Budgeted Fixed Manufacturing Overhead Rate: The budgeted fixed manufacturing overhead rate is that rate at which the total budgeted fixed overhead costs are allocated. Production Volume Variance: The production volume variance is the difference between the budgeted amount of fixed overhead costs and the fixed overhead cost allocated for the actual output. The positive production volume variance shows under-utilization of capacity and the negative production variance shows the over-utilization of capacity. The effect of production-volume variance on T’s operating income in 2015.

Step 1. To determine: Budgeted Fixed Manufacturing Overhead Rate: The budgeted fixed manufacturing overhead rate is the rate at which the total budgeted fixed overhead costs are allocated. Production Volume Variance: The production volume variance is the difference between the budgeted amount of fixed overhead costs and the fixed overhead cost allocated for the actual output. The positive production volume variance shows under-utilization of capacity and the negative production variance shows the over-utilization of capacity. The effect of production-volume variance on T's operating income in 2015. Step 2. Explanation: Given, The fixed manufacturing overhead is $1,517,000.Thebudgetedproductionofunitsis820,000.Thebudgetedfixedoverheadis$1,517,000. Calculation of the production volume variance: The formula to calculate the production volume variance is: Production volume variance = Budgeted fixed overhead - Allocated fixed manufacturing costs. Substitute $1,517,000forbudgetedfixedoverheadand$1,369,000 for allocated fixed manufacturing costs in the above formula, Production volume variance = $1,517,000-$1,369,000 = $148,000U.Hence,theproductionvolumevarianceis$148,000U. As the production volume variance is unfavorable with underutilization of the fixed cost capacity by $148,000.So,theoperatingincomeeffectivelyreducesby$148,000.