Question

What is the volume variance in fixed overhead? Is the volume variance in fixed overhead favorable or unfavorable?

Use the following scenario to help with the questions:

DeFleur manufactures bicycles. The bicycles are manufactured in two divisions. In the framing division, the carbon bicycle frames are manufactured. In the assembly division, the components are assembled to the frame and the bike is ready for sale. There is no market for the unassembled frames and all manufactured frames are transferred to the assembly division. For the purposes of performance evaluation, the framing division transfers the completed frames to the assembly division at the budgeted standard cost of a frame. The budgeted units of production for the framing division is 1,000, all of which will be transferred to the assembly division at the standard full absorption cost.

The budgeted costs for the framing division are as follows:

Direct Materials per unit: 10 layers of carbon-fiber at $20/layer	$200.00
Direct Labor per unit: 8 hours at $12/hour	$96.00

1.  Standard variable overhead is applied to products on the basis of direct labor hours at a rate of $4/unit produced.

Budgeted Fixed Overhead is $30,000 and the standard fixed cost per unit is based on the budgeted units of production.

Actual data for the period relating to the costs are as follows:

The actual number of units produced was	800
Actual Fixed Overhead costs were	$32,000
Actual Variable Overhead costs	$4,000

2. The framing division worked 7,500 direct labor hours during the year at a total cost of $93,750.

3.  A total of 9,000 carbon-fiber layers were purchased and used in production during the year at a total cost of $171,000

4. Total Budgeted cost for the framing department was $330,000. The total actual cost was $300,750

(Note that all the questions on variance are with respect to the framing department.)

Answer 1

	Framing Department
Budgeted Units	1000
Standard Data
Direct Material	10	20	200
Direct Labor	8	12	96
Variable OH	8	0.5	4
Budgeted FOH			30	(30000/1000)
	Total Cost PU		330
Actual Units	800
Actual Data
Direct Material	9000	19	171000
Direct Labor	7500	12.5	93750
Variable OH	7500	0.53	4000
Budgeted FOH			32000
	Total Cost PU		300750
Actual Units	800
Revised Standard Cost
Direct Material	8000	20	160000
Direct Labor	6400	12	76800
Variable OH	6400	0.5	3200
Budgeted FOH			24000
	Total Cost PU		264000
Fixed OH Volume Variance::
	Budgeted Production	1000
	Actual Production	800
	Standard FOH Aborption Rate	30	Per Unit
	Absorbed FOH (800*30)	24000
	Budgeted FOH (1000*30)	30000
	Fixed OH Volume Variance::	-6000	Adverse
			UF