Fixed Overhead Variances - Cost Accounting

1. What is Nova Corp.'s fixed overhead budget variance for August?
   Answer: $15,000 Unfavorable The fixed overhead budget variance is the difference between actual fixed overhead costs and the budgeted fixed overhead costs from the static (or flexible) budget. The amount of fixed overhead in the flexible budget does not change with the activity level. Budgeted Fixed Overhead = $480,000. Actual Fixed Overhead = $495,000. Budget Variance = Actual FOH - Budgeted FOH = $495,000 - $480,000 = $15,000. Since actual costs exceeded the budget, the variance is Unfavorable. All other information about production levels and hours is irrelevant for calculating the budget variance.
2. Which of the following statements is correct regarding the company's fixed overhead variances?
   Answer: The fixed overhead volume variance is $27,000 unfavorable. Let's calculate both variances. Budget Variance = Actual FOH - Budgeted FOH = $370,000 - $360,000 = $10,000 Unfavorable. (Choice B is incorrect). Volume Variance: 1. Predetermined Rate = $360,000 / (20,000 units * 3.0 MH/unit) = $360,000 / 60,000 MH = $6.00 per MH. 2. Standard Hours Allowed = 18,500 units * 3.0 MH/unit = 55,500 MH. 3. Applied FOH = 55,500 MH * $6.00/MH = $333,000. 4. Volume Variance = Budgeted FOH - Applied FOH = $360,000 - $333,000 = $27,000 Unfavorable. (Choice A is correct). Total Variance = $10,000 U + $27,000 U = $37,000 Underapplied. (Choice C is incorrect). Choice D provides incorrect reasoning for the volume variance.
3. If the company's actual fixed overhead for the month was $262,000, what is the fixed overhead budget variance?
   Answer: $12,000 Unfavorable The flexible budget formula separates costs into fixed and variable components. The fixed component is the constant amount, which is $250,000 per month. This represents the budgeted fixed overhead. The budget variance is the difference between this budgeted amount and the actual fixed overhead incurred. Budget Variance = Actual FOH - Budgeted FOH = $262,000 - $250,000 = $12,000. Since actual costs exceeded the budget, the variance is Unfavorable.
4. A company has budgeted annual fixed overhead of $750,000 and applies overhead at a rate of $30 per machine hour. During the year, actual fixed overhead was $750,000. The fixed overhead volume variance was $60,000 unfavorable. What were the standard machine hours allowed for the actual output?
   Answer: 23,000 hours The problem requires working backwards from the volume variance to find the standard hours allowed (SH). 1. The volume variance formula is: Volume Variance = Budgeted FOH - Applied FOH. 2. Applied FOH is calculated as: Standard Rate × Standard Hours Allowed (SH). 3. We are given: Budgeted FOH = $750,000; Volume Variance = $60,000 Unfavorable; Standard Rate = $30/hour. 4. An unfavorable volume variance means Budgeted FOH > Applied FOH. So, +$60,000 = $750,000 - Applied FOH. 5. Solving for Applied FOH: Applied FOH = $750,000 - $60,000 = $690,000. 6. Now, solve for SH: Applied FOH = Rate × SH => $690,000 = $30 × SH. 7. SH = $690,000 / $30 = 23,000 hours.
5. Kilo Company's fixed overhead budget variance was zero for the year. The fixed overhead volume variance was $40,000 favorable. The denominator activity level was 20,000 machine hours, and the standard is 2 machine hours per unit. Budgeted fixed overhead was $200,000. How many units were actually produced during the year?
   Answer: 12,000 units This problem requires working backwards to find the number of units produced. 1. Find Applied FOH. Volume Variance = Budgeted FOH - Applied FOH. A favorable variance means Applied > Budgeted. So, -$40,000 = $200,000 - Applied FOH. Applied FOH = $240,000. 2. Find the predetermined FOH rate. Rate = Budgeted FOH / Denominator Hours = $200,000 / 20,000 MH = $10 per MH. 3. Find the standard hours allowed (SH). Applied FOH = Rate SH. $240,000 = $10/MH SH. SH = 24,000 hours. 4. Find the number of units produced. SH = Actual Units Standard hours/unit. 24,000 hours = Actual Units 2 hours/unit. Actual Units = 12,000 units.
6. A company sets its denominator activity level equal to the master budget production forecast for the year. An unexpected economic boom led the company to produce 20% more units than forecasted in the master budget. If actual fixed costs were equal to budgeted fixed costs, which of the following statements is true regarding the fixed overhead volume variance?
   Answer: The volume variance will be favorable. The volume variance arises from the difference between the denominator activity level and the standard hours allowed for actual production. Here, the denominator level is based on the master budget forecast. Since actual production was 20% higher than the forecast, the standard hours allowed for actual production will be higher than the denominator hours. This means more fixed overhead was applied to production than was budgeted ($ Applied > $ Budgeted). When applied overhead exceeds budgeted overhead, the result is a favorable volume variance, indicating better-than-planned utilization of capacity.
7. Company A sets its denominator level for calculating its fixed overhead rate at practical capacity. Company B, a direct competitor with identical cost structures and production technology, sets its denominator level at the master-budget volume for the year. In a year where both companies produce at a level significantly below practical capacity but equal to the master-budget volume, how would Company A's fixed overhead volume variance compare to Company B's?
   Answer: Company A's volume variance would be unfavorable, while Company B's would be zero. For Company B, the denominator level (master-budget volume) is equal to the standard hours allowed for actual production. Therefore, budgeted fixed overhead equals applied fixed overhead, and the volume variance is zero. For Company A, the denominator level (practical capacity) is higher than the standard hours allowed for actual production. This means budgeted fixed overhead will be greater than applied fixed overhead, resulting in an unfavorable volume variance. This variance highlights the cost of Company A's unused capacity.
8. A company applied $450,000 of fixed manufacturing overhead to its production during the year. The fixed overhead volume variance was $25,000 favorable. What was the amount of budgeted fixed overhead for the year?
   Answer: $425,000 The formula for the volume variance is: Volume Variance = Budgeted FOH - Applied FOH. A favorable variance means that applied FOH was greater than budgeted FOH. Let's denote a favorable variance with a negative sign. -$25,000 = Budgeted FOH - $450,000. Solving for Budgeted FOH: Budgeted FOH = $450,000 - $25,000 = $425,000.
9. Theta Industries has a total fixed overhead variance of $15,000 unfavorable. The fixed overhead volume variance is $9,000 unfavorable, and the budgeted fixed overhead for the period was $200,000. If the standard fixed overhead rate is $20 per direct labor hour and normal capacity is 10,000 direct labor hours, how many direct labor hours were actually worked during the period?
   Answer: 9,550 hours representing the actual activity level that resulted in underabsorption of fixed overhead When analyzing fixed overhead variances, you need to understand that total fixed overhead variance splits into budget variance and volume variance. The volume variance specifically measures the difference between normal capacity and actual activity levels. Given information shows: Total fixed overhead variance = $15,000 unfavorable, Volume variance = $9,000 unfavorable, and Standard rate = $20 per direct labor hour. Since total variance equals budget variance plus volume variance, the budget variance must be $6,000 unfavorable ($15,000 - $9,000). The volume variance formula is: (Normal capacity hours - Actual hours) × Standard rate. Substituting: $9,000 = (10,000 - Actual hours) × $20. Solving: $9,000 ÷ $20 = 450 hours difference. Therefore: Actual hours = 10,000 - 450 = 9,550 hours. Answer C correctly identifies 9,550 hours as the actual activity level that created underabsorption of fixed overhead due to operating below normal capacity. Answer A (10,450 hours) incorrectly adds the variance difference instead of subtracting it, and wrongly suggests higher activity levels when the unfavorable volume variance indicates lower activity. Answer B (9,750 hours) makes the error of trying to adjust for both variances when only the volume variance affects activity levels. The budget variance reflects spending differences, not activity differences. Answer D (8,500 hours) represents an extreme miscalculation that doesn't align with the variance mathematics. Study tip: Remember that unfavorable volume variance always means actual activity was below normal capacity. Use the volume variance formula to work backwards from variance amounts to find actual activity levels.
10. Based on the information provided, what is the fixed overhead budget variance for Pinnacle Manufacturing?
    Answer: $4,500 unfavorable representing excess spending compared to the original budget for the period The fixed overhead budget variance compares actual fixed overhead to budgeted fixed overhead: $184,500 - $180,000 = $4,500 unfavorable. This variance measures only the spending aspect (actual vs. budgeted), not production volume effects. Choice B incorrectly combines different variance types. Choice C describes the volume variance, not budget variance. Choice D represents total variance, not just budget variance.
11. Apex Industries reported actual fixed manufacturing overhead of $520,000 for the year. The company recorded a fixed overhead budget variance of $15,000 unfavorable. The predetermined fixed overhead rate was $25 per direct labor-hour, based on a denominator level of 20,000 direct labor-hours. What was the budgeted fixed overhead for the year?
    Answer: $505,000 The fixed overhead budget (or spending) variance is the difference between actual fixed overhead and budgeted fixed overhead. The formula is: Budget Variance = Actual FOH - Budgeted FOH. An unfavorable variance means actual costs were higher than budgeted. So, $15,000 U = $520,000 - Budgeted FOH. Rearranging the formula to solve for Budgeted FOH gives: Budgeted FOH = $520,000 - $15,000 = $505,000. The denominator level and rate are extraneous information for this specific question.
12. Meridian Industries applies fixed overhead using direct labor hours. The company's predetermined fixed overhead rate is $8 per direct labor hour, based on budgeted fixed overhead of $320,000 and normal capacity of 40,000 direct labor hours. During the period, 38,000 direct labor hours were worked, actual fixed overhead was $325,000, and applied fixed overhead was $304,000. What amount represents the fixed overhead volume variance?
    Answer: $16,000 unfavorable representing the underabsorption of fixed overhead due to operating below normal capacity Volume variance = Budgeted fixed overhead - Applied fixed overhead = $320,000 - $304,000 = $16,000 unfavorable. This can also be calculated as (Normal capacity hours - Actual hours) × Standard rate = (40,000 - 38,000) × $8 = $16,000 unfavorable. The variance is unfavorable because actual hours (38,000) were less than normal capacity (40,000), resulting in underabsorption. Choice A has wrong direction and amount. Choice C has wrong direction and misinterprets the variance. Choice D gives the wrong amount and mischaracterizes the variance.
13. Using the data provided above, calculate both the fixed overhead budget variance and volume variance for Omega Industries in February.
    Answer: Budget variance: $2,000 favorable; Volume variance: $22,500 unfavorable due to underutilization of capacity Fixed overhead variance analysis splits total variance into two components: budget variance (comparing actual costs to budgeted costs) and volume variance (measuring the effect of operating at different capacity levels than planned). The budget variance is straightforward: $\text{Actual fixed overhead} - \text{Budgeted fixed overhead} = \$448,000 - \$450,000 = \$2,000 \text{ favorable}$. Since actual costs were less than budgeted, this creates a favorable variance. The volume variance measures capacity utilization effects: $(\text{Normal capacity hours} - \text{Actual hours}) \times \text{Standard rate} = (18,000 - 17,100) \times \$25 = \$22,500 \text{ unfavorable}$. This unfavorable variance occurs because Omega operated below normal capacity, meaning fixed costs weren't fully absorbed into production. Answer D correctly identifies both variances and explains that the volume variance stems from underutilization of capacity. Answer A incorrectly calculates the budget variance as $20,500 unfavorable (perhaps confusing it with volume variance) and misidentifies the volume variance as favorable, when operating below capacity always creates unfavorable volume variance. Answer B switches the variance amounts, incorrectly assigning the $20,500 to volume variance and $2,000 to budget variance. Answer C completely miscalculates the budget variance as $22,500 unfavorable and incorrectly shows volume variance as favorable, demonstrating fundamental confusion about the variance calculations. Remember: budget variance compares actual to budgeted fixed costs, while volume variance measures the absorption effect of operating above or below normal capacity. Operating below normal capacity always creates unfavorable volume variance because fixed costs are underabsorbed.
14. Based on this information, what was the denominator level of activity in machine hours?
    Answer: 10,000 machine hours This requires a multi-step calculation: 1. First, find the budgeted fixed overhead (FOH). Budget Variance = Actual FOH - Budgeted FOH. -$8,000 = $392,000 - Budgeted FOH Budgeted FOH = $392,000 + $8,000 = $400,000. 2. Next, use the budgeted FOH and the predetermined rate to find the denominator activity level (DH). Predetermined Rate = Budgeted FOH / DH $40 = $400,000 / DH DH = $400,000 / $40 = 10,000 machine hours.
15. For the month of May, a company reported that its total fixed overhead was overapplied by $7,000. During the same period, the company had a fixed overhead budget variance of $3,000 unfavorable. What was the company's fixed overhead volume variance for May?
    Answer: $10,000 Favorable Total Over/Underapplied Overhead is the sum of the budget and volume variances. Overapplied overhead is a net favorable variance. Let F be favorable (-) and U be unfavorable (+). Total Variance = Budget Variance + Volume Variance -$7,000 (Overapplied) = +$3,000 (Unfavorable) + Volume Variance Solving for the Volume Variance: Volume Variance = -$7,000 - $3,000 = -$10,000. A negative result indicates a favorable variance. Therefore, the volume variance is $10,000 Favorable.
16. What is the total under- or overapplied fixed overhead for the year?
    Answer: $25,000 underapplied Total under- or overapplied overhead is the difference between the actual overhead incurred and the overhead applied to production. Total Variance = Actual FOH - Applied FOH = $210,000 - $185,000 = $25,000. Since actual costs are greater than the amount applied, the overhead is underapplied. Alternatively, one could sum the individual variances: Budget Variance = $210,000 - $200,000 = $10,000 Unfavorable. Volume Variance = $200,000 - $185,000 = $15,000 Unfavorable. Total Variance = $10,000 U + $15,000 U = $25,000 Unfavorable (Underapplied).
17. What are the company's fixed overhead budget and volume variances for July?
    Answer: Budget variance, $4,000 Favorable; Volume variance, $5,000 Favorable. The information about the efficiency variance is extraneous; in a 2- or 3-variance analysis, the fixed overhead efficiency variance is zero. Actual machine hours are also irrelevant for these two variances. Budget Variance = Actual FOH - Budgeted FOH = $146,000 - $150,000 = -$4,000, which is $4,000 Favorable. Volume Variance: 1. Predetermined FOH Rate = Budgeted FOH / Denominator Hours = $150,000 / 30,000 MH = $5 per MH. 2. Applied FOH = Standard Hours Allowed × Rate = 31,000 MH × $5/MH = $155,000. 3. Volume Variance = Budgeted FOH - Applied FOH = $150,000 - $155,000 = -$5,000, which is $5,000 Favorable.
18. A factory manager's performance is being evaluated. The company experienced a large unfavorable fixed overhead volume variance for the period. Which of the following is the most likely cause and the most appropriate conclusion regarding the manager's performance?
    Answer: Market demand for the company's product was lower than forecasted, leading to lower production levels, a factor largely outside the manager's control. The fixed overhead volume variance is driven by the level of production relative to the denominator level. An unfavorable variance means production was lower than the denominator level. This is often caused by lower-than-expected sales demand, which is a marketing or general economic issue, not typically something the factory manager can control. The other options describe a budget variance (A), a variable overhead efficiency variance (B), or are irrelevant to fixed overhead (D).
19. Assuming the company's actual fixed costs were exactly as budgeted, which of the following statements about the fixed overhead variances is correct?
    Answer: The budget variance is zero, and the volume variance is unfavorable. The budget variance is the difference between actual and budgeted fixed costs. Since they were equal, the budget variance is zero. The volume variance arises from the difference between the denominator activity level (40,000 MH) and the standard hours allowed for actual output (35,000 MH). Because the standard hours allowed are less than the denominator level, fixed overhead was under-applied, resulting in an unfavorable volume variance. This signifies that the company operated at a lower capacity level than planned.
20. A company is setting its budget for the upcoming year and is considering raising its denominator activity level from 40,000 to 50,000 direct labor-hours, while budgeted fixed overhead costs are expected to remain at $400,000. How would this change affect the predetermined fixed overhead rate and the fixed overhead volume variance, assuming actual production requires 45,000 standard direct labor-hours?
    Answer: The rate would decrease, and the volume variance would change from favorable to unfavorable. First, the effect on the rate: The rate is Budgeted FOH / Denominator Hours. Increasing the denominator from 40,000 to 50,000 hours will cause the rate to decrease (from $10/hr to $8/hr). Second, the effect on the volume variance: Original situation: Denominator = 40,000; Standard hours = 45,000. Since standard hours > denominator, the variance is favorable. New situation: Denominator = 50,000; Standard hours = 45,000. Since standard hours < denominator, the variance becomes unfavorable. Therefore, the rate decreases, and the variance changes from favorable to unfavorable.

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