Question

Primara Corporation has a standard cost system in which it applies overhead to products based on the standard direct labor-hours allowed for the actual output of the period. Data concerning the most recent year appear below:

Total budgeted fixed overhead cost for the year $250,000
Actual fixed overhead cost for the year $254,000
Budgeted direct labor-hours (denominator level of activity) 25,000
Actual direct labor-hours 27,000
Standard direct labor-hours allowed for the actual output 26,000

Required:
a. Compute the fixed portion of the predetermined overhead rate for the year.
b. Compute the fixed overhead budget variance and volume variance.

Answer 1

1. Predetermined overhead rate = Total fixed overhead cost year / Budgeted standard direct labor hours

Predetermined overhead rate = $250,000 / 25,000

Predetermined overhead rate = $10.00 per direct labor hour

2. Fixed overhead budget variance = Actual fixed overhead - Budgeted fixed overhead

Fixed overhead budget variance = $254,000 - $250,000

Fixed overhead budget variance = $4,000 (Unfavorable)

Fixed overhead volume variance = Budgeted fixed overhead - [Fixed overhead applied to work in process]

Fixed overhead volume variance = $250,000 - (26,000*$10)

Fixed overhead volume variance = $250,000 - $260,000

Fixed overhead volume variance = $10,000 (Favorable)