Variable manufacturing overhead variance analysis. The Sourdough Bread

Question:

Variable manufacturing overhead variance analysis. The Sourdough Bread Company bakes baguettes for distribution to upscale grocery stores. The company has two direct-cost categories: direct materials and direct manufacturing labour. Variable manufacturing overhead is allocated to products on the basis of standard direct manufacturing labour-hours. Following is some budget data for the Sourdough Bread Company:

Answer:

Variance analysis: It is the examination of the cost related to actual and estimated figures. It is a tool to control the behavior of cost. There are various types of cost which can be analyzed based on rate, quantity and overall price. The other objectives of analysis are to prepare estimates for next period to avoid variances in future, avoid the reasons due to which the costs become too high which leads to variance.

  1. Compute denominator level used for allocation of variable manufacturing overhead as given below:

Thus, denominator level used for allocation of variable manufacturing overhead is 62,000 direct labor hours.

  1. The figures required to prepare variance analysis is given below:

The figures required to prepare variance analysis is computed using spreadsheet formulas as given below:

Prepare variance analysis of variable manufacturing overhead as given below:

  1. Analysis of the above variance is given below:

Management should analyze the reasons behind these variances and take the necessary action to reduce them.

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