Question

Approach Company, which applies overhead to production on the basis of machine hours, reported the following data for the period just ended:
Actual units produced: 10,800
Actual fixed overhead incurred: $736,000
Standard fixed overhead rate: $15 per hour
Budgeted fixed overhead: $700,000
Planned level of machine-hour activity: 45,000
If Approach estimates four hours to manufacture a completed unit, the company's fixed-overhead volume variance would be:

Answer 1

Answer:

Fixed overhead volume variance=  $53920 FAVORABLE

Explanation:

The formula for fixed overhead volume variance is as follows:

FOVV= Actual Output x FOAR - Budgeted Output x FOAR

FOAR= fixed overhead absorption rate

In order to calculate FOVV we need to first compute fixed overhead absorption rate so that we can absorb overheads to volume/output.

The formula for FOAR is as follows:

FOAR= Budgeted overhead ÷ budgeted base

In this question budgeted overheads are $700000 and budgeted base is machine hours 45000.

FOAR= $700000 ÷ 45000

FOAR= $15.56 PER MACHINE HOUR.

One completed unit requires an estimated four machine hours to complete so the fixed overhead absorption rate per unit would be $62.22 ($15.56×4).

FIXED OVERHEAD ABSORPTION RATE PER UNIT = $62.22

Now that we have FOAR, we have to calculate budgeted output which is not readily available in the question.

The budgeted fixed overhead = $700000

Standard fixed overhead rate = $15 per hour

If we divide budgeted fixed overheads upon standard fixed overhead rate we will get total budgeted number of hours.

Budgeted number of hours= $700000÷$15

Budgeted number of hours= 46666.67

Now One completed unit requires an estimated four machine hours to complete, if we divide budgeted number of hours upon 4 we will get budgeted output as follows;

Budgeted output= 46666.67÷4

Budgeted output= 11666.67

Now we can substitute our workings into the formula of fixed overhead volume variance as follows:

FOVV= Actual Output x FOAR - Budgeted Output x FOAR

FOVV= (10800×$62.22)  -  (11666.67×$62.22)

FOVV= $671976 - $725896

FOVV=  $53920

It seems the entities' ACTUAL FIXED OVERHEADS are lesser than expected which also means entity's budget has been well-spent and cost controlled.