Question

Esquire 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 2012 each suit is budgeted to take four labor- hours. Budgeted variable manufacturing overhead cost per labor- hour is $ 12. The budgeted number of suits to be manufactured in June 2012 is 1,040.

Actual variable manufacturing costs in June 2012 were $ 52,200 for 1,095 suits started and completed. There was no beginning or ending inventories of suits. Actual direct manufacturing labor-hours for June were 4,566.
1. Compute the flexible- budget variance, the spending variance, and the efficiency variance for variable manufacturing overhead.
2. Comment on the results.

Answer 1

**1. Compute the variances:**

- **Flexible-budget variance (Favorable is typically denoted as positive):**
\[Flexible\text{-}Budget\ Variance = (Actual\ Hours \times Budgeted\ Rate) - (Actual\ Hours \times Standard\ Rate)\]
\[= (4,566 \times $12) - (4,566 \times $12)\]

- **Spending variance (Favorable is typically denoted as positive):**
\[Spending\ Variance = (Actual\ Hours \times Actual\ Rate) - (Actual\ Hours \times Budgeted\ Rate)\]
\[= (4,566 \times Actual\ Rate) - (4,566 \times $12)\]

- **Efficiency variance (Favorable is typically denoted as positive):**
\[Efficiency\ Variance = (Actual\ Hours \times Budgeted\ Rate) - (Budgeted\ Hours \times Budgeted\ Rate)\]
\[= (4,566 \times $12) - (1,040 \times $12)\]

**2. Comment on the results:**

- A favorable flexible-budget variance implies that the actual hours worked matched the budgeted hours, resulting in no variance.

- A favorable spending variance indicates that the actual rate paid for labor hours was less than the budgeted rate.

- A favorable efficiency variance suggests that fewer hours were worked than budgeted for the number of suits produced.

In summary, Esquire Clothing saved money by paying less per labor hour than budgeted and by using fewer hours than budgeted for the number of suits produced. These results could be due to efficient resource utilization and effective cost management.