Reference no: EM132991153

Question - Timberline Company costs its production using standard costing. Operating income is reported using absorption costing. Variable manufacturing cost consists of direct material cost of $4.50 per unit and other variable manufacturing costs of $1.50 per unit. The standard production rate is 20 units per machine-hour. Total budgeted and actual fixed manufacturing overhead costs are $840,000. Fixed manufacturing overhead is allocated at $14 per machine-hour based on fixed manufacturing costs of $840,000 ÷ 60,000 machine-hours, which is the level Timberline uses as its denominator level.

The selling price is $10 per unit. Variable operating (nonmanufacturing) cost, which is driven by units sold is $2 per unit. Fixed operating (nonmanufacturing) costs are $240,000. Beginning inventory is 2021 is 60,000 units; ending inventory is 80,000 units. Sales in 2021 are 1,080,000 units.

The same standard unit costs persisted throughout 2020 and 2021. For simplicity, assume that there are no price, spending, or efficiency variances.

Let's go back to the end of 2020...to the time that the budgets were being determined for the 2021 year. The production manager is rewarded a bonus based on a minimum return on investment of 10% on an investment of $11 million. The controller, who is friends with the production manager tells the production manager that he will advise the management accountant to reduce the planned production to 42,000 machine hours. (fixed costs remain the same).

What effect will reducing the production hours have on the production volume variance?