Manufacturing Overhead Analysis

The assignment content discusses various accounting concepts such as absorption costing, variable costing, and calculating costs. It presents a brief solution to calculate total fixed manufacturing overhead for 2012, which is $320,000. The content also includes answers to questions 8.39 and 9.22, discussing direct materials and labor efficiency, manufacturing overhead, and net operating income. Additionally, it highlights the importance of considering absorption costing in calculating net operating income and proposes an improvement to the bonus compensation structure.

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Project
Student Name
College

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Table of Contents
Answer 8.39.....................................................................................................................................3
Part 1............................................................................................................................................3
Part 2............................................................................................................................................3
Answer 9.22.....................................................................................................................................5
Part A...........................................................................................................................................5
Part B...........................................................................................................................................5
Part C...........................................................................................................................................5
Part D...........................................................................................................................................6

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Answer 8.39
Part 1
Total Fixed Manufacturing Overhead-2012 = Direct Manufacturing Hours * Cost Per hour
= 40,000 * $8
= $320,000
Schedule for Jan-2012 Input Cost
Direct materials cost 23,100 lb. at $5.20 per lb $ 120,120
Direct manufacturing labour 40,000 hrs. at $14.60 per hr. $ 584,000
Manufacturing overhead $ 560,000
Variable $ 240,000
Fixed $ 320,000
Standard manufacturing cost $ 1,264,120
*Variable manufacturing overhead = Total Mfg. Overhead – Fixed Mfg. Overhead
= $600,000 - $320,000
= $240,000
Part 2
Actual Budgeted Variance Variance % F/U
Direct Material price $ 5.20 $ 5.00 $ 0.20 4.00% Unfavourable
Direct materials efficiency variance 2.96 3.00 -0.04 -1.28% Favourable
Direct manufacturing labour price variance $ 14.60 $ 15.00 $ (0.40) -2.67% Favourable
Direct manufacturing labour efficiency variance 5.14 5.00 0.14 2.82% Unfavourable
Total manufacturing overhead spending variance $ 600,000 $ 594,000 $
6,000 1.01% Unfavourable
Variable manufacturing overhead efficiency variance $ 30.77 $ 30.00 $ 0.77 2.56% Unfavourable
Production volume variance 7,800 8,333 -533 -6.40% Unfavourable

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Direct material efficiency = Material required per unit
= Total material used / Output
= 23,100 / 7,800
= 2.96 lb. per unit
Direct manufacturing labor efficiency = Direct Mfg. labor used per unit
= Total Mfg. labors / Output
= 40,100 / 7,800
= 5.14
Budgeted Mfg. overhead = Fixed Mfg. Overhead + Variable Mfg. Overhead
= $360,000 + $6 * 7,800 * 5
= $594,000

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Answer 9.22
Part A
Particulars Amount
Sales $ 7,437,500
Variable expenses:
Variable cost of goods manufactured $ 2,070,000
Variable marketing cost $ 810,000
Total variable expenses $ 2,880,000
Contribution margin $ 4,557,500
Fixed expenses:
Manufacturing cost $ 1,100,000
Administrative cost $ 965,450
Marketing cost $ 1,366,400
Total fixed expenses $ 3,431,850
Net operating income $ 1,125,650
Part B
Particulars Amount
Sales $ 7,437,500
Manufacturing cost $ 3,112,500
Marketing cost $ 2,153,900
Administrative cost $ 965,450
Net operating income $ 1,205,650
Part C
Net operating income obtained by absorption costing is $80,000 higher than operating
income obtained by variable costing. Net operating income by absorption cost is higher as it
doesn’t consider variable cost of direct material and marketing cost of unsold inventory.

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Part D
Gross margin is $4,325,000 under absorption costing and directly linking bonus with
gross margin would increase their bonus with improved sales. However, supervisors are not
involved in sales and hence if sales department don’t perform well then even after performing
with production duties, supervisors may get lower amount of bonus.
To improve the bonus compensation, it should be partly connected with the
manufacturing units and partly with net profit. However, bonus should be applicable only when
the company generate gross margins higher than fixed cost.