The annual master manufacturing overhead budget is based on 300,000 direct labour hours. In July, 27,500 labour hours were worked. The master manufacturing overhead budget for the year and the actual overhead costs incurred in July are as follows: Overhead Costs Master Budget (annual) Actual in July Variable Indirect labour 330,000 $29,000 Indirect materials 180,000 14,000 Utilities 150,000 13,900 Maintenance 90,000 8,350 Fixed Supervision 150,000 12,500 Depreciation 96,000 8,000 Insurance and taxes 60,000 5,000 Total $1,056,000 $90,750 Required: Prepare a monthly flexible overhead budget for the year ending December 31, 2020, assuming monthly production levels range from 22,500 to 30,000 direct labour hours. Use increments of 2,500 direct labour hours. Prepare a budget performance report for the month of July 2020, comparing actual results with budgeted data, based on the flexible budget.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
MCC Company produces one product, Motorbikes. Because of wide fluctuations in the demand for Motorbikes, the assembly department has significant variations in its monthly production levels The annual master manufacturing overhead budget is based on 300,000 direct labour hours. In July, 27,500 labour hours were worked. The master manufacturing overhead budget for the year and the actual overhead costs incurred in July are as follows:
|
Overhead Costs |
|
Actual in July |
|
Variable |
||
|
Indirect labour |
330,000 |
$29,000 |
|
Indirect materials |
180,000 |
14,000 |
|
Utilities |
150,000 |
13,900 |
|
Maintenance |
90,000 |
8,350 |
|
Fixed |
||
|
Supervision |
150,000 |
12,500 |
|
|
96,000 |
8,000 |
|
Insurance and taxes |
60,000 |
5,000 |
|
Total |
$1,056,000 |
$90,750 |
Required:
- Prepare a monthly flexible overhead budget for the year ending December 31, 2020, assuming monthly production levels range from 22,500 to 30,000 direct labour hours. Use increments of 2,500 direct labour hours.
- Prepare a budget performance report for the month of July 2020, comparing actual results with budgeted data, based on the flexible budget.
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