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Normal capacity is 10,000 standard hours, 11,000 standard hours apply to the units produced, and the fixed factory overhead rate is $7 per hour. What is the volume variance?
A$7,000 unfavourable
B$14,000 favourable
C$14,000 unfavourable
D$7,000 favourable
Answer & Solution
Correct answer: D. $7,000 favourable
1. Standard hours at normal capacity minus standard hours for actual output is 10,000 minus 11,000.
2. That gives negative 1,000 hours.
3. Negative 1,000 hours times $7 per hour gives negative $7,000.
4. Output ran past normal capacity, so fixed overhead was stretched further than planned.
5. The extra units arrived without any rise in fixed cost, so the variance is favourable.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 8.4 Factory Overhead Variances_
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