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ACCA Applied Knowledge · Management Accounting · Reconciliation of budgeted and actual profit

A company uses standard absorption costing with fixed overheads absorbed at $6 per labour hour. Budgeted output was 2,000 units at a standard 3 hours per unit. Actual output was 2,100 units, taking 6,500 hours, and actual fixed overhead expenditure was $37,000. What is the fixed overhead expenditure variance?

The fixed overhead expenditure variance is $1,000 adverse. Budgeted fixed overhead was $36,000 (2,000 units x 3 hours x $6), while actual spending was $37,000. Spending more than budget gives an adverse variance, and output or hours do not affect this variance.

  1. A$1,000 adverseCorrect
  2. B$1,000 favourable
  3. C$2,800 adverse
  4. D$1,800 favourable

Explanation

Budgeted fixed overhead = 2,000 x 3 x $6 = $36,000. Actual expenditure is $37,000, so the expenditure variance is $1,000 adverse. The $2,800 figure is wrong because it compares actual cost with absorbed cost (2,100 x 3 x $6 = $37,800) in a different way and mixes in volume effects.

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