Question

Man's Clothing is a manufacturer of designer suits. For June 2016, each suit is budgeted to take 3 ​labor-hours. The budgeted number of suits to be manufactured in June 2016 is 1,160. Man's Clothing allocates fixed manufacturing overhead to each suit using budgeted direct manufacturing​ labor-hours per suit. Data pertaining to fixed manufacturing overhead costs for June 2016 are​ budgeted, $52,200​, and​ actual, $63,870. In June 2016 there were 1,200 suits started and completed. There were no beginning or ending inventories of suits.

Requirements

1. Compute the spending variance for fixed manufacturing overhead. Comment on the results.

2. Compute the​ production-volume variance for June 201. What inferences can the clothing company draw from this​ variance?

Answer 1

Question 1

Spending Variance for Fixed Manufacturing Overhead = (Standard Fixed Overhead Rate per Hour * Budgeted Hours) - Actual Fixed Overhead

Actual Fixed Overhead = $ 63,870

Standard Fixed Overhead Rate per Hour = $ 15 per Unit

Budgeted Hours = 3,480 Labour Hours

Spending Variance for Fixed Manufacturing Overhead = (15 * 3,480) - 63,870

Spending Variance for Fixed Manufacturing Overhead = ($ 11,670) Unfavorable Variance

The Unfavorable Variance clearly indicates that the company has spent much more than they should have actually spent due to which the actual cost and budgeted more than that of being a minor differences in the level of production so the Company should look forward for the same and try to improve them in the near future.

Notes

Budgeted Direct Labour Hours = Budgeted Units * Direct Labour Hours per Unit

Budgeted Units = 1,160 Units

Direct Labour Hours per Unit = 3 Hours

Budgeted Direct Labour Hours = 1,160 * 3 = 3,480 Hours

Budgeted Fixed Manufacturing Overhead Rate per Hour = Budgeted Fixed Manufacturing Overhead / Budgeted Direct Labour Hours

= 52,200 / 3,480

= $ 15 per Direct Labour Hour

Question 2

Production Volume Variance for Fixed Manufacturing Overhead = (Standard Fixed Overhead Rate per Direct Labour Hour * Standard Hours for Actual Production) - (Standard Fixed Manufacturing Overhead Rate per Hour * Budgeted Hours)

Standard Fixed Overhead Rate per Hour = $ 15

Budgeted Hours = 3,480 Hours

Standard Hours for Actual Production = Actual Production * Direct Labour Hours per Unit

Actual Production = 1,200 Units

Direct Labour Hours per Unit = 3 Hours

Standard Hours for Actual Production = 1,200 Units * 3 Hours per Unit

= 3,600 Hours

Production Volume Variance for Fixed Manufacturing Overhead = (3,600 * 15) - (3,480 * 15)

Production Volume Variance for Fixed Manufacturing Overhead = $ 1,800 Favourable Variance

The Production Volume Variance is Favourable which means the company can draw the outcome that the company has been able to use its resources much more efficiently and the fixed Manufacturing Overhead cost gets allocated to more number of units due to which the company experienced Favourable Variance.