Question

Grand Clothing is a manufacturer of designer suits. The cost of each suit is the sum of three variable costs (direct material costs, direct manufacturing labor costs, and manufacturing overhead costs) and one fixed-cost category (manufacturing overhead costs). Variable manufacturing overhead cost is allocated to each suit on the basis of budgeted direct manufacturing labor-hours per suit. For June 2013, each suit is budgeted to take 4 labor-hours. Budgeted variable manufacturing overhead cost per labor-hour is $14. The budgeted number of suits to be manufactured in June 2013 is 1,020. Actual variable manufacturing costs in June 2013 were $67,650 for 1,000 suits started and completed. There were no beginning or ending inventories of suits. Actual direct manufacturing labor-hours for June were 4,510. Requirements 1. Compute the flexible-budget variance, the spending variance, and the efficiency variance for variable manufacturing overhead. 2. Comment on the results. Requirement 1. Compute the flexible-budget variance, the spending variance, and the efficiency variance for variable manufacturing overhead. Begin by computing the following amounts for the variable manufacturing overhead. Actual input quantity Actual costs х incurred Budgeted rate Flexible budget

Answer 1

Solution 1:

Variable Overhead Cost Variance
Actual Cost					Standard cost for actual quantity					Standard Cost
AH *	AR =				AH *	SR =				SH *	SR =
4510	$15.00	$67,650.00			4510	$14.00	$63,140.00			4000	$14.00	$56,000.00
			$4,510.00	U				$7,140.00	U
			Variable overhead rate variance					Variable overhead efficiency variance
Variable overhead spending variance					$4,510.00	U
Variable overhead efficiency variance					$7,140.00	U
Variable overhead cost variance					$11,650.00	U

Solution 2:

Both variable overhead spending and efficiency variance are unfavorable because actual overhead rate is higher than standard rate and actual hours used are higher than standard hours allowed.