Question

If the actual overhead is $152,000 and the flexible budget overhead for actual production is $151,000, the controllable overhead variance is:

A) $1000 favorable
B) $1000 unfavorable
C) 0
D) None of the above

Answer 1

The controllable overhead variance is $1,000 unfavorable when actual overhead costs exceed the flexible budget by $1,000. Overhead or fixed costs divided by output results in a hyperbolic average fixed cost curve demonstrating the efficiency of spreading overhead across more units.

Step-by-step explanation:

If the actual overhead is $152,000 and the flexible budget overhead for actual production is $151,000, the controllable overhead variance is $1,000 unfavorable. This variance indicates that the actual overhead costs exceeded the budgeted costs by $1,000, which is not a favorable outcome for cost management.

The concept of 'overhead' refers to fixed costs which do not change with the level of production.

When dividing this fixed overhead cost by the quantity of output produced, you get the average fixed cost. If the fixed cost is $1,000, the average fixed cost curve would be a hyperbola, decreasing continuously as output increases, representing the idea of 'spreading the overhead.' This means as production increases, the fixed cost per unit decreases, which is more efficient for the business.