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Hello sir,
I have a small doubt in the question below:
Q: Birch Co’s actual fixed costs were $3500. There were 18000 units produced. The budgeted fixed costs were $3000 based on budgeted production of 17500 units.
find out the fixed production overhead total variance and state whether its favourable or adverse;
options:
$ sign
440 favourable
500 adversethe answer is: $440 adverse;
However, I think the answer should be 500 adverse. because :
actual total overheads= 3500
original budgeted fixed overhead= 3000
variance = 500 adverse
Sir please explain why im not getting the correct answer!
Thanks in advance!I assume that you found this question in the BPP Revision Kit, in which case you already have the workings for the correct answer!
You have assumed that Birch is using marginal costing (if they were then the variance would indeed be 500 adverse). However it is clear from the budgeted and actual profit statements given in the question that they are using absorption costing.
When using absorption costing, then to get the total variance we compare the actual total fixed costs with the standard fixed cost for the actual production. (Which can then be analysed into the expenditure variance and the volume variance, although this analysis is not required in this question)
Do watch my free lectures on this, where I explain the difference between absorption and marginal costs and the reason why. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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