Question

Required information

[The following information applies to the questions displayed below.]

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 $10,080 variable factory overhead cost and 2,400 direct labor hours to manufacture 4,800 pairs of boots in March.

The factory used 4,500 direct labor hours in March to manufacture 4,600 pairs of boots and spent $17,600 on variable overhead during the month.

For March, the Platter Valley factory of Bybee Industries budgeted $93,600 for fixed factory overhead cost. Its practical capacity is 2,400 direct labor hours per month (to manufacture 4,800 pairs of boots).

The factory used 4,500 direct labor hours in March to manufacture 4,600 pairs of boots. The actual fixed overhead cost incurred for the month was $97,400.

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

Part 1 :

Fixed overhead spending variance = Budgeted Fixed overhead - Actual Fixed Overhead

= 93600 - 97400

= 3800 Unfavourable

Fixed overhead production volume variance = Standard rate of recovery per unit * (Budgeted Output - Actual Output)

Standard rate of recovery per unit = Budgeted Overhead / Budgeted output

= 93600/4800

= 19.50

Fixed overhead production volume variance = 19.50 * (4800-4600)

= 3900 Unfavourable

Part 2 :

Fixed Overhead flexible budget variance = (Standard rate of recovery per unit * Actual Output) - Actual Overhead

= (19.50 * 4600) - 97400

= 7700 Unfavourable

Part 3:

Journal Entry for Fixed Overhead spending Variance

Debit Credit

Fixed Overhead Account 3800

Inventory 3800

Journal Entry for Fixed Overhead Production Volume Variance

Debit Credit

Fixed Overhead Account 3900

Inventory 3900