Selected operating information on three different companies for a recent year is

Question

Selected operating information on three different companies for a recent year is given below:

*Denominator activity for computing the predetermined overhead rate.

Required:

For each company, state whether the volume variance would be favorable or unfavorable. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.))

Company A=

Company B=

Company C=

Company A B C Full-capacity machine-hours 25,000 14,000 15,000 Budgeted machine-hours* 24,000 12,800 15,000 Actual machine-hours 24,000 13,600 14,000 Standard machine-hours allowed for actual production 24,500 12,400 15,000

Explanation / Answer

Answer:

Volume variance can be better understood with a formula, which is as folllows:

Volume variance = Fixed portion of predetermined overhead rate * ( denominator hours - standard hours allowed for actual production)

So by means of the following formula we can explain the secenario in the following way:

FOR COMPANY A : This company has a favourable(F) volume variance as the standard hours allowed for actual production are 24,500 are greater than the denominator hours i.e. budgeted hours which are 24,000.

FOR COMPANY B : Company B has unfavourable volume variance (U) as the standard hours allowed here is 12,400 which is less than the denominator hours i.e. budgeted hours which are 12,800.

FOR COMPANY C : Company C has none i.e. zero variance as the standard hours allowed here is 15,000 which is equal to the denominator hours i.e. budgeted hours which are also 15,000

Note:

No calculation can be done as no rate is provided, so we can only compare..

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