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Question: In a subsequent 4-week period, the business’ actual fixed costs were 3500. There were 18000 units produced. The budgeted fixed costs was 3000 based on budgeted production of 17500 units.
Select two boxes to indicate the fixed production overhead total variance and whether it is favourable or adverse.I calculated the answer to be 500 adverse by comparing the orginal budget figure with the actual fixed costs figure. I don’t understand where I went wrong. How is the fixed production overhead total variance calculated and what is the formula for it.
Also, which variance is calculated by comparting the original budget figure for fixed total overheads with the actual figure for fixed total overheads?
If the company was using marginal costing then the total variance would indeed be 500 adverse.
However, if they were using absorption costing (which I guess is the case here), then the total variance is the difference between the actual fixed overheads ($3,500) and the flexed fixed overheads (actual production of 18,000 multiplied by the standard absorption rate of 3,000/17,500 per unit).
I do explain all of this in my free lectures on basic variance analysis. 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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