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	(2 pounds @ $4)	$	8
Direct labor	(0.5 hours @ $24)		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.

Sales revenue	$	7,238
Less variable costs
Direct materials		748
Direct labor		1,010
Variable overhead		930
Total variable costs	$	2,688
Contribution margin	$	4,550
Less fixed costs
Fixed manufacturing overhead		1,050
Non-manufacturing costs		1,230
Total fixed costs	$	2,280
Operating profit	$	2,270

Required:

What are the fixed overhead price and production volume variances for Paynesville? (Enter your answers in whole dollars. Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.)

Answer 1

Particulars Standard for Actual For 96,400 Ltrs Actual For 96,400 Ltrs Materials Labour Variable OH Fixed OH Standard For 1,00,000 Ltrs Unit Rate 2,00,000 Pounds 50,000 Hours 50,000 Hours 1,00,000 Ltrs $10 Value $800,000 1,92,800 Pounds $1,200,000 48,200 Hours $1,000,000 48,200 Hours $1,000,000 96,400 Ltrs $4S $24S $20 $ $10 $ 771,200 1,92,800 Pounds 1,156,800 48,200 Hours 964,000 48,200 Hours 964,000 96,400 Ltrs $3.88 $ $20.95 $ $16.08$ $10.89 $ 748,000 1,010,000 775,000 1,050,000 Budgeted Sales Activity (in Ltrs) Selling Price Per Unit Bugeted Sales Value Activity Variance Net Sales Actual No.of units sold (Ltrs) 1,00,000 75.00 7,500,000 (270,000) 7,230,000 96,400 Fixed Overhead Cost Variance $ Fixed Overhead Price Variance' Fixed Overhead Volume Varianc $ 86,000 (U) 50,000 U) 86,000 U)

Note: Non Manufacturing Costs are not considered because the question requires Production Variances and not sales variances.