = (Actual Hours – $2,220) / $1.85

We don't have information about the actual hours worked, but we know that the denominator hours must be positive, which means that the actual hours cannot have fallen short of the denominator hours by more than 1,200 (since -1,200 x $1.85 = -$2,220).

Therefore, the standard direct labour hours allowed for the month's output in January must have exceeded the denominator hours by either 1,000 or 1,200. The only option that satisfies this condition is C, which means that the standard direct labour hours allowed for the month's output in January exceeded the denominator hours by 1,200.

Henley Company Uses a Standard Cost System That Applies Manufacturing