Olia Ltd manufactures olive oil. Actual direct manufacturing labour-hours in the

Question

Olia Ltd manufactures olive oil. Actual direct manufacturing labour-hours in the factory that produces the olive oil have been higher than budgeted hours for the last few months and the owner, Olivia Tucci, is concerned about the effect this has had on the company's cost overruns. Because variable manufacturing overhead is allocated to units produced using direct manufacturing labour-hours, Olivia feels that the mismanagement of labour will have a twofold effect on the company's profitability. Following are the relevant budgeted and actual results for the third quarter of 2015: Required: Calculate the variable manufacturing overhead flexible, spending and efficiency variances. Indicate whether each is favourable (F) or unfavourable (U).

Explanation / Answer

Cosidering the overhead variances for setting up Variable Manfcaturing OH flexible variance= Flexible budgeted overhead-Actual Overhead =20000*30-23200*32=                 142,400 Unfavorable Spening Variance =Actual Hrs ( Actual Rate -Std Rate ) =23200*(32-30)                   46,400 Unfavorable Efficiency Variance =Std Rate ( Actual Hrs-Std Hrs )= =30*(23200-20000)=                   96,000 Unfavorable

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