Question

In: Accounting

Top minus NotchTop−Notch Clothing is a manufacturer of designer suits. For June 20172017​, each suit is...

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

Solutions

Expert Solution

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.


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