Final answer:
The fixed overhead budget variance for Petra company is an unfavorable variance of $8,000, calculated as the difference between budgeted fixed costs and actual fixed costs. Spreading the overhead means dividing total fixed costs by the quantity of output, which lowers the average fixed cost per unit as production increases.
Step-by-step explanation:
To determine the fixed overhead budget variance, we first need to understand what a budget variance is. A budget variance is the difference between the budgeted or planned amount of expense and the actual amount incurred. For fixed costs, which are costs that do not vary with the level of production like rent or salaries, the variance is calculated based on the budgeted amount versus the actual amount spent regardless of the production level.
In the scenario provided, Petra company has budgeted $45,000 for fixed costs at a normal operating level of 10,000 units. However, in October, the actual fixed costs were $53,000, with an actual production output of 12,000 units. The fixed overhead budget variance is simply:Budgeted Fixed Costs - Actual Fixed Costs = Fixed Overhead Budget Variance$45,000 - $53,000 = -$8,000This represents an unfavorable variance, meaning the company spent $8,000 more on fixed costs than it had budgeted for.Spreading the overhead refers to the concept of dividing the total fixed costs by the number of units produced to determine the average fixed cost per unit. As production increases, this 'spread' over more units leads to a lower average fixed cost per unit, thus benefitting economies of scale.