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. Following is some budget data for the Brown Bread​ Company:

Budget data

Direct manufacturing labor use

0.02 hours per baguette

Variable manufacturing overhead

$10.00 per direct manufacturing labor-hour

The Brown Bread Company provides the following additional data for the year ended December​ 31, 2017​:

Planned (budgeted) output	3,500,000	baguettes
Actual production	3,200,000	baguettes
Direct manufacturing labor	58,300	hours
Actual variable manufacturing overhead	$781,220

1.	What is the denominator level used for allocating variable manufacturing​overhead? (That​ is, for how many direct manufacturing​ labor-hours is Brown Bread​ budgeting?)
2.	Prepare a variance analysis of variable manufacturing overhead. Begin by calculating the following amounts for the variable overhead that will be used to calculate the variances. Actual Input Actual Costs x Flexible Allocated Incurred Budgeted Rate Budget Overhead Variable MOH
3.	Discuss the variances you have calculated and give possible explanations for them.

Answer 1

1	Denominator level used for allocating variable manufacturing overhead
	= 3500000 x 0.02 = 70000 direct labour hours
2	Variance analysis of variable manufacturing overhead
	Actual cost incurred	$781,220
	Actual input x budgeted rate	$583,000
	(58300 direct hour x $10 per hour)
	Variance	$198,220	Unfavourable
	Actual input x budgeted rate	$583,000
	(58300 direct hour x $10 per hour)
	Flexible budget
	(64000 direct hour x $10 per hour)	$640,000
	Variance	($57,000)	Favourable
	(3200000 x 0.02 = 64000 direct hours)
	Allocated overheads	$640,000
3	Spending variance is $198220 U. It is unfavourable as the actual direct labour rate is
	$13.40 per hour which is higher than standard/budgeted rate
	Efficiency variance is $57000 F. It is favourable as the actual direct hours required for
	the production are less than budgeted direct fours required for the actual production