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 108.000 liters at a budgeted price of $135 per liter thi year. The standard direct cost sheet for one liter of the preservative follows. Direct materials Direct labor (2 pounds @ $8) (0.5 hours $32) $16 16 Variable overhead is applied based on direct labor hours. The variable overhead rate is $60 per direct-labor hour. The fixed overhead rate (at the master budget level of activity is $14 per unit. All non-manufacturing costs are fixed and are budgeted at $16 million for th coming year. At the end of the year, the costs analyst reported that the sales activity variance for the year was $438,000 unfavorable. The following is the actual income statement in thousands of dollars) for the year. $13,998 Sales revenue Less variable costs Direct materials Direct labor Variable overhead Total variable costs Contribution margin Less fixed costs Fixed manufacturing overhead Non-manufacturing costs Total fixed costs Operating profit 1.528 1.610 2.930 $ 6,068 $ 7,90 $ $ 2.960 6,970

Answer 1

Solution:

Budgeted contribution margin per unit= $135 - ($16 + $16 + $60*0.50) = $73 per unit

Actual sales units = Budgeted sales units - Unfavorable activity variance / Budgeted contribution margin per unit

= 108000 - ($438,000 / $73) = 102000 units

Fixed overhead price variance = Budgeted fixed overhead - Actual fixed overhead

= (108000*$14) - $1,690,000 = $178,000 U

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

= (102000*$14) - (108000*$14) = $84,000 U