Briefly explain the nature of the fixed-overhead volume variance. Be sure to address the issue of capacity utilization in your response.
What will be an ideal response?
The fixed-overhead volume variance is the difference between a company's budgeted amount of fixed overhead and that applied to production. The variance will arise if the standard hours allowed for production differ from the hours of planned activity.
This hour difference is what some accountants call an over-utilization or under-utilization of capacity. The cost of this under- or over-utilization is really more than the fixed overhead amount just described, courtesy of the contribution margin lost on the units not produced (when capacity is under-utilized). Note that in the opposite case, the company "gains" from the contribution margin associated with any excess units.
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