Question

During 20x0, a department's three-variance overhead standard costing system reported unfavorable spending and volume variances. The activity level selected for allocating overhead to the product was based on 80% of practical capacity. If 100% of practical capacity had been selected instead, how would the reported unfavorable spending and volume variances be affected?" "increased spending variance, unchanged volume variance" "increased spending variance, increased volume variance" "unchanged spending variance, increased volume variance" "unchanged spending variance, unchanged volume variance"

Answer 1

Under the FIFO method, equivalent production will consist of the work required to complete units in beginning inventory plus units started and completed during the period, plus the work completed on ending inventory. Beginning inventory consisted of 10,000 units that were already 70% complete indicating that they required an additional 30% or 3,000 equivalent units for completion. If a total of 140,000 units were completed, 10,000 of which were from beginning inventory, there were 130,000 units started and completed. Finally, ending inventory consisted of 20,000 units 25% complete or 5,000 equivalent units for a total of 3,000 + 130,000 + 5,000 = 138,000.