Question

The Malt Bread Company bakes baguettes for distribution to upscale grocery stores. The company has two direct cost categories: direct materials and direct manufacturing labor. The Malt Bread Company allocated fixed manufacturing overhead to products on the basis of standard direct manufacturing labor hours.

The following is some budget data for the Malt Bread Company for 2017 and additional information for the gear ended December 21, 2017.

Direct manufacturing labor use: .02 hours per baguette.

Fixed manufacturing overhead: $3.00 per direct manufacturing labor-hour

Planned (budgeted) output 3,600,000 baguettes
Actual production 2,900,000 baguettes
Budgeted direct manufacturing labor 72,000 hours
actual direct manufacturing labor 52,100 hours
Actual fixed manufacturing overhead $286,000

1. Prepare a variance analysis of fixed manufacturing overhead cost.

2. Is fixed overhead underallocated or overallocated? By what amount?

3. Comment on your results. Discuss the variances and explain what may be driving them

Answer 1

		Allocation basis: Direct manufacturing labor hours	Budgeted Data	Actual Data
		Direct manufacturing hours per unit =	0.02	0.018
		Fixed manufacturing overhead HOUR=	$3	5.49
		Output	3,600,000	2,900,000
		Direct Manufacturing HOURS	72,000	52,100
		Manufacturing Overhead	$216,000	$286,000
			(3,600,000*0.02*3)
1	Variance analysis of Fixed Manufacturing Overhead Cost
	Fixed Overhead cost variance =	Fixed overhead recovered – Actual fixed overhead
	Fixed Overhead cost variance =	174,000-286,000
	Fixed Overhead cost variance =	-$112,000
	Fixed overhead recovered = Budgeted Fixed overhead/Budgeted Output*Actual Output
	Fixed overhead recovered = 216,000/3,600,000*2,900,000
	Fixed overhead recovered = $ 174,000
2	Fixed Overhead expenditure variance =	Budgeted fixed overhead -Actual fixed overhead
	Fixed Overhead expenditure variance =	216,000 - 286,000
	Fixed Overhead expenditure variance =	-$70,000
3	Fixed overhead Volume variance =	Absorbed fixed overhead - Budgeted Fixed overhead
		174000-216000
	Fixed overhead Volume variance =	-$42,000
	Standard hours for actual output =	58,000	(0.02*2,900,000)
4	Fixed Overhead Capacity Variance =	Standard fixed overhead rate per hour * (Actual hours-Budgeted hours)
		3*(52100-72,000)
	Fixed Overhead Capacity Variance =	-$59,700
5	Fixed Overhead Efficiency Variance:	Standard fixed overhead rate per hour * (Standard hours of actual output-Actual hours )
		3*(58,000-52,100)
	Fixed Overhead Efficiency Variance:	$17,700
	Summary	Amounts
	Fixed Overhead cost variance =	-$112,000
	Fixed Overhead expenditure variance =	-$70,000
	Fixed overhead Volume variance =	-$42,000
	Fixed Overhead Capacity Variance =	-$59,700
	Fixed Overhead Efficiency Variance:	$17,700
2	Actual fixed overhead incurred	$286,000
	Allocated fixed overhead	$174,000
	Under-recoverred	$112,000
			Drivers
3	Fixed Overhead cost variance =	-112000	(expenditure variance and volume variance)
	Fixed Overhead expenditure variance =	-70000	(Inflation)
	Fixed overhead Volume variance =	-42000	(Capacity not utilised or effeciency)
	Fixed Overhead Capacity Variance =	-59700	(full capacity not reached)
	Fixed Overhead Efficiency Variance:	17700	(Rate of doing work)
	Unfavourable variance is due to Less production and more expenditure