Primara Corporation has a standard cost system in which it applies overhead to p

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:

Required:

1. Compute the fixed portion of the predetermined overhead rate for the year. (Round Fixed portion of the predetermined overhead rate to 2 decimal places.)

2. Compute the fixed overhead budget variance and volume variance. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input all amounts as positive values.)

Total budgeted fixed overhead cost for the year $ 525,100 Actual fixed overhead cost for the year $ 521,100 Budgeted direct labor-hours (denominator level of activity) 59,000 Actual direct labor-hours 60,000 Standard direct labor-hours allowed for the actual output 57,000

Explanation / Answer

1. Fxed portion of the predetermined overhead rate for the year =
= Total Budgeted Fixed OH for the year / Budgeted standard labor hours
= $525,100 / 59,000 = $8.90

2. Budget variance = actual fixed overhead - budgeted fixed overhead
= $521,100 - $525,100 = $4,000 Favourable

Volume variance = (BH – SH) x fixed portion of overhead rate
= (59,000 - 57,000) x $8.90 = $17,800 Unfavorable

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