Question

Tailored Clothing is a manufacturer of designer suits. For June 2017, each suit is budgeted to take 5 labor hours. The budgeted number of suits to be manufactured in June 2017 is 1,080. Tailored 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 2017 are budgeted, $70,200, and actual, $63,910. in June 2017 there were 1,140 suits started and completed. There were no beginning or ending inventories of suits Requirements 1. Compute the spending variance for foxed manufacturing overhead. Comment on the results 2. Compute the production-volume variance for June 2017. What inferences can Tailored Clothing draw from this variance? Requirement 1. Compute the spending variance for fixed manufacturing overhead. Comment on the results Begin by computing the following amounts for the fixed manufacturing overhead Same Budgeted Lump Sum Regardless of Output Level Flexible Budget: Same Budgeted Lump Sum Regardless of Output Level Actual Costs Incurred Allocated Overhead

Answer 1

Same Budgeted Flexible budget : Same Actual cost Lump Sum Lump Budgeted Lump Sum incurred regardless of output| Lump regardless of level output level Allocated overhead 63910 70200 70200 74100 =(70200/1080)x1140 11 Requirement #1) FOH Spending variance: = Actual fixed overhead - Budgeted fixed overhead =63910-70200 6290 Favourable 12 13 14 Favorable FOH Spending variance means actual fixed overhead cost incurred during the period is less than budgeted OH cost. This indicates the manufacturing unit was successful in reducing fixed overheads by elimination of inefficiencies. 16 17 18 19 Requirement #2) Production volume variance: = Allocated FOH - Budgeted FOH =74100-70200 3900 Favourable Favorable production volume variance indicates that actual output is more than budgeted output. This results in an over allocation of fixed manufacturing OH.