Net income computed under absorption costing will be: higher than net income under variable costing when units produced are grea
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The Lopez Company use a standard costing in its manufacturing plant for the auto part. The standard cost of particular auto part based on a denominator level of a 4.000 output unit per year. included 6 machine-hours of variable manufacturing overhead at $8 per hour and 6 machine-hours of fixed manufacturing overhead at $15 per hour.
Actual output produced was 4.400 units.
Variable manufacturing overhead incurred was $245.000.
Fixed manufacturing overhead incurred was $373.000.
Actual machine-hours were 28.400.
Prepare the analysis of all variable manufacturing overhead and fixed manufacturing overhead variances.
Additional diagram attached to this question is displayed in the first image below.
Answer:
Explanation:
By using a columnar method, the analysis of all the variance & fixed manufacturing overhead varaince can be computed as follows:
Variable manufacturing overhead analysis:
Actual cost Incurred: ║ Actual input × Budgeted ║ Allocated: Budgeted
Actual input × Actual rate Input for actual output
rate × Budgeted rate
245000 28400×$8.00 = 227200 (4400×6hrs×$8)
= 211,200
17800 U 16800 U
Spending Variance Efficiency Variance
33800 U
Flexible Budget Variance
Hence;
The spending Variance = $17,800 U
Efficiency Variance = $16,000 U
Flexible Budget Varaince = $33800 U
where; F = Favourable & U = Unfavourable
<u>For the fixed Manufacturing Overhead:</u>
Actual cost Incurred: ║ Flexible Budget Lump ║ Allocated: Budgeted
Actual input × Actual sum regardless of the Input for actual output
rate output level × Budgeted rate
373000 4000×6hrs×15 = 360000 (4400×6hrs×$15)
= 396000
13000 U 36000 F
Spending Variance/ Production-Volume
Flexible budgeted variance Variance
23000 F
Over allocated fixed
Overhead
Hence;
The spending Variance = $13000 U
The production Volume Variance = $36,000 F
Over allocated fixed overhead = $23000 F
where; F = Favourable & U = Unfavourable
NOTE: To have a better view of the above computation in a table format, refer to the second and the third diagram in the image below.
