Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The master budget calls for the company to manufacture and sell 126,000 liters at a budgeted price of $270 per liter this year. The standard direct cost sheet for one liter of the preservative follows. Direct materials (2 pounds @ $17) $ 34 Direct labor (0.5 hours @ $50) 25 Variable overhead is applied based on direct labor hours. The variable overhead rate is $150 per direct-labor hour. The fixed overhead rate (at the master budget level of activity) is $23 per unit. All non-manufacturing costs are fixed and are budgeted at $2.5 million for the coming year. At the end of the year, the costs analyst reported that the sales activity variance for the year was $816,000 unfavorable. The following is the actual income statement (in thousands of dollars) for the year. Sales revenue $ 32,718 Less variable costs Direct materials 3,508 Direct labor 2,960 Variable overhead 8,530 Total variable costs $ 14,998 Contribution margin $ 17,720 Less fixed costs Fixed manufacturing overhead 3,130 Non-manufacturing costs 1,360 Total fixed costs $ 4,490 Operating profit $ 13,230 Required: What are the fixed overhead price and production volume variances for Paynesville?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Exercise 16-46 (Algo) Fixed Cost Variances (LO 16-6)
Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The
| Direct materials | (2 pounds @ $17) | $ | 34 | |
| Direct labor | (0.5 hours @ $50) | 25 | ||
Variable
At the end of the year, the costs analyst reported that the sales activity variance for the year was $816,000 unfavorable.
The following is the actual income statement (in thousands of dollars) for the year.
| Sales revenue | $ | 32,718 | |
| Less variable costs | |||
| Direct materials | 3,508 | ||
| Direct labor | 2,960 | ||
| Variable overhead | 8,530 | ||
| Total variable costs | $ | 14,998 | |
| Contribution margin | $ | 17,720 | |
| Less fixed costs | |||
| Fixed manufacturing overhead | 3,130 | ||
| Non-manufacturing costs | 1,360 | ||
| Total fixed costs | $ | 4,490 | |
| Operating profit | $ | 13,230 | |
Required:
What are the fixed overhead price and production volume variances for Paynesville? (Enter your answers in whole dollars. Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.)
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