Question

Case 12-66 (Part Level Submission)

You have started working as a cost accountant for a firm that has only been in business for one month. The firm is able to buy a new type of biodegradable plastic at a fixed price of $100 per roll. The plastic is then cut and sealed to make garbage bags. Fixed factory overhead is estimated to be $125,000 per month. During this past month, 8,000 cartons of garbage bags were produced, which represents 80% of the activity volume. You are given the following information:

Rolls of plastic used			40
Variable overhead incurred			$61,000
Overhead efficiency variance			$5,000	U
Standard costs per carton of garbage bags:
	Labour hours		2
	Wage rate		$8	per hour
	Total overhead		$20
	Rolls of plastic		0.004	rolls

Calculate the following:

Fixed overhead volume variance $___________ favourable, unfavourable, neither

Answer 1

Fixed Overhead Volume Variance = (Actual Output - Budgeted Output) X Fixed Overhead Absorption Rate per Unit
Fixed Overhead Absorption Rate per Unit = $125,000 (Fixed Overhead) / 10,000 Cartons (Budgeted Output)
Fixed Overhead Absorption Rate per Unit = $12.50 per Carton
Budgeted Output = 8,000 Cartons (Actual Production) / 80%
Budgeted Output = 10,000 Cartons
Fixed Overhead Volume Variance = (8,000 Cartons - 10,000 Cartons) X $12.50
Fixed Overhead Volume Variance = $25,000 (U)