Standard Hours Allowed For Actual Output Accounting Question

Question

Teana Corporation uses machine hours as its denominator activity for fixed manufacturing overhead. For the most recent year, the company showed the following data:

At the beginning of the year :

Budgeted Machine Hours (denominator level) : 600,000 Machine Hours

At the end of the year:

Actual Fixed Manufacturing Overhead : $260,000

Fixed Manufacturing Overhead Budget Variance : $20,000 Favorable

Fixed Manufacturing Overhead Volume Variance : $15,000 Favorable

 

Question : Teana's standard machine hours allowed for actual output was closest to ?

A) 562,500 Machine Hours B) 632,143 Machine Hours C) 637,500 Machine Hours D) 567,857 Machine Hours E) None

Answer was B) but I need help with steps as to how.

Answer 1

Let’s walk through the steps to figure out how the correct answer (B: 632,143 Machine Hours) was calculated.

What We Know:

1. Budgeted Machine Hours (Denominator Level): 600,000 hours
2. Actual Fixed Manufacturing Overhead: $260,000
3. Fixed Manufacturing Overhead Budget Variance: $20,000 Favorable
4. Fixed Manufacturing Overhead Volume Variance: $15,000 Favorable

Step 1: Understand the Variances

1. Budget Variance = Actual Fixed Overhead – Budgeted Fixed Overhead

We’re told this is $20,000 Favorable, meaning Actual < Budgeted by $20,000.

So:

Budgeted Fixed Overhead = Actual + $20,000 = $260,000 + $20,000 = $280,000

1. Volume Variance = Budgeted Fixed Overhead – Applied Fixed Overhead

We’re told this is $15,000 Favorable, meaning the Applied Overhead > Budgeted, by $15,000.

So:

Applied Fixed Overhead = Budgeted + $15,000 = $280,000 + $15,000 = $295,000

Step 2: Calculate the Overhead Rate per Machine Hour

Overhead Rate = Budgeted Fixed Overhead / Budgeted Machine Hours

= $280,000 / 600,000 = $0.4667 per machine hour

Step 3: Find Standard Machine Hours Allowed (What We're Solving For)

Use the formula:

Applied Fixed Overhead = Overhead Rate × Standard Hours Allowed

We already know:

1. Applied Overhead = $295,000
2. Rate = $0.4667

So:

Standard Hours Allowed = $295,000 / $0.4667 ≈ 632,143 machine hours

Final Answer: B) 632,143 Machine Hours

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