Question

The Best of Italy Pizza Restaurant make pizza for in-house and on-line customers. The company has two direct-cost categories: direct materials and direct manufacturing labor. Variable manufacturing overhead is allocated to products on the basis of standard direct manufacturing labor-hours. Following is some budget data for the Best of Italy Pizza: Direct manufacturing labor use 0.42 hours per pizza Variable manufacturing overhead $4.00 per direct manufacturing labor-hour The Best of Italy Pizza Company provides the following additional data for the year ended December 31, 2019: Planned (budgeted) output 54,000 pizza Actual production 43,200 pizza Direct manufacturing labor 14,429 hours Actual variable manufacturing overhead $86,000 The Best of Italy Company also allocates fixed manufacturing overhead to products on the basis of standard direct manufacturing labor-hours. For 2019, fixed manufacturing overhead was budgeted at $3.00 per direct manufacturing labor-hour. Actual fixed manufacturing overhead incurred during the year was $73,000. Required: 1. Prepare a variance analysis of variable manufacturing overhead. 2. Discuss the variances you have calculated and give possible explanations for them. 3. Prepare a variance analysis of fixed manufacturing overhead cost. 4. Is fixed overhead under-allocated or over-allocated? By what amount? 5. Comment on your results. Discuss the variances and explain what may be driving them.

Answer 1

DETAILS OF ITALY PIZZA RESTAURANT
	BUDGETED	ACTUAL
Direct Mfg. Labour	0.42 hrs per pizza	14429 hrs
Variable Mgf. Overhead	$4 per direct mfg labour hrs	$86,000
Output	54000 pizza	43200 pizza
Fixed Mfg. Overhead	$3 per direct mfg labour hrs	$73,000
1. VARIABLE MANUFACTURING OVERHEAD VARIANCE= (Standard Rate – Actual Rate) x Actual Output
Actual variable mfg. overhead per unit = $86000/43200 pizzas = $ 1.99 per unit of pizza
Standard variable mfg. overhead per unit = $4 * 0.42 hrs = $1.68 per unit of pizza
Thus Variable Manufacturing Overhead Variance = (1.68-1.99)*43200 = $13424 (UNFAVOURABLE)
2. Variable Overhead Variance arises when there is a difference between the actual variable overhead and the standard variable overhead based on budgets. Based on answer 1, it can be seen that the company has spent more by $13424 towards its Variable Manufacturing Overhead as compared to its budgeted/standard Variable Manufacturing Overhead.
3. FIXED MANUFACTURING OVERHEAD VARIANCE= (Actual Output x Standard Rate per unit) – Actual Fixed Overhead
Standard rate for Fixed manufacturing overhead per unit= $3 * 0.42 hrs = $1.26 per unit of pizza
Thus, Fixed Manufacturing Overhead Variance = (43200*1.26)-73000 = $18568 (UNFAVOURABLE)
4. Fixed Overhead Variance arises when there is a difference between the standard fixed overhead for actual output and the actual fixed overhead incurred. Based on answer 3, it can be seen that the company has spent more by $18568 towards its FIxed Manufacturing Overhead as compared to its budgeted/standard Fixed Manufacturing Overhead. Thus, Fixed overheads were under-allocated by the company by $18568.
5. The company has spent more than its budgeted overhead, whether it is variable overhead or fixed overhead. The company should adopt the measure to reduce the gap in the number of actual expenses and budgeted expenses either by re-evaluating its budget or by controlling its actual expenses.