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How the capacity level chosen to compute the budgeted fixed overhead cost rate affect the production-volume...

How the capacity level chosen to compute the budgeted fixed overhead cost rate affect the production-volume variance?

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Answer #1

Solution:

The formula for Production volume variance

= (Actual units produced – Budgeted production units) X Budgeted Overhead Rate per unit


So, as per the above formula, Production volume Variance is actually the difference of Actual and Budgeted production multiplied by Budgeted Overhead rate per unit.
Thus, Budget fixed overhead cost rate is an affecting factor in the variance. And Budgeted production is considered as per the capacity level chosen.

So, ultimately the capacity level chosen to compute the budgeted fixed overhead cost rate affect the production volume variance.


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