Question

8-23 Variable manufacturing overhead variance analysis. The French 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. Following is some budget data for the French Bread Company: Direct manufacturing labor use 0.02 hours per baguette Variable manufacturing overhead $10.00 per direct manufacturing labor-hour The French Bread Company provides the following additional data for the year ended December 31, 2017: Required Required Required Required Planned (budgeted) output Actual production Direct manufacturing labor Actual variable manufacturing overhead 3,200,000 baguettes 2,800,000 baguettes 50,400 hours $680,400

1. What is the denominator level used for allocating variable manufacturing overhead? (That is, for how many direct manufacturing labor-hours is French Bread budgeting?)

2. Prepare a variance analysis of variable manufacturing overhead. Use Exhibit 8-4 (page 324) for reference.

3. Discuss the variances you have calculated and give possible explanations for them.

Answer 1

1.

Denominator level = 3,200,000 X 0.02 hours = 64,000 hours

2.

S No	Particulars	Actual Results	Flexible Budget Amounts
a	Output units	2,800,000	2,800,000
b	Direct labor hours	50,400	56,000
c	Labor hour per unit	0.018	0.020
d	Variable MOH	$       680,400	$               560,000
e	Variable MOH per labor hour (d/b	$           13.50	$                    10.00
f	Variable MOH per unit (d/a)	$           0.243	$                    0.200

Spending Variance = 680,400 - 504,000 = 176,400 Unfavorable
Efficiency Variance = 560,000 - 504,000 = 56,000 Favorable

3.

Spending variance - This variance is due to rate change. An explanation could be the increase in energy rates as compared to the budget.
Efficiency variance is favorable. The labor were more efficient.