Question

Esquire Clothing is a manufacturer of designer suits. For June 2020​, each suit is budgeted to take 4 ​labor-hours. The budgeted number of suits to be manufactured in June 2020 is 1,040. 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 2020 are​ budgeted, $62,400​, and​ actual, $63,916. In June 2020 there were 1,080 suits started and completed. There were no beginning or ending inventories of suits.

Required:
a. Compute the spending variance for fixed manufacturing overhead. Comment on the results.
b. Compute the production-volume variance for June 2017. What inferences can Esquire Clothing draw from this variance?

Answer 1

Answer:

a-1. Fixed overhead spending variance = $1,516 Unfavorable

a-2. The manufacturing was not able to reduce fixed overheads by eliminating inefficiency.

b-1. Production-volume variance​ = $2,400 Favorable

b-2. It is favrable becausde actual output is higher than budgeted output resulting in over allocation of fixed overhead.

Explanation:

a. Compute the spending variance for fixed manufacturing overhead. Comment on the results.

a-1. Fixed overhead spending variance = Actual fixed overhead – Budgeted fixed overhead = $63,916 - $62,400​ = $1,516 Unfavorable

a-2. The fixed overhead spending variance is unfavorable because Actual fixed overhead is higher than Budgeted fixed overhead. The implication of this is that the manufacturing was not able to reduce fixed overheads by eliminating inefficiency.

b. Compute the production-volume variance for June 2017. What inferences can Esquire Clothing draw from this variance?

Allocated fixed overhead = (Budgeted fixed manufacturing overhead costs / Budgeted number of suits) * Actual number of suits = ($62,400 / 1,040) * 1,080 = $64,800

b-1. Production-volume variance = Fixed overhead volume variance = Allocated fixed overhead - Budgeted fixed overhead = $64,800 - $62,400​ = $2,400 Favorable

b-2. Fixed overhead volume variance is favorable because the allocated fixed overhead is higher than the budgeted fixed overhead. This indicates that actual output is higher than budgeted output resulting in over allocation of fixed overhead.