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hi Sir
Please I need help with,
A company operates a standard absorption costing system. the standard fixed production overhead rate is $15 per hour.Actual hours worked 5,500
budgeted hours 5,000
standard hours for actual production 4800what was the fixed production overhead capacity variance?
A $7,500 Adv
B $7,500 Fav
C $10500 Adv
D $10500 FavI got A $7,500 Adv as the they used more hours (55 00) than budgeted(5000).
But the answer in the book is2- the number 229 kaplan revision kit.
I got B- 21,000 adverse as they consumed more hours (123000H) than budgeted (120 000) but the result is AThe easiest way to decide whether the capacity variance is favourable or adverse is as follows:
If they manage to work more hours then budgeted, then we will be able to make more units, so this is ‘good’! So the capacity variance is Favourable.
If they work less hours than budgeted, then it means we would only be able to make fewer units, which is ‘bad’! So the capacity variances is Adverse.
(If you want a proper full explanation then you must watch my free lecture on this. However in the exam you do not want to waste time thinking it through in detail – it has to be automatic. What I have written above is quick and always works 🙂 )
PS You said that it was adverse because we consumed more hours than budgeted. Maybe we did, but don’t forget that if you make more units you would expect to use more hours anyway. The capacity variance is simply checking whether we managed to get more workers than we budgeted for or less workers.
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