A manufacturing plant has a budgeted fixed overhead of $100,000 and budgeted production of 10,000 units (each taking 2 hours).
Actual production was 11,000 units, taking 21,000 hours.

What is the fixed overhead volume capacity variance?

Answer options:

$10,000 Favorable

$5,000 Favorable

$5,000 Adverse

$10,000 Adverse

How to approach this question

Capacity variance = (Actual Hours - Budgeted Hours) * Standard Fixed Overhead Rate per Hour. If actual hours > budgeted hours, it is favorable (more capacity utilized).

Full Answer

B.$5,000 Favorable✓ Correct

Budgeted hours = 10,000 units * 2 hrs = 20,000 hrs. Standard rate per hour = $100,000 / 20,000 hrs = $5/hr. Actual hours = 21,000 hrs. Capacity variance = (21,000 - 20,000) * $5 = $5,000 Favorable (because they utilized more capacity than planned).

Common mistakes

Confusing capacity variance with efficiency variance or total volume variance.

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