Question

The Brown Bread Company bakes baguettes for distribution to upscale grocery stores. 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.

Direct manufacturing labor use	0.02 hours per baguette
Variable manufacturing overhead	$10.00 per direct manufacturing labor-hour

Planned (budgeted) output	3,300,000 baguettes
Actual production	3,000,000 baguettes
Direct manufacturing labor	54,100 hours
Actual variable manufacturing overhead	$708,710

The Brown Bread Company also allocates fixed manufacturing overhead to products on the basis of standard direct manufacturing​ labor-hours. For 2017, fixed manufacturing overhead was budgeted at $4.00 per direct manufacturing​ labor-hour. Actual fixed manufacturing overhead incurred during the year was $ 298,000.

REQUIREMENT

1.	Prepare a variance analysis of fixed manufacturing overhead cost.
2.	Is fixed overhead underallocated or​ overallocated? By what​ amount?
3.	Comment on your results. Discuss the variances and explain what may be driving them.

Answer 1

1. Actual Manufacturing Fixed Overhead = $ 298,000

Budgeted Direct Manufcaturing Labor Hours = 3,300,000 * 0.02 = 66,000 hours
Flexible budget Fixed manufacturing overhead costs = Budgeted Direct Manufacturing Labor Hours * Standard Cost per Direct Labor Hours =66,000 hours X $ 4 = $ 264,000

Fixed manufacturing overhead costs applied:-
Standard hours = Actual production X Standard Direct Manufacturing labor hours per baguette = 3,000,000 X 0.02 hours = 60,000 hours
Fixed manufacturing overhead costs applied = 60,000 X $ 4 = $ 240,000

$ 34,000 unfavorable fixed manufacturing overhead spending variance = $ 298,000 - $ 264,000. Variance is unfavorable because the actual fixed manufacturing overhead costs are higher than budgeted costs.

$ 24,000 unfavorable fixed manufacturing overhead volume variance = $ 264,000 - $ 240,000. Variance is unfavorable because the volume of goods produced and sold was lower than expected.

2. Fixed manufacturing overhead is under-allocated by $ 58,000. Because actual fixed manufacturing overhead i.e. $ 298,000 is higher than fixed manufacturing overhead costs applied i.e $ 240,000.

3. Unfavorable fixed manufacturing overhead spending variance is $ 34,000 due to actual fixed manufacturing overhead cost is higher than budgeted costs. Unfavorable fixed manufacturing overhead volume variance is $ 24,000 due to the volume of goods produced and sold is lower than budgeted.