This is the fixed overhead spending variance, not the fixed overhead production-volume variance. The fixed overhead spending variance is the difference between actual fixed overhead incurred for the month (given as $101,200) and budgeted fixed overhead for the month (given as $100,000). Since it is positive, it is unfavorable. The fixed overhead production-volume variance is the difference between the budgeted amount of fixed overhead and the amount of fixed overhead applied (standard rate × standard input for the actual level of output). We already said that the budgeted fixed overhead is given as $100,000. The amount applied must be calculated from the information given. The amount of fixed overhead applied is the application rate per machine hour multiplied by the number of machine hours allowed for the actual output. The application rate per machine hour is the annual budgeted fixed overhead divided by the annual number of machine hours planned to be used.
The fixed overhead production-volume variance is the difference between the budgeted amount of fixed overhead and the amount of fixed overhead applied (standard rate × standard input for the actual level of output). It is Budgeted Fixed Overhead minus Applied Fixed Overhead. This is the only time for an expense variance calculation that a budgeted cost amount comes before an actual cost amount, and yet a negative amount (actual is higher than budget) is a favorable variance. Nanjones applies overhead based on planned machine hours using a predetermined annual rate. The amount of the planned fixed manufacturing overhead was $1,200,000 and the amount of planned machine hours were 240,000. Thus, the standard application rate for fixed manufacturing overhead was $5 per machine hour ($1,200,000 ÷ 240,000). The number of machine hours allowed for the actual level of output in November was 21,000. Now we can calculate the amount of applied fixed manufacturing overheads as $105,000 ($5 × 21,000). The budgeted amount of fixed manufacturing overhead is the static budget amount planned for November of $100,000. Therefore, the fixed overhead volume variance is: $100,000 ? $105,000 = ($5,000) favorable. The fixed overhead production-volume variance is caused by the actual production level being different from the production level used to calculate the budgeted fixed overhead rate. It measures usage of facilities, and so it is not a comparison of actual incurred cost with budgeted cost the way other variances are. When production facilities are used more than was planned (actual is greater than budget), the variance will be favorable because the company has gotten more use from its capacity than it thought it would. When production facilities are used less than was planned (actual is less than budget), the variance is unfavorable because it means the company had unused capacity. The amount of the variance is a rough measure of the cost of the unused capacity. When the company has unused capacity, the cost for that unused capacity should not be passed on to customers in higher prices. Instead, the company should find other uses for the capacity. Management may consider developing a new product to make use of the unused capacity, renting out part of the factory to another company, taking contract work that other companies are outsourcing, or even selling the unused facilities. This variance helps management to see the cost of the unused capacity. Fortunately for Nanjones, it is not in that situation. Its production-volume variance is favorable.
This answer is the amount of applied fixed overhead minus the budgeted fixed overhead. The fixed overhead production-volume variance is the budgeted amount of fixed overhead minus the amount of fixed overhead applied (standard rate × standard input for the actual level of output). This is the only time for an expense variance calculation that a budgeted cost amount comes before an actual cost amount, and yet a negative amount is a favorable variance. A negative amount, meaning the amount of fixed overhead applied was greater than the budgeted amount, is favorable because it means the facilities were used more than was planned, which is good.
The fixed overhead production-volume variance is the difference between the budgeted amount of fixed overhead and the amount of fixed overhead applied (standard rate × standard input for the actual level of output). If in the calculation of fixed manufacturing overhead applied the static budget amount of machine hours (22,000) were used, we would come up with an amount of $110,000 FOH applied. And the fixed overhead volume variance would be $10,000 ($110,000 ? $100,000) favorable; which is incorrect. In the calculation of fixed overhead applied, we should use the number of standard machine hours for the actual level of output (21,000 hours). See the correct answer for a complete explanation and information on interpreting this variance.
|
