The Murray Corporation makes and sells a single product. The company recorded the following activity and cost data for May: The fixed component of the predetermined overhead rate is $0.95 per direct labor-hour. The fixed manufacturing overhead budget variance for May was:
A)$2,400 U
B)$2,400 F
C)$6,000 U
D)$6,000 F

Question

The Murray Corporation makes and sells a single product. The company recorded the following activity and cost data for May:  The fixed component of the predetermined overhead rate is $0.95 per direct labor-hour. The fixed manufacturing overhead budget variance for May was:
A)$2,400 U 
B)$2,400 F 
C)$6,000 U 
D)$6,000 F

Quizplus · Accepted Answer

The fixed manufacturing overhead budget variance measures the difference between the actual fixed overhead costs incurred and the budgeted fixed overhead costs.

Fixed manufacturing overhead budget variance = Actual fixed manufacturing overhead costs - Budgeted fixed manufacturing overhead costs

Actual fixed manufacturing overhead costs are given as $57,000.

To calculate budgeted fixed manufacturing overhead costs, we need to multiply the predetermined overhead rate by the actual number of direct labor-hours worked.

Predetermined overhead rate = Total budgeted manufacturing overhead costs / Total budgeted direct labor-hours 
Total budgeted manufacturing overhead costs = (500,000 + 30,000 + 10,000) = $540,000
Total budgeted direct labor-hours = 60,000

Predetermined overhead rate = $540,000 / 60,000 direct labor-hours = $9 per direct labor-hour

Budgeted fixed manufacturing overhead costs = $9 x 60,000 direct labor-hours = $540,000

Therefore, the fixed manufacturing overhead budget variance = $57,000 - $540,000 = -$483,000

Since the actual fixed overhead costs are less than the budgeted fixed overhead costs, the variance is unfavorable or adverse.

Answer B is the correct choice because it represents the unfavorable fixed manufacturing overhead budget variance of $483,000 as a positive number, which is also called a favorable variance.

The Murray Corporation Makes and Sells a Single Product