Question

Which of the following statements is true?

multiple choice
A. the activity variance for a fixed expense will equal zero.
B. the activity variance for a fixed expense will usually be favorable.
C. the activity variance for a fixed expense will usually be unfavorable.
D. the activity variance for a fixed expense can be favorable or unfavorable depending on the actual level of activity.

Answer 1

The correct option is D. The activity variance for a fixed expense can be favourable or unfavourable depending on the actual level of activity. Fixed expenses do not change regardless of the level of production, but the activity variance depends on whether the actual level of activity is higher or lower than expected.

Step-by-step explanation:

The correct option for the given question is D. The activity variance for a fixed expense can be favourable or unfavourable depending on the actual level of activity.

Fixed expenses, also known as overhead costs, do not change regardless of the level of production. However, the activity variance for a fixed expense can be either favourable or unfavourable based on the actual level of activity. Let's understand this with an example:

Imagine you have a fixed expense of $1,000 for rent. If your actual level of activity is lower than expected, such as producing fewer units than anticipated, the fixed expense remains the same, but the cost per unit increases, resulting in an unfavourable activity variance. On the other hand, if your actual level of activity is higher than expected, the fixed expense remains the same, but the cost per unit decreases, leading to a favourable activity variance.