Question

Brady and McKenzie, Inc. manufactures 1960s style surf boards. Before the new period began, management prepared the following manufacturing overhead budget for an expected activity level of 20,000 direct labor hours:

Variable Manufacturing Overhead Costs $300,000
Fixed Manufacturing Overhead Costs $250,000
At the end of the period, the company noted that 4,000 fewer direct labor hours were logged than expected. The total actual manufacturing overhead costs during the period was $575,000, $220,000 of which was variable manufacturing overhead.
With regard to the data above, which of the following statements is correct?
a. The master budget variance related to variable manufacturing overhead is $105,000 U.
b. The volume variance for manufacturing overhead is $60,000 F.
c. Assuming a materiality threshold of $50,000, the flexible budget variance for fixed manufacturing overhead should be investigated.
d. The volume variance for variable manufacturing overhead is $80,000 F.
e. More than one of the above statements is correct.

Answer 1

Analyzing the manufacturing overhead budget and variances for Brady and McKenzie, Inc. shows that none of the provided statements are correct based on the actual variable and fixed overhead costs.option e is correct answer.

Step-by-step explanation:

The question relates to the manufacturing overhead budget and variance analysis for Brady and McKenzie, Inc., which manufactures surfboards. Specifically, it deals with the computation of variances from the overhead budget based on actual activity levels. To find which statement is correct among the given choices, we need to calculate the master budget variance, the volume variance, and the flexible budget variance for both variable and fixed manufacturing overhead costs.

The master budget variance for variable overhead can be calculated as the difference between the actual variable costs and the budgeted variable costs. With the actual variable costs being $220,000 and the budgeted variable costs being $300,000 for 20,000 direct labor hours, if we adjust the budgeted variable costs proportionally to actual hours (16,000), we get a budgeted cost of (16,000/20,000) * $300,000 = $240,000. The variance is $220,000 - $240,000, which equals to a $20,000 favorable variance. Therefore, option A is incorrect because it states a $105,000 unfavorable variance.

The volume variance for manufacturing overhead, which is often calculated for fixed costs, is the difference between the budgeted fixed overhead and the fixed overhead allocated based on actual activity. Assuming that the company uses direct labor hours to allocate fixed costs, we need not adjust the fixed overhead amount since it remains constant regardless of the labor hours. The actual fixed costs equaled the budgeted amount ($250,000), so there is no volume variance. Thus, option B is incorrect.

Since the fixed overhead does not change with the labor hours, unless the budget did change, there is no flexible budget variance to investigate for fixed manufacturing overhead. This makes option C incorrect, as it implies an investigation is needed. Also, there is no volume variance for variable costs; the volume variance applies to fixed costs. Therefore, option D is wrong. Given the data above, none of the options are correct, which means option E is the right answer.