Question

1. 8-19 FIXED MANUFACTURING OVERHEAD VARIANCE ANALYSIS. The Lebanese Bakery Inc. also allocates FMOH to products on the basis of standard direct manufacturing labour-hours. For 2018, FMOH was budgeted at $4.00 per DMLH. Actual FMOH incurred during the year was $272,000.

   LO 1

   1. Rate variance, $35,200 F

   Baguettes are baked in batches of 100 loaves. Following are some pertinent data for Lebanese Bakery Inc.:

   Direct manufacturing labour use	2.00 DMLH per batch
   Fixed manufacturing overhead	$4.00 per DMLH

   Lebanese Bakery Inc. recorded the following additional data for the year ended December 31,2018:

   Planned (budgeted) output	3,840,000 baguettes
   Actual production	3,360,000 baguettes
   Direct manufacturing labour	50,400 DMLH
   Actual fixed MOH	$272,000

Required

1. Prepare a variance analysis of FMOH costs.

2. Is fixed overhead under- or overallocated? By how much?

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

Answer 1

Part 1

Budgeted standard direct manufacturing labor used = 2/100 =0.02 per baguette

Budgeted output = 3,840,000 baguettes

Budgeted standard direct manufacturing labor-hours = 3,840,000 × 0.02= 76800 hours

Budgeted fixed manufacturing overhead costs = 76800 × $4.00 per hour= $307200

Actual output = 3360000 baguettes

Allocated fixed manufacturing overhead = 3360000 × 0.02 × $4= $268800

Actual Costs Incurred (1)		Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2)		Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3)		Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate(4)
$272000		$307200		$307200		$268800
	$35200 F Spending variance		Never a variance		$38400 U Production-volume
		$35200 F Flexible-budget variance			$38400 U Production-volume
			$3200 U Underallocated fixed overhead (Total fixed overhead variance)

Part 2

Fixed manufacturing overhead is underallocated by $3200.

Part 3

The unfavorable production-volume variance of $38400 indicates the difference between the budgeted 3,840,0000 baguettes and the lower actual 3,360,000 baguettes produced—the fixed cost capacity not used. The favorable spending variance of $35200 indicates that the actual aggregate of fixed costs of $272,000 is lower than the budget amount $307200.