Modern Mode Clothing is a manufacturer of designer suits. For June 2014, each su

Question

Modern Mode Clothing is a manufacturer of designer suits. For June 2014, each suit is budgeted to take

55 labor-hours. The budgeted number of suits to be manufactured in June 2014

is 1,060. Modern Mode Clothing allocates fixed manufacturing overhead to each suit using budgeted direct manufacturing labor-hours per suit. Data pertaining to fixed manufacturing overhead costs for June 2014 are budgeted, $79,500, and actual, $63,930. In June 2014, there were 1,100 suits started and completed. There was no beginning or ending inventories of suits.

Requirements

1. Compute the spending variance for fixed manufacturing overhead. Comment on the results.

2. Compute the production-volume variance for June 2014.

What inferences can Modern Mode Clothing draw from this variance?

Requirement 1. Compute the spending variance for fixed manufacturing overhead. Comment on the results.

Begin by computing the following amounts for the fixed manufacturing overhead.

Flexible Budget:

Same Budgeted

Same Budgeted

Lump Sum

Lump Sum

Actual Costs

Regardless of

Regardless of

Allocated

Incurred

Output Level

Output Level

Overhead

Flexible Budget:

Same Budgeted

Same Budgeted

Lump Sum

Lump Sum

Actual Costs

Regardless of

Regardless of

Allocated

Incurred

Output Level

Output Level

Overhead

Explanation / Answer

Fixed Overhead spending Variance:= Actual Fixed Overheads - Budgeted Fixed Overheads

Actual fixed overhead =63930

Budgeted fixed overhead = 79500

Fixed overhead spending variance= 15570

The manufacturing over head of the company is less than the estimated.

Production volume variance = (Actual units produced - Budgeted units produced) x Budgeted overhead rate

Budgeted over head rate = 79500/1060 =75

Production volume variance = (1100-1060)*75 = 3000

The company can draw inference that company has incurred less or save 3000 in fixed overhead for production of suits.

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