In: Accounting
Top minus NotchTop−Notch
Clothing is a manufacturer of designer suits. For June
20172017,
each suit is budgeted to take
33
labor-hours. The budgeted number of suits to be manufactured in June
20172017
is
1 comma 0601,060.
Top minus NotchTop−Notch
Clothing allocates fixed manufacturing overhead to each suit using budgeted direct manufacturing labor-hours per suit. Data pertaining to fixed manufacturing overhead costs for June
20172017
are budgeted,
$ 54 comma 060$54,060,
and actual,
$ 63 comma 870$63,870.
In June
20172017
there were
1 comma 1201,120
suits started and completed. There were no beginning or ending inventories of suits.
Requirements
1. Compute the spending variance for fixed manufacturing overhead. Comment on the results.
2. Compute the production-volume variance for June
20172017.
What inferences can
Top minus NotchTop−Notch
Clothing draw from this variance?
Requirement 1. Compute the spending variance for fixed manufacturing overhead. Comment on the results.
Begin by computing the following amounts for the fixed manufacturing overhead.
Flexible Budget: |
|||
Same Budgeted |
Same Budgeted |
||
Lump Sum |
Lump Sum |
||
Actual Costs |
Regardless of |
Regardless of |
Allocated |
Incurred |
Output Level |
Output Level |
Overhead |
Flexible Budget: | |||
Same Budgeted | Same Budgeted | ||
Lump Sum | Lump Sum | ||
Actual Costs | Regardless of | Regardless of | Allocated |
Incurred | Output Level | Output Level | Overhead |
$ 63,870 | $ 54,060 | $ 54,060 | $ 57,120 |
Allocated overhead = Budgeted input quantity allowed for actual output x Budgeted rate
Budgeted input quantity allowed for actual output = 3 hours x 1120 suits = 3360 hours
Budgeted rate = $54060/(3 x 1060) = $54060/3180 = $17
Allocated overhead = 3360 x $17 = $57120
1. Spending variance = $63870 - $54060 = $9810 Unfavorable
2. Production-volume variance = $57120 - $54060 = $3060 Favorable
Top-Notch spent more than the budgeted amount due to which there was an unfavorable spending variance of $9810. However, since the number of suits produced 1120 was higher than that budgeted at 1060, the production-volume variance was favorable.