Question
1. Compute the allocation rate that was used for manufacturing overhead in Exhibits 2 and 3. Using these rates, show the computations that were used
1. Compute the allocation rate that was used for manufacturing overhead in Exhibits 2 and 3. Using these rates, show the computations that were used for allocating manufacturing overhead in Exhibits 2 and 3.
2. Exhibit 4 shows a negative $15,000 overhead volume variance. Explain why it exists and why it is negative.
3. Exhibit 4 also shows a positive $2,800 overhead budget variance. What are the potential causes for it?
SCARPE ITALIANE, INC.
Exhibit 1. Manufacturing Overhead Statistics and Costs
Most Recent Accounting Period
Machine-Made
handmade
Total
Manufacturing Statistics
Number of pairs produced
400
1,000
1,400
Number of machine hours
800
200
1,000
Number of batches
5
35
40
Raw material shipments received
2
18
20
Manufacturing Overhead Costs
Machine maintenance
$50,000
Machine set up labor
115,000
Material handling
235,000
Total
$400,000
Exhibit 2. Overhead Allocated with Direct Labor Dollars
Machine-Made
handmade
Total
Direct labor
$5,000
$35,000
$40,000
Direct materials
7,000
18,000
25,000
Machine depreciation (direct)
25,000
5,000
30,000
Manufacturing overhead
50,000
350,000
400,000
Cost of goods manufactured
$87,000
$408,000
$495,000
Full cost per pair
$217.50
$408.00
Price per pair
$300.00
$500.00
Margin percent per pair
27.5%
18.4%
Exhibit 3. Overhead Allocated with Machine Hours
Machine-Made
handmade
Total
Direct labor
$5,000
$35,000
$40,000
Direct materials
7,000
18,000
25,000
Machine depreciation (direct)
25,000
5,000
30,000
Manufacturing overhead
320,000
80,000
400,000
Cost of goods manufactured
$357,000
$138,000
$495,000
Full cost per pair
$892.50
$138.00
Price per pair
$300.00
$500.00
Margin percent per pair
-197.5%
72.4%
Exhibit 4. Comparative Income Statements
Absorption Costing
Variable Costing
Sales
$530,000
$530,000
Cost of goods sold (COGS)
450,000
210,000
Gross margin
$80,000
$320,000
Overhead volume variance
(15,000)
0
Overhead budget variance
2,800
2,800
Adjusted gross margin
$67,800
$322,800
Less: Fixed manufacturing overhead
0
270,000
Less: Selling, general, and administrative
58,000
58,000
Operating income
$9,800
$(5,200)
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Cost-Benefit Analysis For Public Sector Decision Makers
Authors: Diana Fuguitt
1st Edition
1567202225, 9781567202229
