Homework Answers
Capacity variance (CV):
Budgeted production hours = 130,000 × 2 = 260,000
Actual production hours = 274,000
Fixed overhead absorption rate = Budgeted fixed overhead / Budgeted production hours
= $845,000 / 260,000
= $3.25
Therefore,
CV = (Budgeted hours – Actual hours) × Fixed overhead absorption rate
= (260,000 – 274,000) × $3.25
= 14,000 × 3.25
= $45,500 Favorable
This is favorable because the firm able to utilize more production hours actually. It increases capacity.
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