Answer (B) is correct . Overhead is applied according to a rate found by dividing budgeted overhead for a period by an estimated activity level. If actual activity differs from the denominator value (the predetermined activity level), a volume variance will occur. This variance equals the amount of over- or underapplied overhead attributable solely to the difference between budgeted and actual activity. The expected volume is that predicted for the period. Thus, the use of expected volume as a denominator should minimize expected over- or underapplied overhead.
Answer (A) is incorrect because Theoretical (maximum or ideal) capacity is the absolute capacity assuming continuous operations, i.e., on Sundays, holidays, etc., and can never be attained.
Answer (C) is incorrect because Normal volume is an average expected volume over a series of years. It will vary from the expected volume on a year-by-year basis.
Answer (D) is incorrect because Practical capacity is theoretical capacity adjusted downward for holidays, maintenance time, etc. It is very difficult to attain.
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