Zero Company's standard factory overhead rate is $3.75 per direct labor hour (DLH), calculated at 90% capacity = 900 standard DLHs. In December, the company operated at 80% of capacity, or 800 standard DLHs. Budgeted factory overhead at 80% of capacity is $3,150, of which $1,350 is fixed overhead. For December, the actual factory overhead cost incurred was $3,800 for 840 actual DLHs, of which $1,300 was fixed factory overhead.

What is the fixed overhead production volume variance, to the nearest whole dollar, for Zero Company in December?

$150 unfavorable

1. Standard fixed OH application rate = Budgeted fixed overhead/denominator activity level (in DLHs) = $1,350 (given)/900 DLHs (given) = $1.50/DLH.

2. Denominator volume = 900 DLHs (given).

3. Standard hours allowed for this period's output (production) = 800 DLHs (given).

4. Therefore, fixed overhead production volume variance = (Standard DLHs for actual production ? denominator activity level, in DLHs) × Fixed OH application rate/DLH = (800 ? 900) DLHs × $1.50/DLH = $150U (to nearest whole dollar).

Note: the variance here is unfavorable (U) because actual output level (measured in standard hours) < denominator volume hours (i.e., the standard hours assumed in establishing the fixed overhead application rate).