Patridge Company uses a standard cost system in which it applies manufacturing overhead to units of product on the basis of direct labour hours.The information below is taken from the company's flexible budget for manufacturing overhead: $\begin{array} { l r r r }
\text { Percent of Capacity } & 70 \% & 80 \% & 90 \% \
\text { Direct Labour Hours } & 21,000 & 24,000 & 27,000 \
\text { Variable Overhead } & \$ 42,000 & \$ 48,000 & \$ 54,000 \
\text { Fixed Overhead } & \$ 108,000 & \$ 108,000 & \$ 108,000 \
\text { Total Overhead } & \$ 150,000 & \$ 156,000 & \$ 162,000
\end{array}$ During the year,the company operated at exactly 80% of capacity,but it applied manufacturing overhead to products based on the 90% level.What was the company's fixed overhead volume variance for the year?
A) $6,000 favourable.
B) $6,000 unfavourable.
C) $12,000 favourable.
D) $12,000 unfavourable.

Question

Patridge Company uses a standard cost system in which it applies manufacturing overhead to units of product on the basis of direct labour hours.The information below is taken from the company's flexible budget for manufacturing overhead: $\begin{array} { l r r r } 
\text { Percent of Capacity } & 70 \% & 80 \% & 90 \% \
\text { Direct Labour Hours } & 21,000 & 24,000 & 27,000 \
\text { Variable Overhead } & \$ 42,000 & \$ 48,000 & \$ 54,000 \
\text { Fixed Overhead } & \$ 108,000 & \$ 108,000 & \$ 108,000 \
\text { Total Overhead } & \$ 150,000 & \$ 156,000 & \$ 162,000
\end{array}$ During the year,the company operated at exactly 80% of capacity,but it applied manufacturing overhead to products based on the 90% level.What was the company's fixed overhead volume variance for the year?
A) $6,000 favourable.
B) $6,000 unfavourable.
C) $12,000 favourable.
D) $12,000 unfavourable.

Quizplus · Accepted Answer

Fixed overhead volume variance measures the difference between budgeted fixed overhead cost based on the level of activity in the flexible budget and the actual fixed overhead cost.

In this case,
Flexible budget at 80% capacity = $108,000 (fixed overhead only)
Flexible budget at 90% capacity = $108,000 (fixed overhead only)

Since the company applied manufacturing overhead based on the 90% level, the company incurred $108,000 in fixed overhead cost while the budget at 80% level was $108,000. Hence, the fixed overhead volume variance would be unfavorable, and the difference between the two budgets is $0. Therefore, the actual fixed overhead cost equals the budgeted fixed overhead cost (no variance difference). The answer is $12,000 unfavourable because flexible budget at 80% capacity and 90% capacity are the same, but the company used a higher level of capacity.

Patridge Company Uses a Standard Cost System in Which It