Question

Which of the following denominator levels always result in an unfavorable Fixed Manufacturing Overhead Volume Variance? Explain.

		A. Theoretical Capacity
		B. Practical Capacity
		C. Normal Capacity
		D. Master Budget Capacity

Answer 1

The denominator levels always result in an unfavorable Fixed Manufacturing Overhead Volume Variance is : Theoretical Capacity.

Therefore, the correct answer is OPTION A.

Explanation

Theoretical capacity is the budgeted capacity of any company which is only used to describe the production capacity if the conditions were assumed to be constant and there is no breakdown, no idle time, no shortage, no normal loss, which is impossible to achieve.
So, theoretical capacity cannot be used to describe the fixed overhead variances and if used as a denominator levels, will always result in an unfavorable Fixed Manufacturing Overhead Volume Variance.

Others options like :

• Practical Capacity is somewhat considered to be less than theoretical capacity and allows idle time and unavoidable downtime.
• Normal Capacity is the actual capacity of production done by the company.
• Master Budget Capacity is budgeted capacity according to the standard budget and actual production.

So, Fixed Manufacturing Overhead Volume Variance is favourable as well as unfavorable accordingly.