Question

Petra Company uses standard costs for cost control and internal reporting. Fixed costs are budgeted at $36,000 per month at a normal operating level of 10,000 units of production output. During October, actual fixed costs were $40,000, and actual production output was 12,000 units. Required a Determine the fixed overhead budget variance. b Assume that the company applied fixed overhead to production on a per-unit basis. Determine the fixed overhead volume variance. Was the fixed overhead budget variance from requirement (a) affected because the company operated above the normal activity level of 10,000 units? Explain. Explain the possible causes for the volume variance computed in requirement (b). How is reporting of the volume variance useful to management?

DONT ANSWER IF YOU DON'T EXPLAIN TO ME WHY IS THE FIXED OVH VOLUME VARIANCE FAVORABLE!!!!!! IF THE STANDARD IS 43,200 AND THE FLEXIBLE BUDGET IS 36,000. WHY ISN'T IT 7200 UNFAVORABLE BECAUSE THERE ARE MORE UNITS THAT WILL INCREASE YOUR FC THAN YOUR BUDGET???????

Answer 1

Answer a:

Fixed overhead budget variance = Actual fixed overhead - Budgeted Fixed overhead = 40,000 - 36,000 = $4,000 Unfavorable

Fixed overhead budget variance = $4,000 Unfavorable

Answer b:

If company applied fixed overhead to production on a per-unit basis, predetermined rate = 36000 / 10000 = $3.60 per unit.

Applied Fixed overhead = 3.60 * 12000 = $43,200

Fixed overhead volume variance = Budgeted Fixed overhead - Applied Fixed overhead = 36000 - 43,200 = -$7,200

Hence:

Fixed overhead volume variance = $7,200 Favorable

Answer c:

Fixed overhead budget variance = Actual fixed overhead - Budgeted Fixed overhead

Hence, fixed overhead budget variance from requirement (a) is not affected because the company operated above the normal activity level of 10,000 unit.

Answer d:

As we calculated above:

Fixed overhead volume variance = $7,200 Favorable

Reason:

Fixed overhead volume variance arose due  to the company operated above the normal activity level of 10,000 unit and produced 12,000 units.

Answer e:

Reporting of Fixed overhead volume variance is important and useful to management since it reflects the impact of level of volume / activity and indicates whether actual activity /volume is higher/lower than what was budgeted.

Coming to your query:

WHY IS THE FIXED OVERHEAD VOLUME VARIANCE FAVORABLE? IF THE STANDARD IS 43,200 AND THE FLEXIBLE BUDGET IS 36,000 WHY ISN'T IT 7200 UNFAVORABLE ?

The variance analysis segregates the variances to root causes as whether the variance is due to expenditure per unit is more or the activity /units produced itself is more. Both analysis leads to different actions.

When applied fixed overhead is more due to the fact that quantity produced itself is more, it is favorable since in this instance as against budgeted production of 10,000 they produced 12,000 units which is favorable.

Had the units produced been lesser the volume variance would be unfavorable. Volume variance indicates variance due to volume.

Further we are talking of costs here. If standards are higher and we actually spend less, it is favorable.

Hope this clarifies.