Question

TechnoText Inc. bases its fixed overhead rate on its practical capacity of 120,000 units per year. It budgeted to produce 100,000 units during Year 1. The budgeted fixed manufacturing overhead is $480,000. The company actually produced 110,000 units and incurred $535,000 in fixed manufacturing overhead costs. Calculate the expected capacity variance.

A) $80,000 favorable
B) $100,000 favorable
C) $80,000 unfavorable
D) $100,000 unfavorable

Answer 1

C) $80,000 unfavorable

Step-by-step explanation:

The computation of the expected capacity variance is shown below:

But before that fixed overhead rate is

Fixed overhead rate = Budgeted fixed manufacturing overhead ÷ practical capacity

= $480,000 ÷ 120,000 units

= $4 per unit

Now

Expected capacity variance is

= (Budgeted production - practical capacity) × Fixed overhead rate

= (100,000 units - 120,000 units) × $4

= $80,000 Unfavorable

hence, the correct option is c.