Question

The difference between the actual overhead cost and the flexible budget level of overhead for actual production is called:

A) Overhead volume variance
B) Controllable overhead variance
C) Budget variance
D) None of the above

Answer 1

The answer is B) Controllable overhead variance.

Step-by-step explanation:

The difference between the actual overhead cost and the flexible budget level of overhead for actual production is known as the Controllable overhead variance. This variance shows whether the actual overhead costs were effectively controlled in comparison to the budgeted amount for the actual level of production. When it comes to fixed cost or overhead, dividing this cost by the quantity of output produced yields the average fixed cost.

For example, if the fixed cost is $1,000, the average fixed cost decreases as production increases, illustrating the concept of spreading the overhead. This is due to the fact that the same total fixed cost is spread over a greater number of units, lowering the cost per unit.

The curve representing average fixed cost typically slopes downward as more units are produced, approaching closer to the horizontal axis but never actually reaching zero. This visual representation helps to understand how an increase in production can lead to a more efficient allocation of fixed costs over the total output, effectively reducing the cost burden on each individual unit.