Fixed Overhead Budget and Volume Variance Four-Leaf Clover Company assigns fixed
ID: 2570367 • Letter: F
Question
Fixed Overhead Budget and Volume Variance
Four-Leaf Clover Company assigns fixed overhead costs to inventory for external reporting purposes by using a predetermined standard overhead rate based on direct labor hours. The standard rate is based on a normal activity level of 25,000 standard allowed direct labor hours per year. There are five standard allowed hours for each unit of output. Budgeted fixed overhead costs are $360,000 per year. During 2017, the company produced 5,200 units of output, and actual fixed costs were $375,000.
Required
a. Determine the standard fixed overhead rate used to assign fixed costs to inventory.
b. Determine the amount of fixed overhead assigned to inventory in 2017.
c. Determine the fixed overhead budget variance
Explanation / Answer
a) Standard Fixed Overhead Rate = Estimated Fixed Overhead Costs / Estimated ALlocation base i.e. Direct Labor HOurs
= $360,000 / 25,000 DLHs
= $14.40 per direct labor hour
b) The amount of fixed overhead assigned to Inventory in 2017 = Standard Hours for Actual Production x Overhead Rate as calculated in part a
Std Hours For Actual Production = 5,200 Units x 5 Hrs needed per unit = 26,000 DLHs
The amount of fixed overhead assigned to Inventory in 2017 = 26,000 DLHs x $14.40 = $374,400
c) Fixed Overhead Budget Variance
Fixed Overhead Expenditure Variance = Budgeted Fixed Overhead – Actual Fixed Overhead
Actual Fixed Overhead for June = $375,000
Budgeted Fixed Overhead for June = $360,000
Fixed Overhead Expenditure Variance = $360,000 - $375,000 = $15,000 Unfavorable
Unfavorable since actual fixed overheads are higher than budgeted.
Fixed Overhead Volume Variance = Absorbed Overhead – Budgeted Overhead
Absorbed Overhead = Units Actually Produced x Per Unit Standard Fixed Cost (as calculated in part b) = $374,400
Fixed Overhead Volume Variance = 374,400 - 360,000 = $14,400 Favorable
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