The Sourdough Bread Company bakes baguettes for distribution...

The Sourdough Bread Company bakes baguettes for distribution to upscale grocery stores. The company has two direct-cost categories: direct materials and direct manufacturing labor. Variable manufacturing overhead is allocated to products on the basis of standard direct manufacturing labor-hours. Following is some budget data for the Sourdough Bread Company: $$\begin{array}{ll} \text {Direct manufacturing labor use} & \text {0.02 hours per baguette} \\ \text {Variable manufacturing overhead} & \text {$\$ 10.00$ per direct manufacturing labor-hour}\\ \end{array}$$ The Sourdough Bread Company provides the following additional data for the year ended December 31,2017 : $$\begin{array}{ll} \text {Planned (budgeted) output} & \text {3,100,000 baguettes} \\ \text {Actual production} & \text {2,600,000 baguettes}\\ \text {Direct manufacturing labor} & \text {46,800 hours}\\ \text {Actual variable manufacturing overheadd} & \text {\$ 617,760}\\ \end{array}$$ 1. What is the denominator level used for allocating variable manufacturing overhead? (That is, for how many direct manufacturing labor-hours is Sourdough Bread budgeting?) 2. Prepare a variance analysis of variable manufacturing overhead. Use Exhibit 8-4 (page 304) for reference 3. Discuss the variances you have calculated and give possible explanations for them.

The Sourdough Bread Company bakes baguettes for distribution to upscale grocery stores. The company has two direct-cost categories: direct materials and direct manufacturing labor. Variable manufacturing overhead is allocated to products on the basis of standard direct manufacturing labor-hours. Following is some budget data for the Sourdough Bread Company:
$$\begin{array}{ll}
\text {Direct manufacturing labor use} & \text {0.02 hours per baguette} \\
\text {Variable manufacturing overhead} & \text {$\$ 10.00$ per direct manufacturing labor-hour}\\
\end{array}$$
The Sourdough Bread Company provides the following additional data for the year ended December 31,2017 :
$$\begin{array}{ll}
\text {Planned (budgeted) output} & \text {3,100,000 baguettes} \\
\text {Actual production} & \text {2,600,000 baguettes}\\
\text {Direct manufacturing labor} & \text {46,800 hours}\\
\text {Actual variable manufacturing overheadd} & \text {\$ 617,760}\\
\end{array}$$
1. What is the denominator level used for allocating variable manufacturing overhead? (That is, for how many direct manufacturing labor-hours is Sourdough Bread budgeting?)
2. Prepare a variance analysis of variable manufacturing overhead. Use Exhibit 8-4 (page 304) for reference
3. Discuss the variances you have calculated and give possible explanations for them.

Key Concepts

Variable Overhead Efficiency Variance

The variable overhead efficiency variance captures the difference between the actual hours worked and the standard hours allowed for the actual output, multiplied by the standard variable overhead rate. This variance provides insight into how efficiently the input (labor, machine time, etc.) was used in the production process.

Variable Overhead Spending (Rate) Variance

The variable overhead spending, or rate, variance measures the difference between the actual variable overhead rate paid and the standard variable overhead rate, multiplied by the actual hours incurred. It highlights how well the company controlled the cost per unit of the allocation base.

Variable Manufacturing Overhead

Variable manufacturing overhead consists of indirect production costs that change in proportion to the level of production activity. These costs, such as utilities or consumable supplies, are allocated to products based on a chosen activity measure like direct labor hours.

Budgeted (Denominator) Level

The budgeted – or denominator – level represents the expected level of activity (such as labor hours) used for overhead allocation purposes. It is based on the planned production output and predefined resource usage rates, and it provides the basis for standard cost allocation and variance calculations.

Standard Costing System

A standard costing system establishes predetermined standards for materials, labor, and overhead costs. It serves as a benchmark against which actual costs are compared to analyze variances, allowing management to monitor performance and control costs effectively.

Overhead Allocation Base

The overhead allocation base is a measure used to assign indirect costs, like variable manufacturing overhead, to products. In many manufacturing environments, direct labor hours or machine hours are used as a common base because they correlate with the incurrence of overhead costs.

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