Patridge Company uses a standard cost system in which it applies manufacturing overhead to units of product on the basis of direct labour-hours. The information below is taken from the company's flexible budget for manufacturing overhead: $$150,000$156,000$162,000\begin{array} { | l | l | l | l | } \hline \text { Percent of capacity } & 70 \% & 80 \% & 90 \% \\\hline \text { Direct labour-hours } & 21,000 & 24,000 & 27,000 \\\hline \text { Variable overhead } & \$ 42,000 & \$ 48,000 & \$ 54,000 \\\hline \text { Fixed overhead } & 108,000 & 108,000 & 108,000 \\\hline \text { Total overhead } & \$ 150,000 & \$ 156,000 & \$ 162,000 \\\hline\end{array}$ During the year, the company operated at exactly 80% of capacity, but applied manufacturing overhead to products based on the 90% level. The company's fixed overhead volume variance for the year was:

A) $6,000 favourable.
B) $12,000 unfavourable.
C) $12,000 favourable.
D) $6,000 unfavourable.

Question

Patridge Company uses a standard cost system in which it applies manufacturing overhead to units of product on the basis of direct labour-hours. The information below is taken from the company's flexible budget for manufacturing overhead:    Percent of capacity  70 % 80 % 90 %  Direct labour-hours  21 , 000 24 , 000 27 , 000  Variable overhead  $ 42 , 000 $ 48 , 000 $ 54 , 000  Fixed overhead  108 , 000 108 , 000 108 , 000  Total overhead  $ 150 , 000 $ 156 , 000 $ 162 , 000 \begin{array} { | l | l | l | l | } \hline 	ext { Percent of capacity }  &  70 \%  &  80 \%  &  90 \% \\hline 	ext { Direct labour-hours }  &  21,000  &  24,000  &  27,000 \\hline 	ext { Variable overhead }  &  \$ 42,000  &  \$ 48,000  &  \$ 54,000 \\hline 	ext { Fixed overhead }  &  108,000  &  108,000  &  108,000 \\hline 	ext { Total overhead }  &  \$ 150,000  &  \$ 156,000  &  \$ 162,000 \\hline\end{array}  Percent of capacity   Direct labour-hours   Variable overhead   Fixed overhead   Total overhead  ​ 70% 21 , 000 $42 , 000 108 , 000 $150 , 000 ​ 80% 24 , 000 $48 , 000 108 , 000 $156 , 000 ​ 90% 27 , 000 $54 , 000 108 , 000 $162 , 000 ​ ​   During the year, the company operated at exactly 80% of capacity, but applied manufacturing overhead to products based on the 90% level. The company's fixed overhead volume variance for the year was:A) $6,000 favourable.B) $12,000 unfavourable.C) $12,000 favourable.D) $6,000 unfavourable.

Michael and Roni Steinmeyer · Accepted Answer

Final Answer : B, Explanation :  The fixed overhead volume variance is calculated as the difference between the budgeted fixed overhead and the fixed overhead applied based on actual activity. Operating at 80% capacity, the budgeted fixed overhead is $108,000. However, overhead was applied based on the 90% level, which would imply applying $108,000 (fixed overhead does not change with the level of activity within the relevant range). The variance is $0 because fixed overhead is the same regardless of the activity level within the relevant range, indicating an error in the question's premise about calculating the fixed overhead volume variance.

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