Question

Which variance is commonly associated with measuring the cost of under- or over-utilization of plant capacity?

A. The variable-overhead spending variance.
B. The variable-overhead efficiency variance.
C. The fixed-overhead budget variance.
D. The fixed-overhead volume variance.
E. The total fixed-overhead variance.

Answer 1

The fixed-overhead volume variance is associated with the cost of under- or over-utilization of plant capacity. It demonstrates how fixed costs per unit decrease as more units are produced, which is the concept of spreading the overhead.

Step-by-step explanation:

The variance commonly associated with measuring the cost of under- or over-utilization of plant capacity is the fixed-overhead volume variance. This variance measures the difference between the budgeted fixed overhead and the fixed overhead applied to production, based on the actual level of activity. It reflects how the fixed costs are spread across units produced and so indicates whether there is under- or over-utilization of capacity.

The term "spreading the overhead" means allocating the total fixed costs, or overhead, over the number of units produced. If the fixed cost is $1,000, the average fixed cost decreases as more units are produced because the same amount of total fixed cost is spread over more units. Visually, the average fixed cost curve would trend downward as output increases. It starts high when only a few units are produced and decreases with each additional unit, illustrating economies of scale and the benefit of spreading fixed costs over a larger production volume.