Question

Sunny Day Company makes customized golf shirts for sale to golf courses. Each shirt requires 3 hours to produce because of the customized logo for each golf course. Sunny Day uses direct labor-hours to allocate the overhead cost to production. Fixed overhead costs, including rent, depreciation, supervisory salaries, and other production expenses, are budgeted at $15,000 per month. The facility currently used is large enough to produce 1,000 shirts per month. During March Sunny Day produced 760 shirts and actual fixed costs were $11,600. Read the requirements Requirements 1&2. Calculate the fixed overhead spending variance and indicate whether it is favorable (F) or unfavorable (U). If Sunny Day uses direct labor hours available at capacity to calculate the budgeted fixed overhead rate, what is the production-volume variance? Indicate whether it is favorable (F) or unfavorable (U). Begin by determining the formula then computing the fixed overhead rate per direct labor hour (Round the fixed overhead rate to the nearest cont.) . Fixed overhead rate

Answer 1

1)

Spending variance = actual costs incurred - budgeted overhead costs

= 11000-15000

= $4000 Favorable

2) Budgeted rate = 15000/3hours*1000

= $5 per hour

Now, compute production volume variance.

Production volume variance = (Budgeted fixed overhead cost)-(allocated fixed overhead cost)

= 15000-(5*3*760)

= $3600 Unfavorable

3) The unfavorable production volume variance indicates that the capacity used is less than the budgeted capacity for fixed costs.

He would be willing to incur these costs because there is an uncertain demand that could shoot up.

Therefore, large capacity would be able to fulfill this demand and avoid happening of losses due to failure to meet the demand.

4) Sales volume variable = (Actual units sold - budget units)*(contribution margin per unit)

Compute contribution margin per unit = sales price - variable cost

=60-27 = $33

Compute sales volume variance:

Sales volume variance = (actual unit sold - budget units) * (Contribution margin per unit)

= (760-1000) * 33

= $7920 Unfavorable

Calculate budgeted profit per unit:

Budgeted profit per unit = expected sales price - (budgeted variable cost)-(budgeted fixed cost)

= 60-27-(5*3)

= $18

Calculate operating income variance:

Operating income variance = (Actual quantity sold - budgeted quantity sold)*(budgeted profit per unit)

= (760-1000)*18

= $4320 Unfavorable

Reconcile the production volume variance with sales volume variance:

Difference = sales volume variance - operating income volume variance

= 7920-4320

= $3600

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