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111 A company uses absorption costing for both internal and external reporting purposes, as it has a considerable level of fixed production costs.
The following information has been recorded for the past year.
Budgeted fixed production overheads Budgeted (normal) activity levels: Units
Labour hours
$2,500,000
62,500 units 500,000 hours
Actual fixed production overheads Actual levels of activity:
2,890,350
Units produced Labour hours
70,000 units 525,000 hours
Calculate the fixed production overhead expenditureThere is no point in simply typing out a test question and expecting me to provide you with a full answer.
You must have an answer in the same book in which you found the question, and so ask about whatever it is in the answer that you are not clear about and then I will explain.
(It would appear that you have not typed out the question correctly anyway because the fixed overhead expensive is 2,890,350 as given in the question 🙂 )
Have you watched my free lectures on variances? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
(a) Fixed overhead absorption rate = $2,500,000 62,500 units = $40 per unit
This variance represents an under absorption of fixed production overheads.
Fixed production overhead total variance
Fixed production overhead incurred
Fixed production overhead absorbed (70,000 units x $40) Fixed production overhead total variance
2,890,350
2,800,000
90,350
(A)
Fixed production overhead expenditure variance
Budgeted fixed production overhead expenditure Actual fixed production overhead expenditure
2,500,000
2,890,350
Fixed production overhead expenditure variance
390,350
This variance shows that actual fixed production expenditure was greater than budgeted fixed production expenditure.
Sir this is from BPP question bank 111, my doubt is why are we calculating two variance one is the total fixed production overhead expenditure and the other is the fixed production overhead expenditure variance ,how to identify which one is asked ,to calculate for total variance we consider Budgeted FPOH ( actual units × Oar ) whereas for FPOH only we consider Budgeted FPOH ( Budgeted units × Oar ) , is this ryt?
( FPOH FIXED PRODUCTION OVERHEAD EXPENDITURE )
I do not have the BPP Study Text (only the BPP Revision Kit), and if you have copied the question correctly then there is obviously a typing mistake in the question because as I wrote before it would be silly for it to ask you to calculate the fixed production overhead expenditure because it is given in the question.
The absorption rate is $40 per unit and therefore the total fixed overhead variance is 2890350 – (70000 x 40) = 90350 (adverse).
This can be analysed into the fixed overhead expenditure variance and the fixed overhead volume variance.
The expenditure variance is: 2890350 – 2500000 = 390350 (adverse)
The volume variance is: (70000 – 62500) x $40 = 300000 (favourable).(and of course the total of the two is the total fixed overhead variance of 90350 (adverse).
It would appear that the question intended to ask for the fixed overhead expenditure variance (and exam questions will always specify which variance is required).
Again, have you watched my free lectures on this?
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