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Normal capacity is 10,000 standard hours, 8,000 standard hours apply to the units produced, and the fixed factory overhead rate is $7 per hour. What is the volume variance?
A$14,000 favourable
B$7,000 favourable
C$14,000 unfavourable
D$7,000 unfavourable
Answer & Solution
Correct answer: C. $14,000 unfavourable
1. The volume variance is standard hours at normal capacity minus standard hours for actual output, times the fixed overhead rate.
2. 10,000 hours minus 8,000 hours gives 2,000 hours.
3. 2,000 hours times $7 per hour gives $14,000.
4. Output fell short of normal capacity, so fixed overhead was underused.
5. Underusing capacity is an unfavourable outcome, because more units could have been made for the same fixed cost.
6. $7,000 arises only at 11,000 hours, where output runs one thousand hours past normal capacity.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 8.4 Factory Overhead Variances_
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