ACCTMIS 6000 Discussion—Fixed OH Cost Variances

Grooms Bread Company: Fixed Overhead Cost Variances

Company Overview

• Grooms Bread Company specializes in baking baguettes.

• Distribution: Products supplied primarily to upscale grocery stores.

• Direct cost categories include:

  • Direct materials

  • Direct manufacturing labor

• Variable manufacturing overhead is allocated based on standard direct manufacturing labor-hours.

Budget Data for the Year Ended December 31, 2017

• Direct Manufacturing Labor Use: $0.02$ hours per baguette

• Variable Manufacturing Overhead: $10.00$ per direct manufacturing labor-hour

• Planned (Budgeted) Output: $3,100,000$ baguettes

• Actual Production: $2,600,000$ baguettes

• Direct Manufacturing Labor Hours: $46,800$ hours

• Actual Variable Manufacturing Overhead: $617,760$

• Fixed Manufacturing Overhead Calculation:

  • Budgeted at $3.00$ per direct manufacturing labor-hour

  • Activity: Standard direct manufacturing labor-hours used for allocation

  • Actual Fixed Manufacturing Overhead Incurred: $294,000$

Variance Analysis of Fixed Manufacturing Overhead Costs

1. **Calculation of Fixed Overhead Cost Variance:

   Budgeted Fixed OH = $3,100,000$ baguettes $\times$ $0.02$ hrs/baguette $\times$ $3.00$/hr = $186,000$

   Actual Fixed OH = $294,000$ **

   • Variance: Fixed OH Budget - Actual Fixed OH = $186,000$ - $294,000$ = -$138,000$.

   • This indicates that the actual fixed overhead is underallocated or underapplied by $138,000$.

2. Allocation Methodology:

   • Fixed overhead is allocated based on standard direct manufacturing labor hours. Calculate applied fixed OH based on actual direct labor hours:

   Applied Fixed OH = Actual Direct Labor Hours $\times$ Standard Rate = $46,800$ hours $\times$ $3.00$/hour = $140,400$.

3. Conclusion on Variance Results:

   • The variance of -$138,000 shows that Grooms Bread Company has underapplied its fixed overhead costs, indicating that the amount of fixed overhead allocated to products based on the standard was $140,400$ while the actual incurred was $294,000$.

   • The difference suggests that lower production levels may be leading to under-applied overhead. Driving Factors:

     • Production Shortfalls: Actual output ($2,600,000$ baguettes) was significantly below planned output ($3,100,000$ baguettes).

     • Fixed Costs: As fixed manufacturing overhead remains constant regardless of output, the effect of lower activity magnifies the variance.

Moran Clothing: Fixed Overhead Cost Variances

Company Overview

• Moran Clothing produces designer suits.

• Costs associated with each suit include:

  • Direct material costs

  • Direct manufacturing labor costs

  • Variable manufacturing overhead costs (allocated based on budgeted direct labor-hours)

  • Fixed manufacturing overhead costs

Budget Data for June 2017

• Budgeted Labor-Hours for Each Suit: $4$ hours

• Budgeted Variable Manufacturing Overhead Cost per Labor-Hour: $12$

• Budgeted Number of Suits: $1,040$

• Actual Variable Manufacturing Costs (June 2017): $52,164$ for $1,080$ suits completed.

• Actual Direct Manufacturing Labor-Hours: $4,536$ hours

• Budgeted Fixed Manufacturing Overhead Costs for June 2017: $62,400$

• Actual Fixed Manufacturing Overhead: $63,916$

Variance Calculations

1. Spending Variance for Fixed Manufacturing Overhead:

   • Spending Variance:

     • Calculation:

     Spending Variance = Actual Fixed OH - Budgeted Fixed OH = $63,916$ - $62,400$ = $1,516$ (unfavorable).

   • Comment:

     • The unfavorable variance indicates that Moran Clothing spent more than budgeted on fixed manufacturing overhead, which requires further analysis for potential cost control measures.

2. Production-Volume Variance for June 2017:

   • Calculating Allocated Fixed Manufacturing Overhead: Allocated Fixed OH = Budgeted Fixed OH applied to actual production

   • Total Allocated = Budgeted Fixed OH ($62,400$) / Budgeted Labor-Hours $\times$ Actual Labor-Hours

   • Budgeted Production Level Labor-Hours: $1,040$ $\times$ $4$ = $4,160$

   • Allocation Rate:

   Rate = Budgeted Fixed OH / (Budgeted Suits $\times$ Labor-Hours per Suit) = $62,400$ / $4,160$ = $15.00$ per suit

   • Total Allocated Fixed OH for Actual Production:

   Allocated = Total Fixed Overhead = $62,400$ based on budgeted hours

   • Production Volume Variance:

   Production Variance = Allocated OH - Actual Fixed OH = $62,400$ - $63,916$ = -$1,516$.

   • Inferences:

     • The production volume variance reflects expected production levels versus actual output, suggesting Moran Clothing experienced production scale difficulties.

     • Adjusting for overapplied manufacturing overhead could have implications for financial reporting and operational efficiency.

3. Impact Analysis of Overapplied Overhead on Operating Income:

   • If Moran directly adjusts overapplied overhead to cost of goods sold (CGS):

   • Implication: Operating income would decrease by the amount of the overapplied overhead.

   • Adjustment: Operating Income = Operating Income - $884$ (overapplied) affects initial operational assessments.

Company's Electric Bill Allocation (Hypothetical Example)

• Estimated Fixed Overhead for Year: $120,000$ for an estimated production of $100,000$ units.

• Allocated Rate: $120,000$ / $100,000$ units = $1.20$ per unit.

• Actual Production: $90,000$ units.

• Actual Bill at Year End: $108,000$.

• Analysis:

  • Allocated Fixed OH = $1.20$ $\times$ $90,000$ = $108,000$.

  • Such variances demonstrate the importance of aligning overhead allocation practices with actual production levels, informing better financial management strategies.

General Formulas for Fixed Overhead Cost Variances

To aid in exam preparation, here are the general formulas for calculating fixed overhead cost variances:

1. Budgeted Fixed Overhead (Total):

   • Formula: Budgeted Production Level (in units or activity base) $\times$ Standard Input per Unit $\times$ Budgeted Fixed Overhead Rate per Input Unit

   • Alternatively: Budgeted Output Units $\times$ Standard Direct Manufacturing Labor Hours per Unit $\times$ Budgeted Fixed OH Rate per Direct Manufacturing Labor Hour

   • Example: Budgeted Units $\times$ Standard Hours/Unit $\times$ \$\/Hour

2. Actual Fixed Overhead:

   • Formula: The total fixed manufacturing overhead costs actually incurred during a period.

3. Total Fixed Overhead Cost Variance (Overall Variance):

   • Formula: Budgeted Fixed Overhead - Actual Fixed Overhead

   • Interpretation:

     • Positive Value = Favorable Variance (Actual < Budgeted)

     • Negative Value = Unfavorable Variance (Actual > Budgeted)

4. Applied Fixed Overhead:

   • Formula: Actual Output Units $\times$ Standard Input per Unit $\times$ Budgeted Fixed Overhead Rate per Input Unit

   • Alternatively: Actual Direct Manufacturing Labor Hours $\times$ Standard Fixed Overhead Rate per Direct Manufacturing Labor Hour

5. Fixed Overhead Spending Variance:

   • Formula: Actual Fixed Overhead - Budgeted Fixed Overhead

   • Interpretation:

     • Positive Value = Unfavorable Variance (Actual > Budgeted)

     • Negative Value = Favorable Variance (Actual < Budgeted)

6. Fixed Overhead Production-Volume Variance:

   • Formula: Budgeted Fixed Overhead - Applied Fixed Overhead

   • Interpretation:

     • Positive Value = Favorable Variance (Budgeted > Applied); implies actual production was less than budgeted (underperformance).

     • Negative Value = Unfavorable Variance (Budgeted < Applied); implies actual production was more than budgeted (overperformance).

7. Fixed Overhead Allocation Rate (per unit of activity base):

   • Formula: Total Budgeted Fixed Overhead $\div$ Total Budgeted Activity Base (e.g., budgeted direct labor hours, budgeted units)

These formulas are essential for understanding how fixed manufacturing overhead costs deviate from planned amounts and analyzing the underlying reasons for those deviations.