FLEXIBLE BUDGETS, VARIANCES, AND MANAGEMENT CONTROL
8-1
Effective planning of variable overhead costs involves:
1. Planning to undertake only those variable overhead activities that add value for customers using the product or service, and
2. Planning to use the drivers of costs in those activities in the most efficient way.
8-2
At the start of an accounting period, a larger percentage of fixed overhead costs are locked-in than is the case with variable overhead costs. When planning fixed overhead costs, a company must choose the appropriate level of capacity or investment that will benefit the company over a long time. This is a strategic decision.
8-3
The key differences are how direct costs are traced to a cost object and how indirect costs are allocated to a cost object:
8-4
Steps in developing a budgeted variable-overhead cost rate are:
1. Choose the period to be used for the budget,
2. Select the cost-allocation bases to use in allocating variable overhead costs to the output produced,
3. Identify the variable overhead costs associated with each cost-allocation base, and
4. Compute the rate per unit of each cost-allocation base used to allocate variable overhead costs to output produced.
8-5
Two factors affecting the spending variance for variable manufacturing overhead are:
a. Price changes of individual inputs (such as energy and indirect materials) included in variable overhead relative to budgeted prices.
b. Usage of individual items included in variable overhead relative to the quantity of the cost driver of the variable overhead cost pool.
8-6
Reasons for a favorable variable-overhead efficiency variance are:
• Workers more skillful in using machines than budgeted,
• Production scheduler was able to schedule jobs better than budgeted, resulting in lower-than-budgeted machine-hours,
• Machines operated with fewer slowdowns than budgeted, and
• Machine time standards set with padding built in by machine workers.
8-7
A direct materials efficiency variance indicates whether more or less direct materials were used than was budgeted for the actual output achieved. A variable manufacturing overhead efficiency variance indicates whether more or less of the chosen allocation base was used than was budgeted for the actual output achieved.
8-8
Steps in developing a budgeted fixed-overhead rate are:
1. Choose the period to use for the budget,
2. Select the cost-allocation base to use in allocating fixed overhead costs to output produced,
3. Identify the fixed-overhead costs associated with each cost-allocation base, and
4. Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to output produced.
8-9
The relationship for fixed-manufacturing overhead variances is:
There is never an efficiency variance for fixed overhead, because managers cannot be more or less efficient in dealing with an amount that is fixed regardless of the output level. The result is that the flexible-budget variance amount is the same as the spending variance for fixed-manufacturing overhead.
8-10
For planning and control purposes, fixed overhead costs are a lump sum amount that is not controlled on a per-unit basis. In contrast, for inventory costing purposes, fixed overhead costs are allocated to products on a per-unit basis.
8-11
An important caveat is what change in selling price might have been necessary to attain the level of sales assumed in the denominator of the fixed manufacturing overhead rate. For example, the entry of a new low-price competitor may have reduced demand below the denominator level if the budgeted selling price was maintained. An unfavorable production-volume variance may be small relative to the selling-price variance had prices been dropped to attain the denominator level of unit sales.
8-13
The four variances are:
Variable manufacturing overhead costs
- spending variance
- efficiency variance
Fixed manufacturing overhead costs
- spending variance
- production-volume variance
8-14
Interdependencies among the variances could arise for the spending and efficiency variances. For example, if the chosen allocation base for the variable overhead efficiency variance is only one of several cost drivers, the variable overhead spending variance will include the effect of the other cost drivers. As a second example, interdependencies can be induced when there are misclassifications of costs as fixed when they are variable, and vice versa.
8-15
Flexible-budget variance analysis can be used in the control of costs in an activity area by isolating spending and efficiency variances at different levels in the cost hierarchy. For example, an analysis of batch costs can show the price and efficiency variances from being able to use longer production runs in each batch relative to the batch size assumed in the flexible budget.
8-16 Variable manufacturing overhead, variance analysis.
1.
Actual Costs
Incurred
(1)
Actual Inputs
× Budgeted Rate
(2)
Flexible Budget :
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
(4,536 × $11.50)
$52,164
(4,536 × $12)
$54,432
(4 × 1,080 × $12)
$51,840
(4 × 1,080 × $12)
$51,840
$2,268 F
Spending variance
$2,592 U
Efficiency variance
Never a variance
$324 U
Flexible-budget variance
Never a variance
2.
Esquire had a favorable spending variance of $2,268 because the actual variable overhead rate was $11.50 per direct manufacturing labor-hour versus $12 budgeted. It had an unfavorable efficiency variance of $2,592 U because each suit averaged 4.2 labor-hours (4,536 hours ÷ 1,080 suits) versus 4.0 budgeted.
8-17 Fixed-manufacturing overhead, variance analysis (continuation of 8-16).
1 & 2.
=
=
= $15 per hour
Actual Costs Incurred
(1)
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(3)
Allocated:
Budgeted Input
Allowed for Actual Output
× Budgeted Rate
(4)
$63,916
$62,400
$62,400
(4 × 1,080 × $15)
$64,800
$1,516 U $2,400 F
Spending variance Never a variance Production-volume variance
$1,516 U $2,400 F
Flexible-budget variance Production-volume variance
The fixed manufacturing overhead spending variance and the fixed manufacturing flexible budget variance are the same––$1,516 U. Esquire spent $1,516 above the $62,400 budgeted amount for June 2004.
The production-volume variance is $2,400 F. This arises because Esquire utilized its capacity more intensively than budgeted (the actual production of 1,080 suits exceeds the budgeted 1,040 suits). This results in overallocated fixed manufacturing overhead of $2,400 (4 × 40 × $15). Esquire would want to understand the reasons for a favorable production-volume variance. Is the market growing? Is Esquire gaining market share? Will Esquire need to add capacity?
8-18 Manufacturing overhead, variance analysis.
1.
The summary analysis is:
Spending
Variance
Efficiency
Variance
Production-Volume
Variance
Variable Manufacturing Overhead
$40,700 F
$59,200 U
Never a variance
Fixed Manufacturing Overhead
$23,420 U
Never a variance
$36,000 U
Variable Manufacturing Overhead
Actual Costs
Incurred
(1)
Actual Input
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
$610,500
(16,280 × $40)
$651,200
(7,400 × 2 × $40)
$592,000
(7,400 × 2 × $40)
$592,000
$40,700 F
Spending variance
$59,200 U
Efficiency variance
Never a variance
$18,500 U
Flexible-budget variance
Never a variance
Fixed-Manufacturing Overhead
Actual Costs Incurred
(1)
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
$503,420
$480,000
$480,000
(7,400 × 2 × $30.00)
$444,000
$36,000 U
Production-volume variance
Never a variance
$23,420 U
Spending variance
Summary information is:
Actual
Flexible Budget
Output units
7,400
7,400
Allocation base (hours)
16,280
14,800a
Allocation base per output unit
2.20
2.00
Variable MOH
$610,500
$592,000b
Variable MOH per hour
$37.50c
$40.00
Fixed MOH
$503,420
$480,000
Fixed MOH per hour
$30.92d
–
a 7,400 × 2.00 = 14,800 c $610,500 ÷ 16,280 hours = $37.50 per hour
b 7,400 × 2 × $40 = $592,000 d $503,420 ÷ 16,280 hours $30.92 per hour
The budgeted fixed manufacturing overhead rate is $30.00 for assembly by hour:
$480,000
8,000 × 2 hours
= $30.00 per assembly-hour
2.
Zyton produced 600 less CardioX units than were budgeted. The variable manufacturing overhead cost efficiency variance of $59,200 U arises because more assembly-time-hours per output unit (16,280 ÷ 7,400 = 2.2 hours) were used than the budgeted 2.0 hours per unit. The variable manufacturing overhead cost spending variance of $40,700 F indicates one or more of the following probably occurred––(i) actual prices of individual items included in variable overhead differ from their budgeted prices, or (ii) actual usage of individual items included in variable overhead differs from their budgeted usage.
The fixed manufacturing overhead cost spending variance of $23,420 U means fixed overhead was above that budgeted. For example, it could be due to an unexpected increase in plant leasing costs. The unfavorable production-volume variance of $36,000 arises because actual output of 7,400 units is below the 8,000 units used in determining the $30.00 per assembly-hour budgeted rate.
3.
Planning and control of variable manufacturing overhead costs has both a long-run and a short-run focus. It involves Zyton planning to undertake only value-added overhead activities (a long-run view) and then managing the cost drivers of those activities in the most efficient way (a short-run view). Planning and control of fixed manufacturing overhead costs at Zyton have primarily a long-run focus. It involves undertaking only value-added fixed-overhead activities for a budgeted level of output. Zyton makes most of the key decisions that determine the level of fixed-overhead costs at the start of the accounting period.
8-19 4-variance analysis, fill in the blanks.
Variable
Fixed
1. Spending variance
2. Efficiency variance
3. Production-volume variance
4. Flexible-budget variance
5. Underallocated (overallocated) MOH
$1,900 U
1,000 U
NEVER
2,900 U
2,900 U
$1,000 U
NEVER
500 U
1,000 U
1,500 U
These relationships could be presented in the same way as in Exhibit 8-3 (variable overhead shown first):
Actual Costs
Incurred
(1)
Actual Input
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
VariableMOH
$11,900
$10,000
$9,000
$9,000
$2,900 U
Flexible-budget variance
Never a variance
$2,900 U
Underallocated variable overhead
(Total variable overhead variance)
Never a variance
$1,000 U
Efficiency variance
$1,900 U
Spending variance
Actual Costs Incurred
(1)
Same Budgted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
FixedMOH
$6,000
$5,000
$5,000
$4,500
$1,000 U
Spending variance
Never a variance
$500 U
Production-volume variance
$1,000 U
Flexible-budget variance
$500 U
Production-volume variance
$1,500 U
Underallocated fixed overhead
(Total fixed overhead variance)
An overview of the 4 overhead variances is:
4-Variance
Analysis
Spending
Variance
Efficiency
Variance
Production-Volume
Variance
Variable
Overhead
$1,900 U
$1,000 U
Never a variance
Fixed
Overhead
$1,000 U
Never a variance
$500 U
8-20 Straightforward 4-variance overhead analysis.
1.
The budget for fixed manufacturing overhead
= 4,000 × 6 × $15
= $360,000.
An overview of the 4-variance analysis is:
4-Variance
Analysis
Spending
Variance
Efficiency
Variance
Production-
Volume Variance
Variable
Manufacturing
Overhead
$17,800 U
$16,000 U
Never a Variance
Fixed Manufacturing
Overhead
$13,000 U
Never a Variance
$36,000 F
Solution Exhibit 8-22 has details of these variances.
A detailed comparison of actual and flexible budgeted amounts is:
Actual
Flexible Budget
Output units (auto parts)
4,400
4,400
Allocation base (machine-hours)
28,400
26,400a
Allocation base per output unit
6.45b
6.00
Variable MOH
$245,000
$211,200c
Variable MOH per hour
$8.63d
$8.00
Fixed MOH
$373,000
$360,000e
Fixed MOH per hour
$13.13f
–
a 4,400 units × 6.00 machine-hours/unit = 26,400 machine-hours
b 28,400 ÷ 4,400 = 6.45 machine-hours per unit
c 4,400 units × 6.00 machine-hours per unit × $8.00 per machine-hour = $211,200
d $245,000 ÷ 28,400 = $8.63
e 4,000 units × 6.00 machine-hours per unit × $15 per machine-hour = $360,000
f $373,000 ÷ 28,400 = $13.13
2.
Variable Manufacturing Overhead Control 245,000
Accounts Payable Control and other accounts 245,000
Work-in-Process Control 211,200
Variable Manufacturing Overhead Allocated 211,200
Variable Manufacturing Overhead Allocated 211,200
Variable Manufacturing Overhead Spending Variance 17,800
Variable Manufacturing Overhead Efficiency Variance 16,000
Variable Manufacturing Overhead Control 245,000
Fixed Manufacturing Overhead Control 373,000
Wages Payable Control, Accumulated Depreciation
Control, etc. 373,000
Work-in-Process Control 396,000
Fixed Manufacturing Overhead Allocated 396,000
Fixed Manufacturing Overhead Allocated 396,000
Fixed Manufacturing Overhead Spending Variance 13,000
Fixed Manufacturing Overhead Production-Volume Variance 36,000
Fixed Manufacturing Overhead Control 373,000
3.
The control of variable manufacturing overhead requires the identification of the cost drivers for such items as energy, supplies, and repairs. Control often entails monitoring nonfinancial measures that affect each cost item, one by one. Examples are kilowatts used, quantities of lubricants used, and repair parts and hours used. The most convincing way to discover why overhead performance did not agree with a budget is to investigate possible causes, line item by line item.
Individual fixed manufacturing overhead items are not usually affected very much by day-to-day control. Instead, they are controlled periodically through planning decisions and budgeting procedures that may sometimes have horizons covering six months or a year (for example, management salaries) and sometimes covering many years (for example, long-term leases and depreciation on plant and equipment).
Solution Exhibit 8-20
Actual Costs
Incurred
(1)
Actual Input
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
VariableMOH
$245,000
(28,400 × $8)
$227,200
(4,400 × 6 × $8)
$211,200
(4,400 × 6 × $8)
$211,200
$33,800 U
Flexible-budget variance
Never a variance
$33,800 U
Underallocated variable overhead
(Total variable overhead variance)
Never a variance
$16,000 U
Efficiency variance
$17,800 U
Spending variance
Actual Costs Incurred
(1)
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
FixedMOH
$373,000
(4,000 × 6 × $15)
$360,000
(4,000 × 6 × $15)
$360,000
(4,400 × 6 × $15)
$396,000
$36,000 F
Production-volume variance
$13,000 U
Flexible-budget variance
$36,000 F
Production-volume variance
$23,000 F
Overallocated fixed overhead
(Total fixed overhead variance)
Never a variance
$13,000 U
Spending variance
8-21 Straightforward coverage of manufacturing overhead, standard-costing system.
1.
Solution Exhibit 8-21 shows the computations. Summary details are:
Actual
Flexible Budget
Output units
41,000
41,000
Allocation base (machine-hours)
13,300
12,300a
Allocation base per output unit
0.32b
0.30
Variable MOH
$155,100
$147,600c
Variable MOH per hour
$11.66d
$12.00
Fixed MOH
$401,000
$390,000
Fixed MOH per hour
$30.15e
–
a 41,000 × 0.30 = 12,300 d $155,100 ÷ 13,300 = $11.66
b 13,300 ÷ 41,000 = 0.32 e $401,000 ÷ 13,300 = $30.15
c 41,000 × 0.30 × $12 = $147,600
An overview of the 4-variance analysis is:
4-Variance
Analysis
Spending
Variance
Efficiency
Variance
Production- Volume Variance
Variable
Manufacturing Overhead
$4,500 F
$12,000 U
Never a variance
Fixed
Manufacturing Overhead
$11,000 U
Never a variance
$21,000 U
2.
Variable Manuf. Overhead Control 155,100
Accounts Payable Control and other accounts 155,100
Work-in-Process Control 147,600
Variable Manufacturing Overhead Allocated 147,600
Variable Manuf. Overhead Allocated 147,600
Variable Manuf. Overhead Efficiency Variance 12,000
Variable Manuf. Overhead Spending Variance 4,500
Variable Manuf. Overhead Control 155,100
Fixed Manuf. Overhead Control 401,000
Wages Payable Control, Accumulated
Depreciation Control, etc. 401,000
Work-in-Process Control 369,000
Fixed Manufacturing Overhead Allocated 369,000
Fixed Manufacturing Overhead Allocated 369,000
Fixed Manufacturing Overhead Spending Variance 11,000
Fixed Manuf. Overhead Production-Volume Variance 21,000
Fixed Manuf. Overhead Control 401,000
3.
The control of variable manufacturing overhead requires the identification of the cost drivers for such items as energy, supplies, and repairs. Control often entails monitoring nonfinancial measures that affect each cost item, one by one. Examples are kilowatts used, quantities of lubricants used, and repair parts and hours used. The most convincing way to discover why overhead performance did not agree with a budget is to investigate possible causes, line item by line item.
Individual fixed manufacturing overhead items are not usually affected very much by day-to-day control. Instead, they are controlled periodically through planning decisions and budgeting procedures that may sometimes have horizons covering six months or a year (for example, management salaries) and sometimes covering many years (for example, long-term leases and depreciation on plant and equipment).
Solution Exhibit 8-21
Actual Costs
Incurred
(1)
Actual Input
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
VariableManufacturingOverhead
$155,100
(13,300 × $12)
$159,600
(12,300 × $12)
$147,600
(12,300 × $12)
$147,600
$7,500 U
Flexible-budget variance
Never a variance
$7,500 U
Underallocated variable overhead
(Total variable overhead variance)
Actual Costs Incurred
(1)
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
FixedManufacturingOverhead
$401,000
$390,000
$390,000
(12,300 × $30)
$369,000
$21,000 U*
Production-volume variance
$11,000 U
Flexible-budget variance
$21,000 U*
Production-volume variance
$32,000 U
Underallocated fixed overhead
(Total fixed overhead variance)
Never a variance
$11,000 U
Spending variance
=
= $30 per machine-hour
*Alternative computation:
13,000 denominator hours – 12,300 budgeted hours allowed = 700 hours
700 × $30 = $21,000 U
8-22 Overhead variances, service sector.
1. and 2.
= $2 per hour of home delivery time
Budgeted fixed overhead rate = =
= $3.75 per hour of home delivery time
A detailed comparison of actual and flexible budgeted amounts is:
Actual
Flexible Budget
Output units (deliveries)
7,460
7,460
Allocation base (hours)
5,595
5,968a
Allocation base per output unit
0.75b
0.80
Variable MOH
$14,174
$11,936c
Variable MOH per hour
$2.53d
$2.00
Fixed MOH
$27,600
$24,000
Fixed MOH per hour
$4.93e
–
a 7,460 × 0.80 = 5,968
b 5,595 ÷ 7,460 = 0.75
c 7,460 × 0.80 × $2.00 = $11,936
d $14,174 ÷ 5,595 = $2.53
e $27,600 ÷ 5,595 = $4.93
The required variances are:
Spending
Variance
Efficiency
Variance
Variable overhead
Fixed overhead
$2,984 U
$3,600 U
$ 746 F
––
These variances are computed as follows:
Actual Costs
Incurred
(1)
Actual Input
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
VariableOverhead
$14,174
(5,595 × $2)
$11,190
(7,460 × 0.80 × $2)
$11,936
(7,460 × 0.80 × $2)
$11,936
$2,984 U
Spending variance
$746 F
Efficiency variance
$2,238 U
Flexible-budget variance
Never a variance
Never a variance
Actual Costs Incurred
(1)
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
FixedOverhead
$27,600
$24,000
$24,000
(7,460 × 0.80 × $3.75)
$22,380
$1,620 U
Production-volume variance
Never a variance
$3,600 U
Spending variance
The spending variances for variable and fixed overhead are both unfavorable. This means that MOW had increases over budget in either or both the cost of individual items (such as telephone calls and gasoline) in the overhead cost pools, or the usage of these individual items per unit of the allocation base (delivery time). The favorable efficiency variance for variable overhead costs results from more efficient use of the cost allocation base––each delivery takes 0.75 hours versus a budgeted 0.80 hours.
3.
MOW best manages its fixed overhead costs by long-term planning of capacity rather than day-to-day decisions. This involves planning to undertake only value-added fixed-overhead activities and then determining the appropriate level for those activities. Most fixed overhead costs are committed well before they are incurred. In contrast, for variable overhead, a mix of long-run planning and daily monitoring of the use of individual items is required to manage costs efficiently. MOW plans to undertake only value-added variable-overhead activities (a long-run focus) and then manage the cost drivers of those activities in the most efficient way (a short-run focus).
8-23 Total overhead, 3-variance analysis.
1.
This problem has two major purposes:
(a) to give experience with data allocated on a total overhead basis instead of on separate variable and fixed bases and
(b) to reinforce distinctions between actual hours of input, budgeted (standard) hours allowed for actual output, and denominator level.
An analysis of direct manufacturing labor will provide the data for actual hours of input and standard hours allowed. One approach is to plug the known figures (designated by asterisks) into the analytical framework and solve for the unknowns. The direct manufacturing labor efficiency variance can be computed by subtracting $9,640 from $14,440. The complete picture is:
Actual Costs
Incurred
Actual Input
× Budgeted Rate
Flexible Budget:
Budgeted Input
Allowed for Actual Output
× Budgeted Rate
(12,050 hrs. × $16.80)
$202,440*
(12,050 hrs. × $16.00*)
$192,800
(11,750 hrs. × $16.00*)
$188,000
$9,640 U*
Price variance
$4,800 U
Efficiency variance
$14,440 U*
Flexible-budget variance* Given
Direct Labor calculations
Actual input × Budgeted rate = Actual costs – Price variance
= $202,440 – $9,640 = $192,800
Actual input = $192,800 ÷ Budgeted rate = $192,800 ÷ $16 = 12,050 hours
Budgeted input × Budgeted rate = $192,800 – Efficiency variance
= $192,800 – $4,800 = $188,000
Budgeted input = $188,000 ÷ Budgeted rate = $188,000 ÷ 16 = 11,750 hours
Repair Overhead
Variable overhead rate = $64,000* ÷ 8,000* hrs. = $8.00 per standard labor-hour
= $197,600* – 10,000*($8.00) = $117,600
If total overhead is allocated at 120% of direct labor-cost, the single overhead rate must be 120% of $16.00, or $19.20 per hour. Therefore, the fixed overhead component of the rate must be $19.20 – $8.00, or $11.20 per direct labor-hour.
Let D = denominator level in input units
=
$11.20 =
D = 10,500 direct labor-hours
A summary 3-variance analysis for October follows:
Actual Costs
Incurred
Actual Inputs
× Budgeted Rate
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
$249,000*
($117,600 + (12,050 × $8.00)
$214,000
$117,600 + ($8 × 11,750)
$211,600
(11,750 hrs. × $19.20)
$225,600
$35,000 U
Spending variance
$37,400 U
Flexible-budget variance
$14,000 F*
Production-volume variance
$2,400 U
Efficiency variance
$14,000 F*
Production-volume variance
* Known figure
An overview of the 3-variance analysis using the block format in the text is:
3-Variance
Analysis
Spending
Variance
Efficiency
Variance
Production-
Volume Variance
Total
Overhead
$35,000 U
$2,400 U
$14,000 F
2.
The control of variable manufacturing overhead requires the identification of the cost drivers for such items as energy, supplies, equipment, and maintenance. Control often entails monitoring nonfinancial measures that affect each cost item, one by one. Examples are kilowatts used, quantities of lubricants used, and equipment parts and hours used. The most convincing way to discover why overhead performance did not agree with a budget is to investigate possible causes, line item by line item.
Individual fixed manufacturing overhead items are not usually affected very much by day-to-day control. Instead, they are controlled periodically through planning decisions and budgeting that may sometimes have horizons covering six months or a year (for example, management salaries) and sometimes covering many years (for example, long-term leases and depreciation on plant and equipment).
8-24 Overhead variances, missing information.
1.
Flexible Budget:
Budgeted Input
Allowed for
Actual Costs Actual Input Actual Output
Incurred × Budgeted Rate × Budgeted Rate
(b) (a) (c)
$250F (d)
Spending variance Efficiency variance
(e)
Flexible-budget variance
Actual input × Budgeted rate (9,800 × $5) $49,000 (a)
Spending variance 250 U
Actual costs incurred $49,250 (b)
Flexible budget (9,900 × $5) $49,500 (c)
Actual input × Budgeted rate (9,800 × $5) 49,000
Efficiency variance $ 500 F (d)
Flexible budget variance (250 U + 500 F) $ 250 F (e)
Variable overhead is overallocated in the amount of $250 (the same amount as favorable flexible-budget variance).
2.
Flexible Budget Allocated:
Same Lump Sum Budgeted Input
(as in Static Budget) Allowed for
Actual Costs Regardless of Actual Output
Incurred Budgeted Output Level × Budgeted Rate
(a) (b) 9,900 hours x (c)
$1,050U (d)
Spending variance Production-volume variance
(e)
Flexible-budget variance
Actual total overhead costs incurred $80,000
Actual variable overhead costs incurred 49,250
Actual fixed overhead costs incurred $30,750 (a)
Spending variance (fixed overhead) 1,050 U
Flexible budget $29,700 (b)
Flexible budget $29,700
Divide by denominator volume in machine-hours ÷10,000
Budgeted rate per machine-hour $ 2.97 (c)
Allocated ($2.97 × 9,900 machine-hours) $29,403
Flexible budget 29,700
Production-volume variance 297 U (d)
Flexible-budget variance = spending variance $ 1,050 U
Underallocated amount ($1,050 + $297 U) $ 1,347 U
8-26 Comprehensive variance analysis.
a) Budgeted number of machine-hours planned can be calculated by multiplying the number of units planned (budgeted) by the number of machine-hours allocated per unit:
17,760 units ´ 2 machine-hours per unit = 35,520 machine-hours.
b) Budgeted fixed MOH costs per machine-hour can be computed by dividing the flexible budget amount for fixed MOH (which is the same as the static budget) by the number of machine-hours planned (calculated in (a)):
$6,961,920 ÷ 35,520 machine-hours = $196.00 per machine-hour
c) Budgeted variable MOH costs per machine-hour are calculated as budgeted variable MOH costs divided by the budgeted number of machine-hours planned:
$1,420,800 ÷ 35,520 machine-hours = $40.00 per machine-hour.
d) Budgeted number of machine-hours allowed for actual output achieved can be calculated by dividing the flexible-budget amount for variable MOH by budgeted variable MOH costs per machine-hour:
$1,536,000 ÷ $40.00 per machine-hour= 38,400 machine-hours allowed
e) The actual number of output units is the budgeted number of machine-hours allowed for actual output achieved divided by the planned allocation rate of machine hours per unit:
38,400 machine-hours ÷ 2 machine-hours per unit = 19,200 units.
f) The actual number of machine-hours used per panel is the actual number of machine hours used (given) divided by the actual number of units manufactured:
36,480 machine-hours ÷ 19,200 units = 1.9 machine-hours used per panel.
8-27 Journal entries (continuation of 8-26).
1.
Key information underlying the computation of variances is:
ActualResults
Flexible BudgetAmount
Static-Budget
Amount
Output units (panels)
19,200
19,200
17,760
Machine-hours
36,480
38,400
35,520
Machine-hours per panel
1.90
2.00
2.00
Variable MOH costs
$1,532,160
$1,536,000
$1,420,800
Variable MOH costs per machine-
hour (Row 4 ÷Row 2)
$42.00
$40.00
$40.00
Variable MOH costs per unit
(Row 4 ÷ Row 1))
$79.80
$80.00
$80.00
Fixed MOH costs
$7,004,160
$6,961,920
$6,961,920
Fixed MOH costs per machine-
hour (Row 7 ÷ Row 2))
$192.00
$181.30
$196.00
Fixed MOH costs per unit (7 ÷ 1)
$364.80
$362.60
$392.00
Solution Exhibit 8-27 shows the computation of the variances.
Journal entries for variable MOH, year ended December 31, 2006:
Variable MOH Control
1,532,160
Accounts Payable Control and Other Accounts
1,532,160
Work-in-Process Control
1,536,000
Variable MOH Allocated
1,536,000
Variable MOH Allocated
1,536,000
Variable MOH Spending Variance
72,960
Variable MOH Control
1,532,160
Variable MOH Efficiency Variance
76,800
Journal entries for fixed MOH, year ended December 31, 2006:
Fixed MOH Control
7,004,160
Wages Payable, Accumulated Depreciation, etc.
7,004,160
Work-in-Process Control
7,526,400
Fixed MOH Allocated
7,526,400
Fixed MOH Allocated
7,526,400
Fixed MOH Spending Variance
42,240
Fixed MOH Control
7,004,160
Fixed MOH Production-Volume Variance
564,480
2.
Adjustment of COGS
Variable MOH Efficiency Variance
76,800
Fixed MOH Production-Volume Variance
564,480
Variable MOH Spending Variance
72,960
Fixed MOH Spending Variance
42,240
Cost of Goods Sold
526,080
SOLUTION EXHIBIT 8-27
Variable Manufacturing Overhead
Actual Costs
Incurred
(1)
Actual Inputs
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
(36,480 ´ $42)
$1,532,160
(36,480 ´ $40)
$1,459,200
(38,400 ´ $40)
$1,536,000
(38,400 ´ $40)
$1,536,000
$72,960 U
Spending variance
$76,800 F
Efficiency variance
Never a variance
Fixed Manufacturing Overhead
Actual Costs
Incurred
(1)
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless Of
Output Level
(2)
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
(38,400 × $196)
$7,004,160
$6,961,920
$6,961,920
$7,526,400
$42,240 U
Spending variance
Never a variance
$564,480 F
Production-volume variance
8-28 Graphs and overhead variances.
1.
Variable Manufacturing Overhead Costs
Graph for planning
and control and inventory costing
purposes at $9 per machine-hour
4,000,000
Machine-Hours
Total
Variable
Manuf.
Overhead
Costs
$72,000,000
$36,000,000
Fixed Manufacturing Overhead Costs
Total
Fixed
Manuf.
Overhead
Costs
$72,000,000
$36,000,000
Graph for planning
and control purposes
Graph for inventory
costing purpose
($18 per machine-hour)
4,000,000
Machine-Hours
=
=
= $18 per machine-hour
2.
Actual Costs Incurred
(1)
Actual Input
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
$36,100,000
(3,800,000 ´ $9)
$34,200,000
(3,500,000 ´ $9)
$31,500,000
(3,500,000 ´ $9)
$31,500,000
$1,900,000 U
Spending variance
$4,600,000 U
Flexible-budget variance
Never a variance
$4,600,000 U
Underallocated variable overhead
(Total variable overhead variance)
Never a variance
$2,700,000 U
Efficiency variance
Actual Costs Incurred
(1)
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
$72,200,000
$72,000,000
$72,000,000
(3,500,000 × $18)
$63,000,000
$200,000 U
Flexible-budget variance
$9,000,000 U*
Production-volume variance
$9,200,000 U
Underallocated fixed overhead
Total fixed overhead variance
$200,000 U
Spending variance
Never a variance
$9,000,000 U*
Production-volume variance
*Alternative computation:
4,000,000 denominator hours – 3,500,000 budgeted hours allowed = 500,000 hours
500,000 ´ $18 = $9,000,000 U
3.
The underallocated overhead was: variable, $4,600,000 and fixed, $9,200,000. The flexible-budget variance and underallocated overhead are always the same amount for variable overhead, because the flexible-budget amount of variable overhead and the allocated amount of variable overhead coincide. In contrast, the only time the budget and allocated amounts coincide for fixed overhead is when the budgeted input of the allocation base for the actual output level achieved exactly equals the denominator level.
4.
The choice of the denominator level will affect inventory costs. The new fixed overhead rate would be $72,000,000 ÷ 3,000,000 = $24.00. In turn, the allocated amount of fixed overhead and the production-volume variance would change as seen below:
Actual
Budget
Allocated
$72,200,000
$72,000,000
3,500,000 × $24 =
$84,000,000
$200,000 U $12,000,000 F*
Flexible-budget variance Production volume variance
$11,800,000 F
Total fixed overhead variance
*Alternate computation: (3,000,000 – 3,500,000) × $24 = $12,000,000 F
The major point of this requirement is that inventory costs (and, hence, income determination) can be heavily affected by the choice of the denominator level used for setting the fixed manufacturing overhead rate.
8-29 4-variance analysis, find the unknowns.
Known figures denoted by an *
Actual Costs
Incurred
(Actual Inputs
× Actual Rate)
Actual Input
× Budgeted Rate
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
Case A:
Variable
Manufacturing
Overhead
$7,000*
(530 × $15)
$7,950
(500* × $15)
$7,500*
(500* × $15)
$7,500*
Never a variance
$950* F
Spending variance
$450 U
Efficiency variance
Fixed
Manufacturing
Overhead
$10,600*
(Lump sum)
$10,000*
(Lump sum)
$10,000*
(500 × $20a)
$10,000*
$600 U
Spending variance
Never a variance
$0
Production volume variance
Total budgeted manufacturing overhead = $7,500 + $10,000 = $17,500
Case B:
Variable
Manufacturing
Overhead
$5,525
(650 ´ $8.50*)
$5,525
(650* ´ $8.50*)
$5,525
(650* ´ $8.50*)
$5,525
Never a variance
$0*
Spending variance
$0
Efficiency variance
Fixed Manufacturing
Overhead
$6,700
(Lump sum)
$7,000b
(Lump sum)
$7,000b
(650* ´ $10)
$6,500
$300 F*
Spending variance
Never a variance
$500 U*
Production-volume variance
Denominator level = Budgeted FMOH costs ÷ Budgeted FMOH rate = $7,000 ÷ $10 = 700 hours
Case C:
Variable
Manufacturing
Overhead
$6,200
(1,170 ´ $5.00*)
$5,850
(1,150 ´ $5.00*)
$5,750c
(1,150 ´ $5.00*)
$5,750c
$350 U*
Spending variance
$100 U*
Efficiency variance
Never a variance
Fixed
Manufacturing
Overhead
$12,000*
$11,000*
$11,000*
$11,500d
$1,000 U
Spending variance
Never a variance
$500 F*
Production-volume variance
Total budgeted manufacturing overhead = $5,750 + $11,000 = $16,750
a Budgeted FMOH rate = Budgeted FMOH costs ÷ Denominator level = $10,000 ÷ 500 = $20
b = +
$12,525* = BFOVH + (650 ´ $8.50)
BFOVH = $7,000
c Budgeted hours allowed for actual output achieved must be derived from the output level variance before this figure can be derived, or, since the fixed manufacturing overhead rate is $11,000 ÷ 1,100 = $10, and the allocated amount is $11,500, the budgeted hours allowed for the actual output achieved must be 1,150.
d 1,150 ´ ($11,000* ÷ 1,100*) = $11,500
8-30 Flexible budgets, 4-variance analysis.
1.
= 3,600,000 DLH ÷ 720,000 units
= 5 hours per unit
Budgeted DLH allowed for May output = 66,000 units ´ 5 hrs./unit = 330,000 hrs.
Allocated total MOH = 330,000 ´ Total MOH rate per hour
= 330,000 ´ $1.20 = $396,000
2, 3, 4, 5. See Solution Exhibit 8-30
Variable overhead rate per DLH = $0.25 + $0.34 = $0.59
Fixed overhead rate per DLH = $0.18 + $0.15 + $0.28 = $0.61
Fixed overhead budget for May = ($648,000 + $540,000 + $1,008,000) ÷ 12
= $2,196,000 ÷ 12 = $183,000
Using the format of Exhibit 8-3 for variable overhead and then fixed overhead:
Actual variable overhead: $75,000 + $111,000 = $186,000
Actual fixed overhead: $51,000 + $54,000 + $84,000 = $189,000
An overview of the 4-variance analysis using the block format of the text is:
4-Variance
Analysis
Spending
Variance
Efficiency
Variance
Production- Volume
Variance
Variable
Manufacturing
Overhead
$150 U
$8,850 F
Never a variance
Fixed
Manufacturing
Overhead
$6,000 U
Never a variance
$18,300 F
Solution Exhibit 8-34
Variable Manufacturing Overhead
Actual Costs
Incurred
(1)
Actual Inputs
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
$186,000
(315,000 ´ $0.59)
$185,850
(330,000 ´ $0.59)
$194,700
(330,000 ´ $0.59)
$194,700
$150 U
Spending variance
$8,850 F
Efficiency variance
Never a variance
Fixed Manufacturing Overhead
Actual Costs
Incurred
(1)
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
$189,000
$183,000
$183,000
(330,000 ´ $0.61)
$201,300
$6,000 U
Spending variance
Never a variance
$18,300 F
Production-volume variance
Alternate computation of the production volume variance:
= ´
= (330,000 – 300,000) × $0.61
= $18,300 F
8-32 Sales-volume variance, production-volume variance.
1.
Budgeted selling price $100
Budgeted variable cost per unit $40
Budgeted fixed cost per unit ($5,000,000 ÷ 20,000) 25
Budgeted cost per unit 65
Budgeted profit per unit $ 35
Operating income based on budgeted profit per unit
$35 per unit × 22,000 units $ 770,000
Flexible-budget operating income is:
Revenues $100 × 22,000 $2,200,000
Variable costs $40 × 22,000 880,000
Fixed costs 500,000
Operating income $ 820,000
Static-budget operating income is
Revenues $100 × 20,000 $2,000,000
Variable costs $40 × 20,000 800,000
Fixed costs 500,000
Operating income $ 700,000
2.
The sales-volume variance recognizes that when Morano sells 22,000 units instead of the budgeted 20,000, only the revenue and the variable costs are affected. Fixed costs remain unchanged.
= –
×
= ($100 – $40) × 2,000 = $60 × 2,000 = $120,000 F
Production-volume variance = ×
= × 2,000 = $25 × 2,000 = $50,000 F
Compare the sales-volume variance and the production-volume variance. The $120,000 F sales-volume variance explains the difference between the static-budget operating income and the flexible-budget operating income:
Static-budget operating income $700,000
Sales-volume variance $120,000 F
Flexible-budget operating income $820,000
The $50,000 F production-volume variance explains the difference between operating income based on the budgeted profit per unit and the flexible-budget operating income:
Operating income based on budgeted profit per unit $770,000
Production-volume variance 50,000 F
Flexible-budget operating income $820,000
8-33 Activity-based costing, variance analysis.
Static-Budget Actual
1. Amounts Amounts
a. Units of SFA produced and sold 21,000 22,000
b. Batch size 500 550
c. Number of batches (a ÷ b) 42 40
d. Testing-hours per batch 5.5 5.4
e. Total testing-hours (c × d) 231 216
f. Variable overhead cost per testing-hour $40 $42
g. Variable testing overhead costs (e × f) $9,240 $9,072
h. Total fixed testing overhead costs $28,875 $27,216
i. Fixed overhead cost per testing-hour (h ÷ e) $125 $126
The flexible budget is based on the budgeted number of testing-hours for the actual output achieved, 22,000 units ÷ 500 units per batch = 44 batches
Computation of variable testing overhead cost variances follows:
Allocated:
Budgeted Input
Allowed for
Actual Costs Actual Input Actual Output
Incurred × Budgeted Rate × Budgeted Rate
(40 × 5.4 × $42) (40 × 5.4 × $40) (44 × 5.5 × $40)
$9,072 $8,640 $9,680
$432 U $1,040 F
Spending variance Efficiency variance
The unfavorable spending variance is due to the actual variable overhead cost per testing-hour increasing from the budgeted $40 per hour to the actual rate of $42 per hour. The favorable efficiency variance is due to the actual output of 22,000 units (1) requiring fewer batches, 40, than the budgeted amount of 42 and (2) each batch taking less time, 5.4 hours, than the budgeted time of 5.5 hours.
2.
Computation of the fixed testing overhead cost variances follows:
Same Budgeted Allocated:
Lump Sum Budgeted Input
(as in Static Budget) Allowed for
Actual Costs Regardless of Actual Output
Incurred Output Level × Budgeted Rate
(44 × 5.5 × $125)
$27,216 $28,875 $30,250
$1,659 F $1,375 F
Spending variance Production-volume variance
The fixed testing overhead cost spending variance is $1,659 F because the amount of actual costs was lower than the budgeted amount of $28,875. The production-volume variance is $1,375 F because the actual number of SFA produced and sold required more budgeted testing-hours than the budgeted testing-hour capacity available.
8-35 Comprehensive review of Chapters 7 and 8, working backward from given variances.
1.
Solution Exhibit 8-35 outlines the Chapter 7 and 8 framework underlying this solution.
(a) $176,000 ÷ $1.10 = 160,000 pounds
(b) $69,000 ÷ $11.50 = 6,000 pounds
(c) $10,350 – $18,000 = $7,650 F
(d) Standard direct manufacturing labor rate = $800,000 ÷ 40,000 hours = $20 per hour
Actual direct manufacturing labor rate = $20 + $0.50 = $20.50
Actual direct manufacturing labor-hours = $522,750 ÷ $20.50
= 25,500 hours
(e) Standard variable manufacturing overhead rate = $480,000 ÷ 40,000
= $12 per direct manuf. labor-hour
Variable manuf. overhead efficiency variance of $18,000 ÷ $12 = 1,500 excess hours
Actual hours – Excess hours = Standard hours allowed
25,500 – 1,500 = 24,000 hours
(f) Budgeted fixed manufacturing overhead rate = $640,000 ÷ 40,000 hours
= $16 per direct manuf. labor-hour
Fixed manufacturing overhead allocated = $16 ´ 24,000 hours = $384,000
Production-volume variance = $640,000 – $384,000 = $256,000 U
2.
The control of variable manufacturing overhead requires the identification of the cost drivers for such items as energy, supplies, and repairs. Control often entails monitoring nonfinancial measures that affect each cost item, one by one. Examples are kilowatts used, quantities of lubricants used, and repair parts and hours used. The most convincing way to discover why overhead performance did not agree with a budget is to investigate possible causes, line item by line item.
Individual fixed overhead items are not usually affected very much by day-to-day control. Instead, they are controlled periodically through planning decisions and budgeting procedures that may sometimes have planning horizons covering six months or a year (for example, management salaries) and sometimes covering many years (for example, long-term leases and depreciation on plant and equipment).
Solution Exhibit 8-35
Actual Costs
Incurred
(Actual Input
´ Actual Rate)
Actual Input
´ Budgeted Rate
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
´ Budgeted Rate
$69,000 U
Efficiency variance
$176,000 F
Price variance
Direct
Materials
160,000 ´ $10.40
$1,664,000
160,000 ´ $11.50
$1,840,000
96,000 ´ $11.50
$1,104,000
3 ´ 30,000 ´ $11.50
$1,035,000
Direct
Manufacturing
Labor
0.85 ´ 30,000 ´ $20.50
$522,750
0.85 ´ 30,000 ´ $20
$510,000
0.80 ´ 30,000 ´ $20
$480,000
$30,000 U
Efficiency variance
$42,750 U
Flexible-budget variance
$12,750 U
Price variance
Actual Costs
Incurred
Actual Input
´ Budgeted Rate
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
´ Budgeted Rate
Allocated:
Budgeted Input
Allowed for
Actual Output
´ Budgeted Rate
Variable
MOH
0.85 ´ 30,000 ´ $11.70
$298,350
0.85 ´ 30,000 ´ $12
$306,000
0.80 ´ 30,000 ´ $12
$288,000
0.80 ´ 30,000 ´ $12
$288,000
Never a variance
$10,350 U
Flexible-budget variance
Never a variance
$18,000 U
Efficiency variance
$7,650 F
Spending variance
Actual Costs
Incurred
(1)
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
$256,000 U
Production volume variance
Never a varianceFixed
MOH
$597,460
$640,000
0.80 x 50,000 × $16
$640,000
0.80 x 30,000 × $16
$384,000
$42,540 F
Spending variance
$42,540 F
Flexible-budget variance
$256,000 U
Production volume variance
8-36 Review of Chapters 7 and 8, 3—variance analysis.
1. Total standard production costs are based on 7,800 units of output.
Direct materials, 7,800 ´ $15.00
(or 7,800 ´ 3 lbs. ´ $5.00 or 23,400 lbs. ´ $5.00) $ 117,000
Direct manufacturing labor, 7,800 ´ $75.00
(or 7,800 ´ 5 hrs. ´ $15.00 or 39,000 hrs. ´ $15.00) 585,000
Manufacturing overhead:
Variable, 7,800 ´ $30.00 (or 39,000 hrs. ´ $6.00) 234,000
Fixed, 7,800 ´ $40.00 (or 39,000 hrs. ´ $8.00) 312,000
Total $1,248,000
The following is for later use:
Fixed manufacturing overhead, a lump-sum budget $320,000*
*Fixed manufacturing overhead rate =
$8.00 =
Budget = 40,000 hours ´ $8.00 = $320,000
2.
Solution Exhibit 8-36 presents a columnar presentation of the variances. An overview of the 3-variance analysis using the block format of the text is:
3-Variance
Analysis
Spending
Variance
Efficiency
Variance
Production
Volume Variance
Total Manufacturing Overhead
$39,400 U
$6,600 U
$8,000 U
Solution Exhibit 8-36
Actual Costs
Incurred:
Actual Input
(Actual Input x Budgeted Price)
Flexible Budget:
Budgeted Input
Allowed for Actual Output
× Actual Rate
Purchases
Usage
× Budgeted Price
Direct
Materials
(25,000 ´ $5.20)
$130,000
(25,000 ´ $5.00)
$125,000
(23,100 ´ $5.00)
$115,500
(23,400 ´ $5.00)
$117,000
$5,000 U
a. Price variance
$1,500 F
b. Efficiency variance
Direct
Manuf.
Labor
(40,100 ´ $14.60)
$585,460
(40,100 ´ $15.00)
$601,500
(39,000 ´ $15.00)
$585,000
$16,040 F $16,500 U
c. Price variance d. Efficiency variance
Actual Costs
Incurred
Actual Input
´ Budgeted Rate
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
´ Budgeted Rate
Allocated:
(Budgeted Input
Allowed for
Actual Output
´ Budgeted Rate)
Variable
Manufacturing
Overhead
(not given)
(40,100 ´ $6.00)
$240,600
(39,000 ´ $6.00)
$234,000
(39,000 ´ $6.00)
$234,000
$6,600 U
Efficiency variance Never a variance
Fixed
Manufacturing
Overhead
(not given)
$320,000
$320,000
(39,000 ´ $8.00)
$312,000
$8,000 U*
Never a variance Production volume variance
Total
Manufacturing
Overhead
( given)
$600,000
($240,600 + $320,000)
$560,600
($234,000 + $320,000)
$554,000
($234,000 + $312,000)
$546,000
$39,400 U $6,600 U $8,000 U
e. Spending variance f. Efficiency variance g. Production volume variance
*Denominator level in hours 40,000
Production volume in standard hours allowed 39,000
Production-volume variance 1,000 hours x $8.00 = $8,000 U
8-37 Overhead variances, ethics.
1a.
1b.
Budgeted fixed OH rate =
= $2.50 per machine-hour
1c.
Fixed overhead spending variance = Actual costs incurred – Budgeted amount. Because fixed overhead spending variance is unfavorable, the amount of actual costs is higher than the budgeted amount.
Actual cost = $2,500,000 + $600,000
= $3,100,000
1d.
Production-volume variance =
Budgeted fixed overhead –
= $2,500,000 – ($2.50 per machine-hour × 2 machine-hours per unit* × 498,000 units)
= $2,500,000 – $2,490,000
= $10,000 U
*Budgeted variable overhead per unit = $20
Budgeted variable overhead rate = $10 per machine-hour
Therefore, budgeted machine hours allowed per unit = = 2 machine-hours
2.
Variable overhead spending variance:
= –
×
= – $10 per machine-hour × 960,000 machine-hours
= ($10.50 – $10) × 960,000 = $480,000 U
Variable overhead efficiency variance:
Actual units of Budgeted units of Budgeted
variable overhead variable overhead variable
cost-allocation – cost-allocation base × overhead
base used for allowed for rate
actual output actual output
= (960,000 – (2 × 498,000)) × $10
= (960,000 – 996,000) × 10 = $360,000 F
3.
By manipulating, Remich has created a sizable unfavorable fixed overhead spending variance or, at least, has increased its magnitude. Jerry Remich’s action is clearly unethical. Variances draw attention to the areas which need management attention. If the top management relies on Remich, due to his expertise, to interpret and explain the reasons for the unfavorable variance, it is likely that his report will be biased and misleading to the top management. The top management may erroneously conclude that Monroe is not able to manage his fixed overhead costs effectively. Another probable adverse outcome of Remich’s actions will be that Monroe will have even less confidence in the usefulness of accounting reports. This, of course, defeats the purpose of preparing the reports. In summary, Remich’s unethical actions will waste top management’s time and may lead to wrong decisions.
Soalan yang tak ada jawapan:
8-12
8-18 (different amount)
8-23 (have some error! find out!)
8-25
8-28 (have some error! find out!)
8-29 (fill up the table given! Need to do it!)
8-31
8-34
8-36 (have some error! find out!)
No comments:
Post a Comment