Question

The Platter Valley factory of Bybee Industries manufactures field boots. The cost of each boot includes direct materials, direct labor, and manufacturing (factory) overhead. The firm traces all direct costs to products, and it assigns overhead cost to products based on direct labor hours. The company budgeted $15,000 variable factory overhead cost and 2,500 direct labor hours to manufacture 5,000 pairs of boots in March. The factory used 2,700 direct labor hours in March to manufacture 4,800 pairs of boots and spent $15,600 on variable overhead during the month. For March, the Platter Valley factory of Bybee Industries budgeted $90,000 for fixed factory overhead cost. Its practical capacity is 2,500 direct labor hours per month (to manufacture 5,000 pairs of boots). The factory used 2,700 direct labor hours in March to manufacture 4,800 pairs of boots. The actual fixed overhead cost incurred for the month was $92,000. Required: 1. Compute the fixed overhead spending (budget) variance and the production volume variance for March and indicate whether each variance is favorable (F) or unfavorable (U). 2. Compute the fixed overhead flexible-budget variance for March. Is this variance favorable (F) or unfavorable (U)? 3. Provide the appropriate journal entry to record the fixed overhead spending variance and the appropriate journal entry to record the production volume variance for March. Assume that the company uses a single account, Factory Overhead, to record overhead costs.

Answer 1

1. Standard fixed factory overhead application rate per direct labor hour (DLH):

= Budgeted Fixed Factory Overhead / Total Direct Labor Hours, Practical Capacity

= $90,000/2,500 DLHs = $36.00 per DLH

Standard direct-labor hours (DLH) per unit: =  2,500 hours/5,000 units = 0.5 DLHs per unit

Spending Variance = Actual cost - Budgeted cost = 92000 - 90000 = $2,000 U

Production Volume Variance = Budgeted cost - Applied cost = 90000 - (4800*0.5*36) = 3600 U

Date	Account and Explanation	Debit	Credit
	Fixed overhead spending variance	2000
	Factory Overhead (or, Variable Factory Overhead)		2000
	(To record variance)
	Production volume variance	3600
	Factory Overhead (or, Variable Factory Overhead)		3600