FIXED MANUFACTURING OVERHEAD, VARIANCE ANALYSIS Esquire Clothing allocates fixed

Question

FIXED MANUFACTURING OVERHEAD, VARIANCE ANALYSIS Esquire 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 2014 are budgeted, $62,400, and actual, $63,916. REQUIREMENTS: 1. Compute the spending variance for fixed manufacturing overhead. Comment on the results. 2. Compute the production-volume variance for June 2014. What inferences can Esquire Clothing draw from this variance?

Explanation / Answer

From the given information:

                       Budgeted overhead rate is $12.00 per labour hr.

                      Budgeted manufacturing cost = $ 62,400

                    Actual manufacturing cost =     $ 63,916

                      This implies budgetd labor-hours = 62,400/12 = 5200 and

                                        Actual labor-hours = 63,916/12 = 5326.

Now,

          1. Spending variance for fixes manufacturing overhead = Actual fixed overhed - Budgeted fixed overhead

                                                                                         = 63,916 - 62,400

                                                                                         = $ 1,516.

               Here, the resulatant variance is adverse which means to say actual expense is higher than budgeted expense. Causes may be 1. Due to planning inaccuracies,

                                      2. Actual labour hours may vary than budgeted due to inefficiencies.

                                      3. Any other considerations not taken while budgeting.

              2. Production- Volume variance:

                                    It measures the amount of overhead rate applied to number of units produced

                                 = (Actul units produced - Budgeted units produced ) * Budgeted overhead rate

                                 = ( 5326 - 5200 )* 12

                                 = 1126*12 = 2252

         Here, Excess quantity of production is considerd to be favorable which means manufacturing overhead costs can be allocated across more number of units produced, which reduces total allocated cost per unit.

         Note: For calculating production- volume variance, it is assumed that each unit o fproduction requires

                   one labor hour.That means total numer of units produced = total number of labor- hours employed.

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