Question

A fixed-overhead volume variance would normally arise when?

1) Actual hours of activity coincide with actual units of production
2) Budgeted fixed overhead is overapplied to production
3) There is a fixed-overhead budget variance
4) Actual fixed overhead exceeds budgeted fixed overhead
5) There is a variable-overhead efficiency variance

Answer 1

A fixed-overhead volume variance arises when the actual production levels differ from the budgeted production levels, causing a discrepancy in the allocated fixed overhead costs per unit. The average fixed cost curve is a hyperbola that reflects the spreading of overhead costs over increasing units of production, lowering the cost per unit.

Step-by-step explanation:

A fixed-overhead volume variance normally arises when there is a difference between the budgeted level of fixed overhead costs and the fixed overhead costs applied to actual production, due to variations in output levels. Specifically, a variance would arise when actual hours of activity do not coincide with budgeted hours of activity leading to over or under-absorption of fixed costs, not necessarily linked to the total amount of fixed overhead incurred. This is different from a situation where fixed costs remain constant regardless of the level of production, such as rent on a factory.

An average fixed cost is calculated by dividing the total fixed cost by the quantity of output produced. For example, if the fixed cost is $1,000 and the output is 250 units, the average fixed cost per unit would be $4. Graphically, the average fixed cost curve is a hyperbola, which continually declines as output increases, representing spreading the overhead. 'Spreading the overhead' means allocating fixed costs over a larger number of units, which lowers the cost per unit as production volume increases.