Question

Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The master budget calls for the company to manufacture and sell 100,000 liters at a budgeted price of $75 per liter this year. The standard direct cost sheet for one liter of the preservative follows. Direct materials Direct labor (2 pounds @ $4) (0.5 hours @ $24) $ 8 12 Variable overhead is applied based on direct labor hours. The variable overhead rate is $20 per direct-labor hour. The fixed overhead rate (at the master budget level of activity) is $10 per unit. All non-manufacturing costs are fixed and are budgeted at $1.2 million for the coming year. At the end of the year, the costs analyst reported that the sales activity variance for the year was $270,000 unfavorable. The following is the actual income statement (in thousands of dollars) for the year.

Answer 1

Solution:

Fixed overhead price variance = Budgeted fixed overhead - Actual fixed overhead = $1,000,000 - $1,050,000 = $50,000 U

Fixed overhead production volume variance = Fixed overhead applied - Budgeted fixed overhead

Sales activity variance = $270,000 Unfavorable

Nos of actual units sold = 100000 - ($270,000/$75) = 96400 units

Fixed overhead production volume variance = (96400*$10) - $1,000,000 = $36,000 U