Question

Sussex Company uses a standard cost system and prepared the following budget for May when 24,000 machine hours of activity were anticipated: variable overhead, $48,000; fixed overhead: $240,000. Actual data for May were:

Standard machine hours allowed for output attained: 25,000
Actual machine hours worked: 24,000
Variable overhead incurred: $50,000
Fixed overhead incurred: $250,000
The fixed-overhead budget and volume variances are:
Fixed-Overhead Budget Variance Fixed-Overhead Volume Variance
A. $0 $10,000 favorable
B. $10,000 favorable $0
C. $10,000 favorable $10,000 unfavorable
D. $10,000 unfavorable $0
E. $10,000 unfavorable $10,000 favorable

Answer 1

The fixed-overhead budget variance is $10,000 unfavorable and the fixed-overhead volume variance is $10,000 favorable. Correct option is E.

Step-by-step explanation:

The fixed-overhead budget variance is calculated as the difference between the actual fixed overhead incurred and the budgeted fixed overhead. In this case, the budgeted fixed overhead was $240,000 and the actual fixed overhead incurred was $250,000. Therefore, the fixed-overhead budget variance is $10,000 unfavorable.

The fixed-overhead volume variance is calculated by multiplying the standard fixed overhead rate by the difference between the standard machine hours allowed for output and the actual machine hours worked. In this case, the standard fixed overhead rate is $240,000/24,000 machine hours = $10 per machine hour. The difference between the standard machine hours allowed (25,000) and the actual machine hours worked (24,000) is 1,000 machine hours. Therefore, the fixed-overhead volume variance is $10 per machine hour x 1,000 machine hours = $10,000 favorable.

Therefore, the fixed-overhead budget variance is $10,000 unfavorable and the fixed-overhead volume variance is $10,000 favorable.