Question

Webster has the following budgeted costs at its anticipated production level (expressed in hours): variable overhead, $150,000; fixed overhead, $240,000. If Webster now revises its anticipated production slightly downward, it would expect:

A. total fixed overhead of $240,000 and a lower hourly rate for variable overhead.
B. total fixed overhead of $240,000 and the same hourly rate for variable overhead.
C. total fixed overhead of $240,000 and a higher hourly rate for variable overhead.
D. total variable overhead of less than $150,000 and a lower hourly rate for variable
overhead.
E. total variable overhead of less than $150,000 and a higher hourly rate for variable
overhead.

Answer 1

With a reduction in production, Webster's total fixed overhead remains the same at $240,000, but the hourly rate for variable overhead increases as the same total variable costs are spread over fewer hours, leading to answer C.

Step-by-step explanation:

When Webster revises its anticipated production slightly downward, we expect the total fixed overhead to remain unchanged at $240,000 because fixed costs are not affected by changes in the level of production. However, the hourly rate for variable overhead would change. Since variable costs vary with production, a decrease in the production level would typically lead to less total variable overhead, but the hourly rate calculated by dividing total variable overhead by total hours, may increase, since the same total variable costs are spread over fewer production hours.

Therefore, the correct expectation following a revision of production level slightly downward would be:

• Total fixed overhead remains at $240,000.
• The lower production leads to a higher hourly rate for variable overhead because the number of production hours decreases, while the total variable costs may remain the same or only slightly decrease.

In summary, the correct answer is C: total fixed overhead of $240,000 and a higher hourly rate for variable overhead.