The Parco Company applies manufacturing overhead costs to products on the basis of direct labor-hours. The standard cost card shows that 12 direct labor-hours are required per unit of product. For August, the company budgeted to work 360,000 direct labor-hours and to incur the following total manufacturing overhead costs:
| Total variable overhead costs | $396,000 |
| Total fixed overhead costs | $475,200 |
During August, the company completed 28,000 units of product, worked 344,000 direct labor-hours, and incurred the following total manufacturing overhead costs:
| Total variable overhead costs | $395,600 |
| Total fixed overhead costs | $461,200 |
The denominator activity in the predetermined overhead rate is 360,000 direct labor-hours. What is the fixed overhead volume variance for August?
First, compute the fixed overhead (FOH) rate as follows:
Budgeted fixed overhead costs ÷ budgeted direct labor hours = FOH rate
$475,200 ÷ 360,000 direct labor hours = $1.32 per direct labor hour
Volume variance = Budgeted fixed overhead – Fixed overhead applied
Volume variance = Budgeted fixed overhead – (Standard hours allowed x FOH rate)
Volume variance = $475,200 – (((28,000 units x 12) x $1.32)
Volume variance = $475,200 – (336,000 x $1.32) = $475,200 – $443,520 = $31,680 U
Since budgeted fixed overhead was more than the amount applied to work in process during the period, the volume variance is unfavorable
