Harrison Company Uses Machine Hours to Allocate Its Fixed Overhead

question 83

Essay

Harrison Company uses machine hours to allocate its fixed overhead costs.Mr.Alvarez,the production manager has been told that his fixed overhead variances for the past month were as follows:
Fixed overhead budget variance: $2,000 F
Fixed overhead volume variance: $20,000 U
The production V.P.has asked Mr.Alvarez to account for his underutilization of capacity for the month.Required:
Explain the meaning of the two variances and Mr.Alvarez's responsibility for them.

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Definitions:

Fair Value

The cost one would incur for acquiring an asset or the amount one would need to pay off a debt in a smooth transaction between parties in the market as of the date of valuation.

Land

The surface of the earth, considered as property and a basis for real estate transactions.

Successful-efforts Method

An accounting approach used in the oil and gas industry to capitalize only those costs associated with successfully locating new oil and natural gas reserves.

Full-cost Method

An accounting practice where all direct and indirect costs of producing an asset are capitalized and then amortized over time.