CHAPTER THREE AND FOUR

FLEXIBLE BUDGETS AND STANDARDS

Static Budgets and Variances

A variance is the difference between actual results and expected performance. Theexpected performance is
also called budgeted performance, which is a point of referencefor making comparisons.

It highlights the areas that have deviated most from expectations; variances enable managers to focus their
efforts on the most critical areas. Variances are also used in performance evaluation and to motivate
managers. Sometimes variances suggest that the company should consider a change in strategy. For
example, large negative variances caused by excessive defect rates for a new product may suggest a flawed
product design. Managers may then want to investigate the product design and potentially change the mix of
products being offered.

The benefits of variance analysis are not restricted to companies. In today’s difficult economic environment,
public officials have realized that the ability to make timely tactical alterations based on variance
information guards against having to make more draconian adjustments later.

Static Budgets and Static-Budget Variances

The static budget, or master budget, is based on the level of output planned at the start ofthe budget period.
The master budget is called a static budget because the budget for theperiod is developed around a single
(static) planned output level.

The static-budget variance is the difference between the actual result and the corresponding budgeted
amount in the static budget.

A favorable variance—denoted F and has the effect, when considered in isolation, of increasing operating
income relative to the budgeted amount. For revenue items, F means actual revenues exceed budgeted
revenues. For cost items, F means actual costs are less than budgeted costs.

An unfavorable variance—denoted U and has the effect, when viewed in isolation, of decreasing operating
income relative to the budgeted amount. Unfavorable variances are also called adverse variances in some
countries,such as the United Kingdom.

Consider Webb Company, a firm that manufactures and sells jackets. The jackets require tailoring and many
other hand operations. Webb sells exclusively to distributors, who in turn sell to independent clothing stores
and retail chains. For simplicity, we assume that Webb’s only costs are in the manufacturing function; Webb
incurs no costs in other value-chain functions, such as marketing and distribution. We also assume that all
units manufactured in April 2011 are sold in April 2011. Therefore, all direct materials are purchased and
used in the same budget period, and there is no direct materials inventory at either the beginning or the end
of the period. No work-in-process or finished goods inventories exist at either the beginning or the end of

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the period. Webb has three variable-cost categories. The budgeted variable cost per jacket for each category
is as follows:

Cost Category Variable Cost per Jacket

Direct material costs……………………………………………………… $60
Direct manufacturing labor costs………………………………………….. 16
Variable manufacturing overhead costs…………………………………… 12
Total variable costs……………………………………………………….$88

The number of units manufactured is the cost driver for direct materials, direct manufacturinglabor, and
variable manufacturing overhead. The relevant range for the cost driveris from 0 to 12,000 jackets.
Budgeted and actual data for April 2011 follow:

Budgeted fixed costs for production between 0 and 12,000 jackets…………………… $276,000

Budgeted selling price………………………………………………………………… $ 120 per jacket

Budgeted production and sales………………………………………………………… 12,000 jackets

Actual production and sales…………………………………………………….…..… 10,000 jackets

Level 1 Analysis
Actual Static-Budget
Results Variances Static Budget
(1) (2) = (1) − (3) (3)
Units sold……………………… 10,000………………… 2,000 U……………….. 12,000
Revenues………………….. $ 1,250,000……………. $190,000 U………….. $ 1,440,000
Variable costs
Direct materials………………....... 621,600………………. 98,400 F…………… . 720,000
Direct manufacturing labor…….. …198,000……………….. 6,000 U……………. 192,000
Variable manufacturing overhead... 130,500………………. 13,500 F…………..… 144,000
Total variable costs………………. 950, 100…………….. 105,900 F………..…. 1,056,000
Contribution margin……………… 299,900……………… 84,100 U…………...… 384,000
Fixed costs……………………….... 285,000……………….. 9,000 U………….… 276,000
Operating income………………….$ 14,900……………. $ 93,100 U……………$108,000
$ 93,100 U
Static-budget variance

Staticbudget variance for operating income =Actual result – Staticbudget amount

= $14,900 - $108,000 = $93,100 U.
Remember, Webb produced and sold only 10,000 jackets, although managers anticipated an
output of 12,000 jackets in the static budget. Managers want to know howmuch of the static-
budget variance is because of inaccurate forecasting of output unitssold and how much is due to
Webb’s performance in manufacturing and selling10,000 jackets. Managers, therefore, create a

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flexible budget, which enables a more in-depth understanding of deviations from the static
budget.
Flexible Budgets
A flexible budget calculates budgeted revenues and budgeted costs based on the actual output in
the budget period. The flexible budget is prepared at the end of the period(April 2011), after the
actual output of 10,000 jackets is known. The flexible budget isthe hypothetical budget that
Webb would have prepared at the start of the budget periodif it had correctly forecast the actual
output of 10,000 jackets.
In preparing the flexible budget, note that:
 The budgeted selling price is the same $120 per jacket used in preparing the static budget.
 The budgeted unit variable cost is the same $88 per jacket used in the static budget.
 The budgeted total fixed costs are the same static-budget amount of $276,000. Why?
Because the 10,000 jackets produced falls within the relevant range of 0 to12,000 jackets.
Therefore, Webb would have budgeted the same amount of fixedcosts, $276,000,
whether it anticipated making 10,000 or 12,000 jackets.
The only difference between the static budget and the flexible budget is that the static budget is
prepared for the planned output of 12,000 jackets, whereas the flexible budget is based on the
actual output of 10,000 jackets. The static budget is being “flexed,” or adjusted, from 12,000
jackets to 10,000 jackets.The flexible budget for 10,000 jackets assumes that all costs are either
completely variable or completely fixed with respect to the number of jackets produced.
Webb develops its flexible budget in three steps.
Step 1: Identify the Actual Quantity of Output.In April 2011, Webb produced and sold 10,000
jackets.
Step 2: Calculate the Flexible Budget for Revenues Based on Budgeted Selling Price and Actual
Quantity of Output.
Flexible-budget revenues = $120 per jacket * 10,000 jackets
= $1,200,000
Step 3: Calculate the Flexible Budget for Costs Based on Budgeted Variable Cost perOutput Unit,
Actual Quantity of Output, and Budgeted Fixed Costs.
Flexible-budget variable costs
Direct materials, $60 per jacket * 10,000 jackets……………………………….. $ 600,000
Direct manufacturing labor, $16 per jacket * 10,000 jackets……………………... 160,000
Variable manufacturing overhead, $12 per jacket * 10,000 jackets………………..120,000
Total flexible-budget variable costs ………………………………………………..880,000
Flexible-budget fixed costs …………………………………………………………276,000
Flexible-budget total costs……………………………………………………….$1,156,000
The flexible budget allows for a more detailed analysis of the $93,100 unfavorable static-budget
variance for operating income.

Flexible-Budget Variances and Sales-Volume Variances

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 The sales-volume variance is the difference between a flexible-budget amount and the
corresponding static-budget amount. The flexible-budget variance is the difference between an
actual result and the corresponding flexible-budget amount.
The flexible-budget-based variance analysis for Webb, which subdivides the $93,100
unfavorable static-budget variance for operating income into two parts: a flexible-budget
variance of $29,100 U and a sales-volume variance of $64,000 U.
Level 2 Flexible-Budget-Based Variance Analysis for Webb Company for April 2011
Actual results Flexible-Budget Flexible Sales volume Static budget
variances Budget
(2) = (1) (3)
variances
(1) (5)
(4) = (3) (5)
(3)
Units sold 10,000 0 10,000 2000 U 12,000
Revenues $ 1,250,000 50,000 F 1,200,000 $240,000 U $1,440,000
Variable costs
Direct materials 621,600 21,600 U 600,000 120,000 F 720,000
Direct manufacturing labor 198,000 38,000 U 160,000 32,000 F 192,000
V. manufacturing overhead 130,500 10,500 U 120,000 24,000 F 144,000
Total variable costs 950,100 70,100 U 880,000 176,000 F 1,056,000
Contribution margin 299,900 20,100 U 320,000 64,000 U 384,000
Fixed manufacturing costs 285,000 9,000 U 276,000 0 276,000
Operating income $ 14,900 $29,100 U $ 44,000 $ 64,000 U $ 108,000
Level 2 29,100 U 64,000U
Flexible-budget varianceSales-volume variance
Level 193,100 U
Static budget variance
Sales-Volume Variances
The difference between the static-budget and the flexible-budget amounts is called the sales-
volume variance because it arises solely from the difference between the 10,000 actual quantity
(volume) of jackets sold and the 12,000 quantity of jackets expected to be sold in the static
budget.
Sales-volume variance for operating income = Flexiblebudget amount - Staticbudget amount
= $44,000 - $108,000
= $64,000 U
Sales-volumevariance foroperating income =
(Budgeted contribution margin per unit) * (Actual units sold – Staticbudget units sold)
= (Budgeted selling price - Budgeted variable cost per unit) * (Actual units sold- Static-budget
units sold)
= ($120 per jacket - $88 per jacket) * (10,000 jackets - 12,000 jackets)
= $32 per jacket * (-2,000 jackets)
= $64,000 U

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Webb’s managers determine that the unfavorable sales-volume variance in operating income
could be because of one or more of the following reasons:
1. The overall demand for jackets is not growing at the rate that was anticipated.
2. Competitors are taking away market share from Webb.
3. Webb did not adapt quickly to changes in customer preferences and tastes.
4. Budgeted sales targets were set without careful analysis of market conditions.
5. Quality problems developed that led to customer dissatisfaction with Webb’s jackets.
Flexible-budget variances are a better measure of operating performancethan static-budget
variances because they compare actual revenues to budgeted revenuesand actual costs to
budgeted costs for the same 10,000 jackets of output.
The flexible-budget variance for revenues is called the selling-price variance because it arises
solely from the difference between the actual selling price and the budgeted selling price:
Sellingprice variance = (Actual selling price – Budgeted selling price) * Actual units sold
= ($125 per jacket - $120 per jacket) * 10,000 jackets
= $50,000 F
Market-Share and Market-Size Variances
The market-share variance is the difference in budgeted contribution margin for actual market
size in units caused solely by actual market share being different from budgeted market share.
The formula for computing the market share variance is as follows:
Market-share = Actual* Actual market – Budgeted market * budgeted
Variance market size in units share share contribution margin
Per unit
= 62,500 units * (0.16 - 0.20) * $32 per unit
= $80,000 U
Webb lost 4.0 market-share percentage points—from the 20% budgeted share to the actual share
of 16%. The $80,000 U market-share variance is the decline in contribution margin as a result of
those lost sales.
The market-size variance is the difference in budgeted contribution margin at budgeted market
share caused solely by actual market size in units being different from budgeted market size in
units. The formula for computing the market size variance is as follows:
Market-size = Actual market – Budgeted market * budgeted * budgeted
Variance size size market share contribution margin
Per unit
= (62,500 units - 60,000 units) * 0.20 * $32 per unit = $16,000 F
The market-size variance is favorable because actual market size increased 4.17% [(62,500 –
60,000) ÷ 60,000 = 0.417, or 4.17%] compared to budgeted market size.
Price Variances and Efficiency Variances for Direct-Cost Inputs
To gain further insight, almost all companies subdivide the flexible-budget variance for direct-
cost inputs into two more-detailed variances:

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 1. A price variance that reflects the difference between an actual input price and a budgeted
input price.
2. An efficiency variance that reflects the difference between an actual input quantity and a
budgeted input quantity.
The information available from these variances (which we call level 3 variances) helps managers
to better understand past performance and take corrective actions to implement superior
strategies in the future. Managers generally have more control over efficiency variances than
price variances because the quantity of inputs used is primarily affected by factors inside the
company (such as the efficiency with which operations are performed), while changes in the
price of materials or in wage rates may be largely dictated by market forces outside the company.
Obtaining Budgeted Input Prices and Budgeted Input Quantities
To calculate price and efficiency variances, Webb needs to obtain budgeted input prices and
budgeted input quantities. Webb’s three main sources for this information are past data, data
from similar companies, and standards.
1. Actual input data from past periods. Most companies have past data on actual inputprices
and actual input quantities. These historical data could be analyzed for trendsor patterns to
obtainestimates of budgeted prices and quantities. The advantage of past data is that
theyrepresent quantities and prices that are real rather than hypothetical and can serve
asbenchmarks for continuous improvement. Another advantage is that past data aretypically
available at low cost. However, there are limitations to using past data. Pastdata can include
inefficiencies such as wastage of direct materials. They also do notincorporate any changes
expected for the budget period.
2. Data from other companies that have similar processes. The benefit of using datafrom peer
firms is that the budget numbers represent competitive benchmarks fromother companies. For
example, Baptist Healthcare System in Louisville, Kentucky,maintains detailed flexible budgets
and benchmarks its labor performance againsthospitals that provide similar types of services and
volumes and are in the upper quartileof a national benchmark. The main difficulty of using this
source is that inputpriceand input quantity data from other companies are often not available or
maynot be comparable to a particular company’s situation.
3. Standards developed by Webb. A standard is a carefully determined price, cost, orquantity
that is used as a benchmark for judging performance. Standards are usuallyexpressed on a per-
unit basis. Consider how Webb determines its direct manufacturinglabor standards. Webb
conducts engineering studies to obtain a detailed breakdown ofthe steps required to make a
jacket. Each step is assigned a standard time based onwork performed by a skilled worker using
equipment operating in an efficient manner.There are two advantages of using standard times: (i)
They aim to exclude past inefficienciesand (ii) they aim to take into account changes expected to
occur in the budgetperiod. An example of (ii) is the decision by Webb, for strategic reasons, to
lease new sewing machines that operate at a faster speed and enable output to be produced
withlower defect rates. Similarly, Webb determines the standard quantity of square yards ofcloth
required by a skilled operator to make each jacket.

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The term “standard” refers to many different things. Always clarify its meaning andhow it is
being used. A standard input is a carefully determined quantity of inputsuchas square yards of
cloth or direct manufacturing labor-hoursrequired for one unit ofoutput, such as a jacket. A
standard price is a carefully determined price that a companyexpects to pay for a unit of input.
In the Webb example, the standard wage rate that Webbexpects to pay its operators is an
example of a standard price of a direct manufacturinglabor-hour. A standard cost is a carefully
determined cost of a unit of outputfor example,the standard direct manufacturing labor cost of a
jacket at Webb.
Standard cost per output unit for = Standard input allowed *Standard price per
Each variable direct-cost input for one output unitinput unit
Standard direct material cost per jacket: 2 square yards of cloth input allowed per output unit
(jacket) manufactured, at $30 standard price per square yard
Standard direct material cost per jacket = 2 square yards * $30 per square yard = $60
Standard direct manufacturing labor cost per jacket: 0.8 manufacturing labor-hour of input
allowed per output unit manufactured, at $20 standard price per hour
Standard direct manufacturing labor cost per jacket = 0.8 labor-hour * $20 per labor-hour = $16
Note:-To clarify, budgeted input prices, input quantities, and costs need not be based on
standards.As we saw previously, they could be based on past data or competitive benchmarks,
for example. However, when standards are used to obtain budgeted input quantities and prices,
the terms “standard” and “budget” are used interchangeably.
Data for Calculating Webb’s Price Variances and Efficiency Variances
Consider Webb’s two direct-cost categories. The actual cost for each of these categories for the
10,000 jackets manufactured and sold in April 2011 is as follows:
Direct Materials Purchased and Used
1. Square yards of cloth input purchased and used…………………………………. 22,200
2. Actual price incurred per square yard……………………………………….……… $ 28
3. Direct material costs (22,200 * $28) ……………………………………………$621,600
Direct Manufacturing Labor
1. Direct manufacturing labor-hours…………………………………………………. 9,000
2. Actual price incurred per direct manufacturing labor-hour …………………………$ 22
3. Direct manufacturing labor costs (9,000 * $22) ……………………………….$198,000
A price variance is the difference between actual price and budgeted price, multiplied by actual
input quantity, such as direct materials purchased or used. A price variance is sometimes called
an input-price variance or rate variance, especially when referring to a price variance for
direct manufacturing labor.
An efficiency variance is the difference between actual input quantity used—such as square
yards of cloth of direct materials—and budgeted input quantity allowed for actual output,
multiplied by budgeted price. An efficiency variance is sometimes called a usage variance.
The formula for computing the price variance is as follows:
Price variance= (Actual price of input - Budgeted price of input) * Actual quantity of input
Price variances for Webb’s two direct-cost categories are as follows:
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 Direct materials…… ($28 per sq. yard – $30 per sq. yard) * 22,200 square yards = $44,400 F
Direct manufacturing labor………. ($22 per hour – $20 per hour) * 9,000 hours = $18,000 U
Efficiency Variance
Efficiency Variance = (Actual quantity of - Budgeted quantity of input
Input used allowed for actual output) * Budgeted price of input
The idea here is that a company is inefficient if it uses a larger quantity of input than the
budgeted quantity for its actual level of output; the company is efficient if it uses a smaller
quantity of input than was budgeted for that output level.
The efficiency variances for each of Webb’s direct-cost categories are as follows:
Direct materials [22,200 sq. yds. – (10,000 units * 2 sq. yds./unit)] * $30 per sq. yard
= (22,200 sq. yds. – 20,000 sq. yds.) * $30 per sq. yard = $66,000 U
Direct manufacturing [9,000 hours – (10,000 units * 0.8 hour/unit)] * $20 per hour
Labor = (9,000 hours – 8,000 hours) * $20 per hour = 20,000 U

Actual Costs Incurred Actual Input Quantity * Flexible Budget

(Actual Input Quantity * Budgeted Price (Budgeted Input Quantity Allowed
Actual Price) for Actual Output *Budgeted Price)
Direct (22,200 sq. yds. * $28/sq. yd.) (22,200 sq. yds. * $30/sq. yd.) (10,000 units * 2 sq. yds./unit * $30/sq.yd.)
Materials$621,600 $666,000 $600,000Level
3$44,400 F$66,000 U
Price varianceEfficiency variance
Level 2 $21,600 U
Flexible-budget variance

Direct
Manufacturing 9,000 hours * $22/hr. 9,000 hours * $20/hr. 10,000 units * 0.8 hr./unit * $20/hr.
Labor$198,000 $180,000 $160,000

Level 3 $18,000 U $20,000 U

Price variance Efficiency variance

Level 2 $38,000 U

Flexible-budget variance

Manufacturing overhead cost variances

Standard costing is a costing system that (a) traces direct costs to output produced by
multiplying the standard prices or rates by the standard quantities of inputs allowed for actual
outputs produced and (b) allocates overhead costs on the basis of the standard overhead-cost rate
times the standard quantities of the allocation bases allowed for the actual outputs produced.

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The standard cost of Webb’s jackets can be computed at the start of the budget period. Webb’s
management accountants calculate standard overhead cost rates based on the planned amount of
variable and fixed overhead and the standard quantities of the allocation bases.
Developing Budgeted Variable Overhead Rates
Budgeted variableoverhead cost-allocation rates can be developed in four steps.
Step 1: Choose the Period to Be Used for the Budget. Webb uses a 12-month budget period.
Step 2: Select the Cost-Allocation Bases to Use in Allocating Variable Overhead Costs to
Output Produced. Webb’s operating managers select machine-hour as the cost-allocationbase
because they believe that machine-hour is the only cost driver of variable overhead.Based on an
engineering study, Webb estimates it will take 0.40 of a machine-hour peractual output unit. For
its budgeted output of 144,000 jackets in 2011 Webb budgets57,600 (0.40* 144,000) machine-
hours.
Step 3: Identify the Variable Overhead Costs Associated with Each Cost-Allocation Base.
Webb groups all of its variable overhead costs, including costs of energy, machine maintenance,
engineering support, indirect materials, and indirect manufacturing labor in a single cost pool.
Webb’s total budgeted variable overhead costs for 2011 are $1,728,000.
Step 4: Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Variable
Overhead Costs to Output Produced. Dividing the amount in Step 3 ($1,728,000)by the
amount in Step 2 (57,600 machine-hours), Webb estimates a rate of $30 per standardmachine-
hour for allocating its variable overhead costs.
Webb calculates the budgeted variable overhead cost rate per output unit as follows:
Budgeted variable Budgeted input Budgeted variable
Overhead cost rate = allowed per * overhead cost rate
Output per unit output unit per input unit
= 0.40 hours per jacket * $30 per hour = $12 per jacket
Developing Budgeted Fixed Overhead Rates
The process of developing the budgeted fixed overhead rate is the same as that detailed earlier
for calculating the budgeted variable overhead rate.
Step 1: Choose the Period to Use for the Budget.A fixed overhead cost is typically 12 months to
help smooth out seasonal effects.
Step 2: Select the Cost-Allocation Bases to Use in Allocating Fixed Overhead Costs to Output
Produced. For simplicity, we assume Webb expects to operate at capacity in fiscal year 2011—
with a budgeted usage of 57,600 machine-hours for a budgeted output of 144,000 jackets.

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Step 3: Identify the Fixed Overhead Costs Associated with Each Cost-Allocation Base. Webb’s
fixed overhead budget for 2011 is $3,312,000.
Step 4: Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Fixed
Overhead Costs to Output Produced.
Budgeted fixed overhead cost per Budgeted total costs in fixed overhead cost pool
unit of cost-allocation base= Budgeted total quantity of costallocation base
=$3,312,000 = $57.50 per machine-hour
57,600
Webb can now calculate the budgeted fixed overhead cost per output unit as follows:
Budgeted fixed overhead cost per Budgeted quantity of cost-allocation Budgeted fixed overhead cost
Output unit = base allowed per output unit * per unit of cost-allocation base
= 0.40 of a machine-hour per jacket * $57.50 per machine-hour
= $23.00 per jacket
When preparing monthly budgets for 2011, Webb divides the $3,312,000 annual total fixed costs
into 12 equal monthly amounts of $276,000.
Variable Overhead Cost Variances
The following data are for April 2011, when Webb produced and sold 10,000 jackets:
Actual ResultFlexible-Budget Amount
1. Output units (jackets) 10,000 10,000
2. Machine-hours per output unit 0.45 0.40
3. Machine-hours (1 * 2) 4,500 4,000
4. Variable overhead costs $130,500 $120,000
5. Variable overhead costs per machine-hour (4 ÷ 3) $ 29.00 $ 30.00
6. Variable overhead costs per output unit (4 ÷ 1) $ 13.05 $ 12.00
Flexible-Budget Analysis
Variable overhead flexible-budget variance= Actual costs incurred - Flexible-budget amount
= $130,500 - $120,000 = $10,500 U
Webb’s managers can get further insight into the reason for the $10,500 unfavorable variance by
subdividing it into the efficiency variance and spending variance.
Variable Overhead Efficiency Variance
The variable overhead efficiency variance is the difference between the actual quantity of the
cost-allocation base used and budgeted quantity of the cost-allocation base that should have been
used to produce actual output, multiplied by the budgeted variable overhead costper unit of the
cost-allocation base.
Variable overhead Actual quantity of variable - Budgeted quantity of
Efficiency variance = overhead cost-allocationvariable overhead *Budgeted variable
base used for actual outputcost-allocation baseoverhead cost per unit
allowed for actual output of cost-allocation base
= (4,500 hours - 0.40 hr./unit * 10,000 units) * $30 per hour
= (4,500 hours - 4,000 hours) * $30 per hour = $15,000 U

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The efficiency variance for variable overhead cost is based on the efficiency with which the cost-
allocation base is used.
Variable Overhead Spending Variance
The variable overhead spending variance is the difference between actual variable overhead cost
per unit of the cost-allocation base and budgeted variable overhead cost per unit of the cost-
allocation base, multiplied by the actual quantity of variable overhead cost-allocation base used
for actual output.

Variable overhead Actual variable Budgeted variable Actual quantity of variable overhead
Spending variance = overhead cost per unit - overhead cost per unit cost-allocation base
Of cost-allocation base of cost-allocation base used for actual output
= ($29 per machine-hour - $30 per machine-hour) * 4,500 machine-hours
= (- $1 per machine-hour) * 4,500 machine-hours
= $4,500 F
Fixed Overhead Cost Variances
The fixed overhead flexible-budget variance is the difference between actual fixed overhead
costs and fixed overhead costsin the flexible budget:
Fixed overhead flexible-budget variance = Actual costs incurred - Flexible-budget amount
= $285,000 - $276,000 = $9,000 U
There is not an efficiency variance for fixed overhead costs. That’s because a given lump sum of
fixed overhead costs will be unaffected by how efficiently machine-hours are used to produce
output in a given budget period. Because there is no efficiency variance, the fixed overhead
spending variance is the same amount as the fixed overhead flexible-budget variance:
Fixed overhead spending variance = Actual costs incurred - Flexible-budget amount
= $285,000 - $276,000 = $9,000 U
Production-Volume Variance
The production-volume variance, also referred to as the denominator-level variance, is the
difference between budgeted fixed overhead and fixed overhead allocated on the basis of actual
output produced. The allocated fixed overhead can be expressed in terms of allocation base units
(machine-hours for Webb) or in terms of the budgeted fixed cost per unit:
Production volume variance = Budgeted fixed overhead - Fixed overhead allocated for actual
Output units produced
= $276,000 - (0.40 hour per jacket * $57.50 per hour * 10,000 jackets)
= $276,000 - ($23 per jacket * 10,000 jackets)
= $276,000 - $230,000 = $46,000 U
The $46,000 U production-volume variance can also be thought of as $23 per jacket 2,000
jackets that were not produced (12,000 jackets planned – 10,000 jackets produced).

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