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ACCA Applied Knowledge · Management Accounting · Standard costing system

Harlan Co uses standard absorption costing with fixed overheads absorbed on direct labour hours. Budget: 10,000 units, 2 hours per unit, fixed overheads $160,000. Actual: 9,500 units produced, 20,400 hours worked, fixed overheads $158,000. What are the fixed overhead expenditure and volume variances respectively?

The expenditure variance is $2,000 favourable and the volume variance is $8,000 adverse. Actual spending of $158,000 was below the $160,000 budget. Absorbed overhead was 9,500 units at $16, or $152,000, which is $8,000 below the budgeted $160,000 because output was 500 units short.

  1. A$2,000 favourable expenditure; $8,000 adverse volumeCorrect
  2. B$2,000 favourable expenditure; $6,000 adverse volume
  3. C$2,000 adverse expenditure; $8,000 adverse volume
  4. D$2,000 favourable expenditure; $8,000 favourable volume

Explanation

Expenditure variance = budget $160,000 - actual $158,000 = $2,000 favourable. Absorption rate = $160,000 / 20,000 hours = $8 per hour, or $16 per unit. Absorbed = 9,500 x $16 = $152,000. Volume variance = $152,000 - $160,000 = $8,000 adverse. Using actual hours of 20,400 would wrongly be an efficiency approach and is not the volume variance.

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