Question

JBG Ltd. budgets for fixed overhead of Rs. 24,000 and production of 4,800 units. Actual production is 4,200 units and fixed overhead cost incurred is Rs. 22,000. The fixed volume variance is:
(a) Rs. 3,000 (A)
 (b) Rs. 2,000 (F)
(c) Rs. 1,000 (A)
 (d) Rs. 3,000 (F)

Answer 1

Hint: Here, we need to find the fixed volume variance. First, we will find the budgeted fixed overheads on actual production. Then, using the formula for fixed volume variance, we will calculate the fixed volume variance.

Formula Used: The fixed volume variance is given by the formula Budgeted Fixed Overheads on actual production \[ - \] Budgeted Fixed Overheads on budgeted production.

Complete step-by-step answer:
The fixed volume variance is the difference between the budgeted fixed overheads on actual production and the budgeted fixed overheads on budgeted production.
It is given by the formula Budgeted Fixed Overheads on actual production \[ - \] Budgeted Fixed Overheads on budgeted production.
The fixed volume variance is said to be favourable if budgeted fixed overheads on actual production are more than budgeted fixed overheads on budgeted production. It is adverse if budgeted fixed overheads on actual production are less than budgeted fixed overheads on budgeted production.
We can observe that the number of units produced is 4200, whereas the number of units budgeted for is 4800.
We will use a unitary method to find the budgeted fixed overheads for the produced 4200 units.
Budgeted fixed overheads for 4800 units \[ = \] Rs. 24,000
Dividing by 4800, we get
Budgeted fixed overheads for 1 unit \[ = {\rm{Rs}}{\rm{.}}\dfrac{{24,000}}{{4,800}} = {\rm{Rs}}{\rm{. }}5\]
Multiplying by 4200, we get
Budgeted fixed overheads for 4200 units \[ = {\rm{Rs}}{\rm{.}}\left( {5 \times 4200} \right) = {\rm{Rs}}{\rm{. }}21,000\]
Thus, we get budgeted fixed overheads on actual production as Rs. 21,000.
Now, it is given that the budgeted fixed overheads on budgeted production of 4800 units is Rs. 24,000.
Thus, we get the fixed volume variance as
Fixed volume variance \[ = {\rm{Rs}}{\rm{. }}21000 - {\rm{Rs}}{\rm{. }}24000\]
Since Rs. 21,000 is greater than Rs. 24,000, the fixed volume variance is adverse.
Thus, we get
Fixed volume variance \[ = {\rm{Rs}}{\rm{. }}3000\left( {\rm{A}} \right)\]
Therefore, we get the fixed volume variance as Rs. 3,000 (A).
The correct option is option (a)

Note: We can use another simpler formula for fixed volume variance to solve the question.
The fixed volume variance is also given by the formula
(Actual units produced \[ - \]Budgeted units)\[ \times \] Budgeted fixed overheads per unit .
Budgeted fixed overheads for 1 unit \[ = {\rm{Rs}}{\rm{.}}\dfrac{{24,000}}{{4,800}} = {\rm{Rs}}{\rm{. }}5\]
The actual units produced are 4200 units and the budgeted units are 4800 units.
Therefore, we get
Fixed volume variance \[ = {\rm{Rs}}{\rm{.}}\left( {4200 - 4800} \right) \times 5 = {\rm{Rs}}{\rm{.}}\left( { - 600} \right) \times 5 = {\rm{Rs}}{\rm{. }}3000\left( {\rm{A}} \right)\]
Therefore, we get the fixed volume variance as Rs. 3,000 (A).