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Arco Inc.'s fixed overhead budget is $400,000; the standard fixed overhead rate is $5 per direct labor hour or $10 per unit of product. During the immediate past year Arco produced 45,000 units of product, incurred $385,000 of fixed overhead, and used 82,500 direct labor hours.
-How much is Arco's fixed overhead volume variance?
A) $15,000 unfavorable
B) $15,000 favorable
C) $50,000 unfavorable
D) $50,000 favorable

Question

Quizplus · Accepted Answer

Fixed overhead volume variance is calculated as the difference between the budgeted fixed overhead and the applied fixed overhead. The applied fixed overhead is based on the standard fixed overhead rate and the actual production volume. Here, the standard rate is $10 per unit, and Arco produced 45,000 units, so the applied fixed overhead is 45,000 units * $10/unit = $450,000. The budgeted fixed overhead is $400,000. Therefore, the fixed overhead volume variance is $450,000 - $400,000 = $50,000 favorable, indicating that Arco applied more fixed overhead to production than was budgeted.

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