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.
Exhibit 4 shows a negative $15,000 overhead volume variance. Explain why it exists and why it is negative.
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)