This amount is the difference between the actual variable overhead and the budgeted fixed overhead. See the correct answer for a complete explanation.
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This answer results from using the actual amount of labor hours used (94,000) to calculate the budgeted fixed overhead costs instead of the budgeted labor hours (100,000). We use the budgeted amount of labor hours (100,000) because we need to calculate what the total budgeted fixed overhead amount was that the company used in its calculation of the cost per direct labor hour. To calculate the budgeted cost per direct labor hour, the company divided the total budgeted fixed cost by the budgeted number of labor hours. Therefore, to find the budgeted fixed manufacturing cost, we reverse the process and multiply the budgeted cost per labor hour by the number of budgeted labor hours. The amount of budgeted fixed cost is the same for any level of production. Budgeted fixed cost is the same in the flexible budget as it is in the static budget. So in calculating the budgeted fixed manufacturing overhead, it does not matter what the actual level of production was.
The fixed overhead budget/spending variance is the difference between the actual fixed overhead incurred and the budgeted fixed overhead costs. The actual amount of fixed overhead costs was $540,000. The budgeted amount of fixed overhead was $500,000 ($5 of fixed overhead per labor hour multiplied by 100,000 budgeted labor hours). We use the budgeted amount of labor hours (100,000) because we need to calculate what the total budgeted fixed overhead amount was that the company used in its calculation of the cost per direct labor hour. To calculate the budgeted cost per direct labor hour, the company divided the total budgeted fixed cost by the budgeted number of labor hours. Therefore, to find the budgeted fixed manufacturing cost, we reverse the process and multiply the budgeted cost per labor hour by the number of budgeted labor hours. The amount of budgeted fixed cost is the same for any level of production. Budgeted fixed cost is the same in the flexible budget as it is in the static budget. So in calculating the budgeted fixed manufacturing overhead, it does not matter what the actual level of production was. The fixed overhead budget/spending variance is $40,000 unfavorable ($540,000 ? $500,000). The actual fixed overhead costs incurred were higher than the budgeted amount, so the variance is unfavorable.
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