Answer the following questions using the information below:
Munoz, Inc., produces a special line of plastic toy racing cars. Munoz, Inc., produces the cars in batches. To manufacture a batch of the cars, Munoz, Inc., must set up the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of car.
Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2011:

-Calculate the production-volume variance for fixed setup overhead costs.
A)$3,325 unfavorable
B)$400 unfavorable
C)$3,325 favorable
D)$400 favorable

Question

Answer the following questions using the information below:
Munoz, Inc., produces a special line of plastic toy racing cars. Munoz, Inc., produces the cars in batches. To manufacture a batch of the cars, Munoz, Inc., must set up the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of car.
Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2011:
 
-Calculate the production-volume variance for fixed setup overhead costs.
A)$3,325 unfavorable 
B)$400 unfavorable 
C)$3,325 favorable 
D)$400 favorable

Quizplus · Accepted Answer

The formula for production-volume variance is:

Production-Volume Variance = (Standard Hours – Actual Hours) x Fixed Overhead Rate

Fixed Overhead Rate = Fixed Setup Overhead Costs / Standard Setup Hours

Fixed Overhead Rate = $48,000 / 1,200 hours = $40 per hour

Standard Hours = 800
Actual Hours = 1,000
Production-Volume Variance = (800 – 1,000) x $40 = $8,000 unfavorable

However, we need to find the variance for fixed setup overhead costs, not total overhead costs. From the information given in the problem, we know that only some of the setup overhead costs are fixed, while others are variable. Since we do not know the breakdown of fixed and variable costs, we cannot calculate the variance for only the fixed costs. Therefore, the best choice is C, which is the closest to the actual answer we calculated for the total production-volume variance.

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