Primara corporation has a standard cost system in which it applies overhead to products based on the standard direct labor-hours allowed for the actual output of the period. data concerning the most recent year appear below: total budgeted fixed overhead cost for the year $250,000 actual fixed overhead cost for the year $254,000 budgeted standard direct labor-hours (denominator level of activity) 25,000 actual direct labor-hours 27,000 standard direct labor-hours allowed for the actual output 26,000

A. Predetermined overhead rate = $10

B. Budgeted variance = $4,000 (Unfavorable)

C. Volume variance = $10,000 (Favorable)

Explanation:

Requirement A

We know,

Predetermined overhead rate =  Total fixed overhead cost for the year ÷ Budgeted standard direct labor-hours

Given,

Total fixed overhead cost for the year = $250,000

Budgeted standard direct labor-hours = $25,000

Putting the values into the formula, we can get

Predetermined overhead rate = $250,000 ÷ $25,000

Or, Predetermined overhead rate = $10

Predetermined overhead rate = $10 per direct labor hour.

Comment: Generally, a Predetermined overhead rate is calculated with the help of direct labor hours.

Requirement B

We know,

Budgeted variance = actual fixed overhead cost for the year - budgeted fixed overhead cost for the year.

Given,

actual fixed overhead cost for the year = $254,000

budgeted fixed overhead cost for the year = $250,000

Budgeted variance = $254,000 - $250,000

Budgeted variance = $4,000 (Unfavorable)

As the actual fixed overhead cost for the year is higher than budgeted fixed overhead cost for the year, the situation is unfavorable.

Requirement C

We know,

Volume variance =  Predetermined overhead rate × ( Standard direct labor hours - Budgeted direct labor-hours)

Given,

Predetermined overhead rate = $10 (From requirement A)

Standard direct labor hours = $26,000

Budgeted direct labor-hours = $25,000

Putting the values into the formula, we can get

Volume variance = $10 × ($26,000 - $25,000)

Or, Volume variance = $10 × $1,000

Volume variance = $10,000 (Favorable)

As Standard direct labor hours is higher than Budgeted direct labor-hours, the situation is favorable.

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