Herman Company, which applies overhead to production on the basis of machine hours, reported the following data for the period just ended:
Actual units produced: 13,000
Actual fixed overhead incurred: $742,000
Standard fixed overhead rate: $15 per hour
Budgeted fixed overhead: $720,000
Planned level of machine-hour activity: 48,000
If Herman estimates four hours to manufacture a completed unit, the company's fixed-overhead budget variance would be:
A) $22,000 favorable.
B) $22,000 unfavorable.
C) $60,000 favorable.
D) $60,000 unfavorable.
E) None of the other answers are correct.

Question

Quizplus · Accepted Answer

First, we need to calculate the predetermined fixed overhead rate:

Predetermined fixed overhead rate = Budgeted fixed overhead / Planned level of machine-hour activity
Predetermined fixed overhead rate = $720,000 / 48,000 = $15 per hour

Next, we need to calculate the fixed overhead budget variance:

Fixed overhead budget variance = Actual fixed overhead incurred - Budgeted fixed overhead
Fixed overhead budget variance = $742,000 - $720,000 = $22,000 unfavorable

The fact that Herman estimates four hours to complete a unit is irrelevant to the calculation of the fixed overhead budget variance. Therefore, the correct choice is B, $22,000 unfavorable.

Herman Company, Which Applies Overhead to Production on the Basis