Question

Question 4

You have been assigned for a Customer Due Diligence (CDD), more specifically, for reviewing the actual and budgeted figures of variable manufacturing overhead of Nowheresville Pty Ltd., a manufacturer of umbrellas. Jules De Martino is concerned whether this potential corporate customer is sticking to its variable manufacturing overhead budget or not. The analysis is for a specific month of the year, comparing the budgeted and actual figures.

The variable manufacturing overhead cost is allocated to each umbrella based on budgeted direct manufacturing labour-hours per umbrella. For the specific month of the year, each umbrella is budgeted to take 4 labour-hours. Budgeted variable manufacturing overhead cost per labour-hour is $18. The budgeted number of umbrellas to be manufactured in this given month is 300.

Actual variable manufacturing overhead costs in the given month were $20,000 for 280 umbrellas started and completed. There was no opening or closing stock of umbrellas. Actual direct manufacturing labour-hours for this given month were 1,200.

Required

1. a) Calculate the static-budget variance, the flexible-budget variance, and the sales-volume variance for variable manufacturing overhead. (e.g., Exercise 16.11, Chapter 16, 5 marks)

2. b) Based on the above answer, comment on whether Nowheresville Pty Ltd. is sticking to its variable manufacturing overhead budget or not. (e.g., Exercise 16.11, Chapter 16, 10 marks)

3. c) Calculate the spending and efficiency variances for the given month and identify what has caused the flexible-budget variance for Nowheresville Pty Ltd. (e.g., Exercise 16.11, Chapter 16, 5 marks)

Answer 1

		Budgeted labor hour per unit	4
	SR	BudgetedVariable overhead per hour	$18
		Budgeted number of umbrellas	300
		Budgeted direct labor hours=300*4	1200
		Budgeted Variable Overhead Cost	$21,600	(1200*18)
		Actual Number of umbrellas manufactured	280
	SH	Flexible Budget direct labor hours=280*4	1120
		Flexible Budget Variable Overhead Cost	$20,160	(1120*18)
	AH	Actual manufacturing Labor Hour	1200
		Actual Variable Overhead cost	$20,000
	AR	Actual Variable Overhead cost per hour	$16.67	(20000/1200)
	a)	Static budget Variance=21600-20000	$1,600
		Flexible budget variance=20160-20000	$160	Favorable
		Sales Volume Variance =(300-280)*Contribution per unit
		Contribution data is not available
	b)	Actual variable overhead cost is lower than flexible budget
		The company is sticking to its overhead budget
	c)
	AH*(AR-SR)	Spending Variance =1200*(16.67-18)=	$1,600	Favorable
		Actual Rate is lower than budgeted
	SR*(AH-SH)	Efficiency Variance =18*(1200-1120)	$1,440	Unfavorable
		Actual hour is higher than budgeted
		Favorable variance is becauseActual rate is lower than budgeted