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

Budgeted fixed overhead was $90,000 based on 30,000 machine hours. Actual machine hours were 31,500, actual output took a standard 29,400 hours, and actual fixed overhead was $88,500. Fixed overheads are absorbed per machine hour. What is the fixed overhead capacity variance?

The fixed overhead capacity variance is $4,500 favourable. The absorption rate is $3 per machine hour, and actual hours of 31,500 exceeded the budgeted 30,000 hours by 1,500. Using more capacity than budgeted is favourable, giving 1,500 x $3 = $4,500.

  1. A$4,500 favourableCorrect
  2. B$1,800 adverse
  3. C$6,300 adverse
  4. D$4,500 adverse

Explanation

Absorption rate = $90,000 / 30,000 = $3 per hour. Capacity variance = (actual hours 31,500 - budget hours 30,000) x $3 = $4,500 favourable. Efficiency variance = (29,400 - 31,500) x $3 = $6,300 adverse. Volume total = $1,800 adverse (600 hours short x $3), so $1,800 adverse is the volume variance, not capacity.

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