Question

information on carney company's fixed overhead costs follows: overhead applied $ 360,600 actual overhead 386,400 budgeted overhead 370,500 required: what are the fixed overhead price and production volume variances?

Answer 1

The fixed overhead price variance for Carney Company is $15,900 unfavorable, and the production volume variance is $9,900 favorable. The average fixed cost curve shows a downward slope as production increases, illustrating the concept of 'spreading the overhead,' i.e., allocating fixed costs over a larger number of production units to reduce cost per unit.

Step-by-step explanation:

The question involves calculating the fixed overhead price and production volume variances for Carney Company. The fixed overhead price variance is calculated by subtracting the budgeted overhead from the actual overhead, which in this case is $386,400 - $370,500 = $15,900 unfavorable.

This indicates that the actual fixed overhead costs were higher than expected.

The production volume variance is calculated by subtracting the overhead applied from the budgeted overhead, resulting in $370,500 - $360,600 = $9,900 favorable.

This tells us that the amount of overhead applied to production was less than anticipated based on the budgeted amounts, implying a higher efficiency in utilizing fixed overhead resources.

In terms of understanding average fixed cost and spreading the overhead, consider a fixed cost of $1,000. The average fixed cost curve would show a continuous decrease as production increases because the same amount of overhead is spread over more units.

This downward slope of the average fixed cost curve represents the action of 'spreading the overhead,' which simply means allocating the fixed costs over a larger number of units, thereby reducing the cost per unit.