MM Laces makes high quality lacing systems for running shoes. They anticipate pr

Question

MM Laces makes high quality lacing systems for running shoes. They anticipate producing and selling 500,000 pairs in the coming year. Based on that estimate and standards for overhead, MM budgets for a total of $250,000 of factory overhead, of which S150,000 is fixed. MM applies factory overhead on the basis of direct labor dollars (which is a variable cost) and estimates that total direct labor will be $125,000. In the production period, 480,000 pairs of laces are produced and sold. Total direct labor and factory overhead costs are $130,000 and $235,000 respectively. Calculate the following: (Be sure to identify whether the variance is favorable or unfavorable.) Total factory overhead variance Volume Variance Spending Variance

Explanation / Answer

Budgeted Sales 500000 Total Budgeted OH 2,50,000 Less: Fixed OH 1,50,000 Variable Budgeted OH 1,00,000 Budgeted Direct Labor Dollars 1,25,000 Per Dollar Variable OH 0.80 (100000/125000) Per Dollar Fixed OH 1.20 (150000/125000) Total OH recovery rate 2.00 Standard DL Cost Per Unit 0.25 (125000/500000) Actual Sales Unit 480000 Total Direct Labor 130000 Factory OH Cost 235000 Standard OH 260000 (130000*2.00) Factory OH Cost 235000 1 Standard Cost-Actual Cost 25000 Favourable Total FOH Variance 2 Standard Direct Labor for Actual 120000 (0.25*480000) Standard FOH basis above DL Cost 240000 (120000*2) Applied OH Actual Factory OH Cost 235000 Standard Cost-Actual Cost 5000 Favourable Volume Variance 3 Budgeted Cost 2,50,000 Actual Cost 235000 Budgeted Cost-Actual Cost 15,000 Favourable Spending Variance

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