Problem T410 Your answer is partially correct Try again Gera

\"Problem T4-10 Your answer is partially correct. Try again. Gerald/Brooke, Ltd., manufactures shirts, which it sels to customers for embossing with variaus slagans and emblems. The standard cost card for the shirts is as follows. Standard Quantity 1.25 yards 0.25 DUH Standard Standard Pricc 1.6 per yard $12 per DLH $2 Direct materials Direct labor Variable $4 per Fixed overhead 6 per Dul DLH 0.25 DLH 1.5 $7.5 The annual budgets were based on the production of 1,000,000 shirts, using 250,000 direct labor hours, Due to slight scasonal demands, the company plans to produce 80,000 shirts per morth, January through August, and 90,000 shirts per month, September through December. (a) Caloulate total budgeted fxed overhead cost. Total budgeted fixed overhead cost (b) What is the monthly fixed overhead budget amount? Does it depend on the number of shirts that are produced each month? Monthly fixed overhead budget amount not de on the number of shirts produced. (c) What monthly fxed overhead volume variance does management expect between January and August? Between September and December? At the end of the year? Monthly fixed overhead volume variance Between January and August Between September and December At the end of the year nfavorabl

Solution

since the annual budget was set to produce 1,000,000 shirts using 250,000 direct labour hour

i.e. production of 1 shirt requires = 250,000/1,000,000 = 0.25 direct labour hour

and recovery rate set to $6 per direct labour hour i.e. 1 shirt costs = 0.25*6=$1.5 fixed overhead

1) so total budgeted fixed overhead cost = budgeted output*recovery rate = 1,000,000*1.5=$1,500,000

2) monthly fixed overhead budgeted amount = annualamount/12 = $1,500,000/12= $125,000

   the amount does not depend upon the volume produced since its fixed not variable to quantity produced. Its us who allocates these fixed amount to per unit produced known as revoery rate.

3) fixed overhead voulme variance = Actual Output x Fixed overhead recovery rate -Budgeted Output x Fixed overhead recovery rate

volume variance between jan to aug,

jan to aug= 8 months

budgeted output = 1000000/12= 83333.33 shirts per month or

Budgeted Output x Fixed overhead recovery rate = 83333.33*1.5= $125000 per month(equals to ehat we calculated in Q2)

volume variance between jan to aug, = 8 months * (80000*1.5- 125000) = -40000 (unfavourable)

volume variance between sep to dec, = 4 months * (90000*1.5- 125000) = +40000 (unfavourable)

volume variance between jan to dec, = volume variance between jan to aug,+ volume variance between sep to dec,

volume variance between jan to dec, = -40000 + 40000 = $0

basically volume variance refers to the difference in cost due to change in volume , since annual actual voulume = 80000*8+90000*4 = 1,000,000 shirts matches the annual budgeted shirts , hence there is no difference annual wise,

bu monthly section wise its different becoz of change in quantum monthly wise