Question

Radiance 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 2014, each suit is budgeted to take 5 labor-hours. Budgeted variable manufacturing overhead cost per labor-hour is $10. The budgeted number of suits to be manufactured in June 2014 is 1,020. Actual variable manufacturing costs in June 2014 were $40,500 for 960 suits started and completed. There were no beginning or ending inventories of suits. Actual direct manufacturing labor-hours for June were 4,500. Requirements 1. Compute the flexible-budget variance, the spending variance, and the efficiency variance for variable manufacturing overhead. 2. Comment on the results. Compute the flexible-budget variance, the spending variance, and the efficiency variance for variable manufacturing overhead.

Answer 1

1. Spending variance = $4,500 Favorable

Efficiency variance = $3,000 Favorable

Flexible budget variance = $1,500 Favorable

2. The comment of the result is shown below:-

Step-by-step explanation:

Actual rate = $40,500 ÷ 4,500

= $9

1.Actual cost incurred = Actual input quantity × Actual rate

= 4,500 × $9

= $40,500

2.Actual input quantity × Budgeted rate

= 4500 × $10

= $45,000

3.Flexible budget = Budgeted input quantity allowed for actual output × Budgeted rate

= 5 × 960 × $10

= $48,000

4.Allocated overhead = Budgeted input quantity allowed for actual output × budgeted rate

= 5 × 960 × $10

= $48,000

Spending variance = $45,000 - $40,500

= $4,500 Favorable

Efficiency variance = $48,000 - $45,000

= $3,000 Favorable

Flexible budget variance = $4,500 - $3,000

= $1,500 Favorable

The result is that the Radiance is having the spending variance favorable of $4,500 the reason is that the actual variable overhead rate was $9 per direct manufacturing hour versus budgeted of $10.Thus, it had a efficiency variance favorable of $3,000 as each suit averaged $4.69 labor hours($4500 ÷ 960) versus 5 budgeted labor hours.