Fixed overhead volume variance is computed as Budgeted fixed overhead minus Applied fixed overhead. Given Budgeted $20,000 and Applied $24,000, what is the variance and its classification?

Fixed overhead volume variance is computed as Budgeted fixed overhead minus Applied fixed overhead. Given Budgeted $20,000 and Applied $24,000, what is the variance and its classification?

• A. $4,000 F
• B. $-4,000 F
• C. $4,000 U
• D. $0

Answer: (A)

The main idea is to compare how much fixed overhead the company budgeted to apply versus how much fixed overhead was actually applied to production. When actual production causes more fixed overhead to be absorbed than budgeted, the overhead is over-absorbed, which is considered a favorable variance because it lowers the cost assigned to each unit and can boost reported profit. Here, the budgeted fixed overhead is 20,000 and the fixed overhead applied to production is 24,000. Since 24,000 is greater than 20,000, the company absorbed 4,000 more fixed overhead than planned. Therefore, the fixed overhead volume variance is 4,000 and it is favorable. (Note: some sign conventions report the variance as applied minus budgeted; the result is the same—a positive 4,000 favorable—for the given numbers.)

The main idea is to compare how much fixed overhead the company budgeted to apply versus how much fixed overhead was actually applied to production. When actual production causes more fixed overhead to be absorbed than budgeted, the overhead is over-absorbed, which is considered a favorable variance because it lowers the cost assigned to each unit and can boost reported profit.

Here, the budgeted fixed overhead is 20,000 and the fixed overhead applied to production is 24,000. Since 24,000 is greater than 20,000, the company absorbed 4,000 more fixed overhead than planned. Therefore, the fixed overhead volume variance is 4,000 and it is favorable. (Note: some sign conventions report the variance as applied minus budgeted; the result is the same—a positive 4,000 favorable—for the given numbers.)