Question

Downward demand spiral. Gostkowski Company is about to enter the highly competitive personal electronics market with a new optical reader. In anticipation of future growth, the company has leased a large manufacturing facility and has purchased several expensive pieces of equipment. In 2013, the company’s first year, Gostkowski budgets for production and sales of 24,000 units, compared with its practical capacity of 48,000. The company’s cost data are as follows:

Variable manufacturing costs per unit:
Direct materials	$ 20
Direct manufacturing labor	$ 35
Manufacturing overhead	$   9
Fixed manufacturing overhead	$ 576,000

a. Recompute the selling price using practical capacity as the denominator level of activity.  

b. Assuming Gostkowski actually sold 20,000 units and actual fixed overhead was equal to the budgeted, compute the production-volume variance? Indicate whether over or under applied.

Answer 1

Answers:

a.) $76

b.)

Explanations:

a.) Selling price calculation:

Direct materials	$20
Direct manufacturing labor	$35
Manufacturing overhead	$9
Fixed manufacturing overhead (576,000 ÷ 48,000)	$12
Minimum Selling Price	$76

.

b.)

Production volume variance = (actual units produced - budgeted production units) x budgeted overhead rate per unit

Here budgeted Overhead Per unit = $9 + $12 = $21

Therefore,

Production volume variance = (24,000- 20,000) × $21

= 4,000 × $21

= $84.000 Unfavorable.

.

Fixed manufacturing overhead applied = $20,000 × $12 = $240,000

Actual Fixed manufacturing overhead = $576,000

Under applied = Actual - Applied = $576,000 - $240,000

Under applied = $336,000