Question

Exercise 10A-1 Fixed Overhead Variances [LO10-4]

Primara Corporation has a standard cost system in which it applies overhead to products based on the standard direct labor-hours allowed for the actual output of the period. Data concerning the most recent year appear below:

Total budgeted fixed overhead cost for the year	$	530,400
Actual fixed overhead cost for the year	$	521,000
Budgeted direct labor-hours (denominator level of activity)		68,000
Actual direct labor-hours		69,000
Standard direct labor-hours allowed for the actual output		66,000

Required:

1. Compute the fixed portion of the predetermined overhead rate for the year. (Round Fixed portion of the predetermined overhead rate to 2 decimal places.)

2. Compute the fixed overhead budget variance and volume variance. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input all amounts as positive values.)

Answer 1

(1)-The fixed portion of the predetermined overhead rate for the year.

The fixed portion of the predetermined overhead rate for the year = Total budgeted fixed overhead cost for the year / Budgeted direct labor-hours

= $530,400 / 68,000 direct labor-hours

= $7.80 per direct labor-hour

(2)-The fixed overhead budget variance and volume variance

The fixed overhead budget variance

The fixed overhead budget variance = Actual fixed overhead cost for the year - Total budgeted fixed overhead cost for the year

= $521,000 - $530,400

= $9,400 F [Favorable]

The fixed overhead volume variance

The fixed overhead volume variance = [BH – SH] x fixed portion of the predetermined overhead rate

= [68,000 hours – 66,000 hours] x $7.80 per direct labor hours

= $15,600 U [Unfavorable]