Question

Suction Inc., is a manufacturer of vacuums and uses standard costing. Manufacturing overhead​ (both variable and​ fixed) is allocated to products on the basis of budgeted​ machine-hours. In 2017​, budgeted fixed manufacturing overhead cost was 18,000,000. Budgeted variable manufacturing overhead was $12 per​machine-hour. The denominator level was 1,000,000 machine-hours

1.	Prepare a graph for fixed manufacturing overhead. The graph should display how Suction​, Inc.'s fixed manufacturing overhead costs will be depicted for the purposes of​ (a) planning and control and​ (b) inventory costing.
2.	Suppose that 950,000 machine-hours were allowed for actual output produced in 2017​, but 975,000 actual​ machine-hours were used. Actual manufacturing overhead was $11,212,500​, variable, and $17,900,000​, fixed. Compute​ (a) the variable manufacturing overhead spending and efficiency variances and​ (b) the fixed manufacturing overhead spending and​ production-volume variances.
3.	What is the amount of the​ under- or overallocated variable manufacturing overhead and the​under- or overallocated fixed manufacturing​ overhead? Why are the​ flexible-budget variance and the​ under- or overallocated overhead amount always the same for variable manufacturing overhead but rarely the same for fixed manufacturing​ overhead?
4.	Suppose the denominator level was 750,000 rather than 1,000,000 machine-hours. What variances in requirement 2 would be​ affected? Recompute them.

Answer 1

	Budgeted			Absorbed			Actual
	Machine hours	Rate	Amount	Machine hours	Rate	Amount	Machine hours	Rate	Amount
Fixed Manufacturing costs	1000000	18	18000000	950000	18	17100000			17900000
Variable overhead	1000000	12	12000000	950000	12	11400000	975000	11.5	11212500

2	Fixed Overhead Variance	Actual overhead-Absorbed overhead
		17900000-17100000
		-800000	Unfavourable
	Fixed Overhead Spending Variance	Actual Fixed Overhead-Budgeted Fixed Overhead
		17900000-18000000
		100000	Favourable
	Fixed Overhead Volume Variance	Absorbed Fixed Overhead-Budgeted Fixed overhead
		17100000-18000000
		-900000	Unfavourable
	Variable Overhead Variance	Actual overhead-Absorbed overhead
		11212500-11400000
		187500	Favourable
	Variable Overhead Spending Variance	(Actual Rate-Standard Rate)*actual machine hours
		(11.5-12)*975000
		487500	Favourable
	Variable Overhead Volume Variance	(Actual hours-Standard hours)*standard rate
		(975000-950000)*12
		-300000	Unfavourable

3

The flexible budget variance and under/over absorbed overhead is same in case of variable overhead but rarely in case of fixed overhead

because the variable overhead in flexible budget will change with change in levels of production,hence the variance and under/over absorbed overhead is almost the same.

Fixed overhead remains the same and does not change with the change in level of activity,thus the flexible budget does not reflect any change in fixed overhead

Therefore the variances of actual fixed overhead incurred differs as compared to flexible budget variances

4		Budgeted			Standard for actual			Actual
		Machine hours	Rate	Amount	Machine hours	Rate	Amount	Machine hours	Rate	Amount
	Fixed Manufacturing costs	750000	24	18000000	950000	24	22800000			17900000
	Variable overhead	750000	12	9000000	950000	12	11400000	975000	11.5	11212500
	Fixed Overhead Variance	Actual overhead-Absorbed overhead
		17900000-22800000
		4900000	Favourable
	Fixed Overhead Spending Variance	Actual Fixed Overhead-Budgeted Fixed Overhead
		17900000-18000000
		100000	Favourable
	Fixed Overhead Volume Variance	Absorbed Fixed Overhead-Budgeted Fixed overhead
		22800000-18000000
		4800000	Favouarble