8 CHAPTER FLEXIBLE BUDGETS, OVERHEAD COST 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: Direct costs Indirect costs Actual Costing Actual prices Actual inputs used Actual indirect rate Actual inputs used Standard Costing Standard prices Standard inputs allowed for actual output Standard indirect cost-allocation rate Standard quantity of cost-allocation base allowed for actual output
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. 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. Percentage change in the actual quantity used of individual items included in variable overhead cost pool, relative to the percentage change in the quantity of the cost driver of the variable overhead cost pool. Possible 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 were overly lenient.
8-5
8-6
8-1
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. The relationship for fixed-manufacturing overhead variances is:
Flexible-budget variance
8-9
Spending variance
Efficiency variance (never a variance)
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 fixedmanufacturing 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 productionvolume variance may be small relative to the selling-price variance had prices been dropped to attain the denominator level of unit sales.
8-2
8-12 A strong case can be made for writing off an unfavorable production-volume variance to cost of goods sold. The alternative is prorating it among inventories and cost of goods sold, but this would penalize the units produced (and in inventory) for the cost of unused capacity, i.e., for the units not produced. But, if we take the view that the denominator level is a soft number i.e., it is only an estimate, and it is never expected to be reached exactly, then it makes more sense to prorate the production volume variancewhether favorable or notamong the inventory stock and cost of goods sold. Prorating a favorable variance is also more conservative: it results in a lower operating income than if the favorable variance had all been written off to cost of goods sold. Finally, prorating also dampens the efficacy of any steps taken by company management to manage operating income through manipulation of the production volume variance. In sum, a production-volume variance need not always be written off to cost of goods sold. 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.
8-3
8-16 1.
(20 min.) Variable manufacturing overhead, variance analysis.
Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (3) (4 1,080 $12) $51,840 Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (4) (4 1,080 $12) $51,840
Actual Costs Incurred Actual Input Qty. Actual Rate (1) (4,536 $11.50) $52,164
Actual Input Qty. Budgeted Rate (2) (4,536 $12) $54,432
$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 labor-hours.
8-4
8-17 1 & 2.
(20 min.) Fixed-manufacturing overhead, variance analysis (continuation of 8-16). Budgeted fixed overhead rate per unit of allocation base = = $62,400 1,040 4
$62,400 4,160 = $15 per hour Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $62,400
$1,516 U Spending variance Never a variance
Actual Costs Incurred (1) $63,916
Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $62,400
Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (4) (4 1,080 $15) $64,800
$2,400 F Production-volume variance $2,400 F Production-volume variance
$1,516 U Flexible-budget 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 2007. 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?
8-5
8-18 1. 2. 1. 2. 3. 4. 5. 6.
a
(30 min.)
Variable manufacturing overhead variance analysis.
Denominator level = (3,200,000 0.02 hours) = 64,000 hours Actual Results 2,800,000 50,400 0.018 $680,400 $13.50 $0.243 Flexible Budget Amounts 2,800,000 56,000a 0.020 $560,000 $10 $0.200
Output units (baguettes) Direct manufacturing labor-hours Labor-hours per output unit (2 1) Variable manuf. overhead (MOH) costs Variable MOH per labor-hour (4 2) Variable MOH per output unit (4 1) 0.020= 56,000 hours
2,800,000
Actual Costs Incurred Actual Input Qty. Actual Rate (1) (50,400 $13.50) $680,400
Actual Input Qty. Budgeted Rate (2) (50,400 $10) $504,000
Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (3) (56,000 $10) $560,000
Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (4) (56,000 $10) $560,000
$176,400 U Spending variance
$56,000 F Efficiency variance
Never a variance Never a variance
$120,400 U Flexible-budget variance
3. Spending variance of $176,400U. It is unfavorable because variable manufacturing overhead was 35% higher than planned. A possible explanation could be an increase in energy rates relative to the rate per standard labor-hour assumed in the flexible budget. Efficiency variance of $56,000F. It is favorable because the actual number of direct manufacturing labor-hours required was lower than the number of hours in the flexible budget. Labor was more efficient in producing the baguettes than management had anticipated in the budget. This could occur because of improved morale in the company, which could result from an increase in wages or an improvement in the compensation scheme. Flexible-budget variance of $120,400U. It is unfavorable because the favorable efficiency variance was not large enough to compensate for the large unfavorable spending variance.
8-6
8-19
(30 min.) Fixed manufacturing overhead variance analysis.
1. Budgeted standard direct manufacturing labor used = 0.02 per baguette Budgeted output = 3,200,000 baguettes Budgeted standard direct manufacturing labor-hours = 3,200,000 0.02 = 64,000 hours Budgeted fixed manufacturing overhead costs = 64,000 $4.00 per hour = $256,000 Actual output = 2,800,000 baguettes Allocated fixed manufacturing overhead = 2,800,000 0.02 $4 = $224,000 Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $256,000 Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $256,000 Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (4) (2,800,000 0.02 $4) $224,000
Actual Costs Incurred (1) $272,000
$16,000 U Spending variance
Never a variance
$32,000 U Production-volume variance $32,000 U Production-volume variance
$16,000 U Flexible-budget variance
$48,000 U Underallocated fixed overhead (Total fixed overhead variance)
2. The fixed manufacturing overhead is underallocated by $48,000.
3.
The production-volume variance of $32,000U captures the difference between the budgeted 3,200,0000 baguettes and the lower actual 2,800,000 baguettes producedthe fixed cost capacity not used. The spending variance of $16,000 unfavorable means that the actual aggregate of fixed costs ($272,000) exceeds the budget amount ($256,000). For example, monthly leasing rates for baguette-making machines may have increased above those in the budget for 2007.
8-7
8-20 1.
(3040 min.) Manufacturing overhead, variance analysis. The summary information is: Actual 5,400 10,280 1.90b $ 30.20d $310,500 $514,000 $ 50.00g Flexible Budget 5,400 10,800c 2.00 $ 30.00 $324,000e $480,000 Static Budget 5,000 10,000a 2.00 $ 30.00 $300,000f $480,000 $ 48.00h
Zircon (March 2007) Outputs units (number of assembled CardioX) Hours of assembly time Assembly hours per CardioX unit Variable overhead costs per hour of assembly time Variable overhead costs Fixed overhead costs Fixed overhead costs per hour of assembly time
a b c d e f
5,000 units 2 assembly hours per unit = 10,000 hours 10,280 hours $310,500
5,400 units = 1.90 assembly hours per unit
5,400 units 2 assembly hours per unit = 10,800 hours
10,280 assembly hours = $30.20 per assembly hour
10,800 assembly hours $30 per assembly hour = $324,000 $514,000
10,000 assembly hours $30 per assembly hour = $300,000
10,280 assembly hours = $50 per assembly hour h $480,000 10,000 assembly hours = $48 per assembly hour
g
Actual Costs Incurred Variable Manufacturin g Overhead
Actual Input Qty. Budgeted Rate 10,280 $30.00 assy. hrs. per assy. hr. $308,400
Flexible Budget Budgeted Input Qty. Allowed Budgeted for Actual Output Rate 10,800 $30.00 assy. hrs. $324,000 per assy. hr.
Allocated Budgeted Input Qty. Allowed for Actual Output 10,800 assy. hrs. $324,000
B
p
$310,500
$2,100 U Spending variance $13,500 F Flexible-budget variance
$15,600 F Efficiency variance Never a variance Never a variance $13,500 F Overallocated variable overhead Flexible Budget: Allocated:
8-8
Actual Costs Incurred Fixed Manufacturin g Overhead
Static Budget Lump Sum Regardless of Output Level
Static Budget Lump Sum Regardless of Output Level
Budgeted Input Allowed for Actual Output 10,800 assy. hrs.
$514,000
$480,000
$480,000
$518,40
$34,000 U Spending Variance Never a Variance
$38,400 F Production-volume variance
$34,000 U Flexible-budget variance $4,400 F Overallocated fixed overhead
$38,400 F Production-volume variance
8-9
The summary analysis is: Spending Variance Variable Manufacturing Overhead Fixed Manufacturing Overhead 2. $2,100 U $34,000 U Efficiency Variance $15,600 F Never a variance Production-Volume Variance Never a variance $38,400 F
Variable Manufacturing Costs and Variances 310 ,500 310,500
a. Variable Manufacturing Overhead Control Accounts Payable Control and various other accounts To record actual variable manufacturing overhead costs incurred. b. Work-in-Process Control Variable Manufacturing Overhead Allocated To record variable manufacturing overhead allocated. c. Variable Manufacturing Overhead Allocated Variable Manufacturing Overhead Spending Variance Variable Manufacturing Overhead Control Variable Manufacturing Overhead Efficiency Variance To isolate variances for the accounting period.
324,000 324,000 324,000 2,100 310,500 15,600
d. Fixed Manufacturing Overhead Efficiency Variance 15,600 Variable Manufacturing Overhead Spending Variance 2,100 Cost of Goods Sold 13,500 To write off variable manufacturing overhead variances to cost of goods sold.
Fixed Manufacturing Costs and Variances a. Fixed Manufacturing Overhead Control Salaries Payable, Acc. Depreciation, various other accounts To record actual fixed manufacturing overhead costs incurred. b. Work-in-Process Control Fixed Manufacturing Overhead Allocated To record fixed manufacturing overhead allocated. c. Fixed Manufacturing Overhead Allocated Fixed Manufacturing Overhead Spending Variance Fixed Manufacturing Overhead Production-Volume Variance Fixed Manufacturing Overhead Control To isolate variances for the accounting period. 514,000 514,000 518,400 518,400 518,400 34,000 38,400 514,000
d. Variable Manufacturing Overhead Production-Volume Variance 38,400 Fixed Manufacturing Overhead Spending Variance Cost of Goods Sold To write off fixed manufacturing overhead variances to cost of goods sold.
34,000 4,400
3. Planning and control of variable manufacturing overhead costs has both a long-run and a short-run focus. It involves Zircon 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 Zircon have primarily a long-run focus. It involves undertaking only value-added fixed-overhead activities for a budgeted level of output. Zircon makes most of the key decisions that determine the level of fixed-overhead costs at the start of the accounting period.
8-21 1. 2. 3. 4. 5.
(10 min.) 4-variance analysis, fill in the blanks. 15 Variable $1,900 U 1,000 U NEVER 2,900 U 2,900 U Fixed $1,000 U NEVER 500 U 1,000 U 1,500 U
Spending variance Efficiency variance Production-volume variance Flexible-budget variance Underallocated (overallocated) MOH
These relationships could be presented in the same way as in Exhibit 8-5.
Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (3) $9,000 Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (4) $9,000
Variable MOH
Actual Costs Incurred (1) $11,900
Actual Input Qty. Budgeted Rate (2) $10,000
$1,900 U Spending variance
$1,000 U Efficiency variance
Never a variance
$2,900 U Flexible-budget variance
Never a variance
$2,900 U Underallocated variable overhead (Total variable overhead variance)
Fixed MOH
Actual Costs Incurred (1) $6,000
Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $5,000
Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $5,000
Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (4) $4,500
$1,000 U Spending variance
Never a variance
$500 U Production-volume variance $500 U Production-volume variance
$1,000 U Flexible-budget variance
$1,500 U Underallocated fixed overhead (Total fixed overhead variance)
An overview of the 4 overhead variances is: 4-Variance Analysis Variable Overhead Fixed Overhead 8-22 Spending Variance $1,900 U $1,000 U Efficiency Variance $1,000 U Never a variance ProductionVolume Variance Never a variance $500 U
(2030 min.) Straightforward 4-variance overhead analysis.
1. The budget for fixed manufacturing overhead is 4,000 units 6 machine-hours $15 machine-hours/unit = $360,000. An overview of the 4-variance analysis is: 4-Variance Analysis Variable Manufacturing Overhead Fixed Manufacturing Overhead Spending Variance $17,800 U Efficiency Variance $16,000 U ProductionVolume Variance Never a Variance
$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: Output units (auto parts) Allocation base (machine-hours) Allocation base per output unit Variable MOH Variable MOH per hour Fixed MOH Fixed MOH per hour
a b
Actual 4,400 28,400 6.45b $245,000 $8.63d $373,000 $13.13f
Flexible Budget 4,400 26,400a 6.00 $211,200c $8.00 $360,000e
4,400 units 6.00 machine-hours/unit = 26,400 machine-hours 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 Accounts Payable Control and other accounts
245,000 245,000
Work-in-Process Control Variable Manufacturing Overhead Allocated Variable Manufacturing Overhead Allocated Variable Manufacturing Overhead Spending Variance Variable Manufacturing Overhead Efficiency Variance Variable Manufacturing Overhead Control Fixed Manufacturing Overhead Control Wages Payable Control, Accumulated Depreciation Control, etc. Work-in-Process Control Fixed Manufacturing Overhead Allocated
211,200 211,200 211,200 17,800 16,000 245,000 373,000 373,000 396,000 396,000
Fixed Manufacturing Overhead Allocated 396,000 Fixed Manufacturing Overhead Spending Variance 13,000 Fixed Manufacturing Overhead Production-Volume Variance Fixed Manufacturing Overhead Control
36,000 373,000
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 kilowatt-hours 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 dayto-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 8-22
Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (3) (4,400 6 $8) $211,200 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (4,400 6 $8) $211,200
Actual Costs Incurred (1) Variable MOH $245,000
Actual Input Budgeted Rate (2) (28,400 $8) $227,200
$17,800 U Spending variance
$16,000 U Efficiency variance
Never a variance
$33,800 U Flexible-budget variance
Never a variance
$33,800 U Underallocated variable overhead (Total variable overhead variance) Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) (4,000 6 $15) $360,000
Actual Costs Incurred (1) Fixed MOH $373,000
Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) (4,000 6 $15) $360,000
Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (4,400 6 $15) $396,000
$13,000 U Spending variance
Never a variance
$36,000 F Production-volume variance
$13,000 U $36,000 F Production-volume variance Flexible-budget variance $23,000 F Overallocated fixed overhead (Total fixed overhead variance)
8-23 (30 min.) 40 1.
Straightforward coverage of manufacturing overhead, standardcosting system.
Solution Exhibit 8-23 shows the computations. Summary details are: Output units Allocation base (machine-hours) Allocation base per output unit Variable MOH Variable MOH per hour Fixed MOH Fixed MOH per hour Actual 41,000 13,300 0.32b $155,100 $11.66d $401,000 $30.15e Flexible Budget 41,000 12,300a 0.30 $147,600c $12.00 $390,000
a b c
41,000 0.30 = 12,300 13,300 41,000 = 0.32 41,000 0.30 $12 = $147,600
d e
$155,100 13,300 = $11.66 $401,000 13,300 = $30.15
An overview of the 4-variance analysis is: 4-Variance Analysis Variable Manufacturing Overhead Fixed Manufacturing Overhead Spending Variance $4,500 F Efficiency Variance $12,000 U Production Volume Variance Never a variance
$11,000 U
Never a variance
$21,000 U
2.
Variable Manuf. Overhead Control Accounts Payable Control and other accounts Work-in-Process Control Variable Manufacturing Overhead Allocated Variable Manuf. Overhead Allocated Variable Manuf. Overhead Efficiency Variance Variable Manuf. Overhead Spending Variance Variable Manuf. Overhead Control Fixed Manuf. Overhead Control Wages Payable Control, Accumulated Depreciation Control, etc. Work-in-Process Control Fixed Manufacturing Overhead Allocated Fixed Manufacturing Overhead Allocated Fixed Manufacturing Overhead Spending Variance Fixed Manuf. Overhead Production-Volume Variance Fixed Manuf. Overhead Control
155,100 155,100 147,600 147,600 147,600 12,000 4,500 155,100 401,000 401,000 369,000 369,000 369,000 11,000 21,000 401,000
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 kilowatt-hours 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 dayto-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 8-23
Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (3) (12,300 $12) $147,600 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (12,300 $12) $147,600
Actual Costs Incurred (1) Variable Manufacturing Overhead $155,100
Actual Input Budgeted Rate (2) (13,300 $12) $159,600
$4,500 F $12,000 U Spending variance Efficiency variance
Never a variance
$7,500 U Flexible-budget variance Never a variance $7,500 U Underallocated variable overhead (Total variable overhead variance) Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $390,000
Actual Costs Incurred (1) Fixed Manufacturing Overhead $401,000
Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $390,000
Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (12,300 $30) $369,000
$11,000 U Spending variance
Never a variance
$21,000 U* Production-volume variance $21,000 U* Production-volume variance
$11,000 U Flexible-budget variance
$32,000 U Underallocated fixed overhead (Total fixed overhead variance)
=
$390,000 13,000 machine - hours
= $30 per machine-hour
*Alternative computation: 13,000 denominator hours 12,300 budgeted hours allowed = 700 hours; 700 hours $30 per machine-hour = $21,000 U
8-24 1.
(2025 min.) Overhead variances, service sector. Actual Results 8,800 0.65a 5,720 $1.80c $10,296 $38,600 Flexible Budget 8,800 0.70 6,160b $1.50 $9,240d $35,000 Static Budget 10,000 0.70 7,000b $1.50 $10,500d $35,000 $5.00e
Meals on Wheels (May 2007) Output units (number of deliveries) Hours per delivery Hours of delivery time Variable overhead costs per delivery hour Variable overhead (VOH) costs Fixed overhead costs Fixed overhead cost per hour
a b
5,720 hours 8,800 deliveries = 0.65 hours. per delivery hrs. per delivery number of deliveries = 0.70 10,000 = 7,000 hours c $10,296 VOH costs 5,720 delivery hours = $1.80 per delivery hour d Delivery hours VOH cost per delivery hour = 7,000 $1.50 = $10,500 e Static budget delivery hours = 10,000 units 0.70 hours/unit = 7,000 hours; Fixed overhead rate = Fixed overhead costs Static budget delivery hours = $35,000 7,000 hours = $5 per hour
VARIABLE OVERHEAD Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate 6,160 hrs $1.50 per hr. $9,240
Actual Costs Incurred $10,296
Actual Input Qty. Budgeted Rate 5,720 hrs $1.50 per hr. $8,580 $1,716 U Spending variance
$660 F Efficiency variance
2.
FIXED OVERHEAD Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level $35,000 $3,600 U Spending variance
Actual Costs Incurred $38,600
Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate 8,800 units 0.70 hrs./unit $5/hr. 6,160 hrs. $5/hr. $30,800
$4,200 U Production-volume variance
3. 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 baseeach delivery takes 0.65 hours versus a budgeted 0.70 hours. MOW can best manage 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 should plan 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). There is no production-volume variance for variable overhead costs. The unfavorable production-volume variance for fixed overhead costs arises because MOW has unused fixed overhead resources that it may seek to reduce in the long run.
8-25 (35 min.) Total overhead, 3-variance analysis. 50 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 as follows: Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (11,750 hrs. $16.00*) $188,000
Actual Costs Incurred (12,050 hrs. $16.80) $202,440*
Actual Input Budgeted Rate (12,050 hrs. $16.00*) $192,800
$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 = 10,000* $8.00 = $117,600 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 Budgeted fixed overhead rate per input unit $11.20 D = $117,600 D
=
= 10,500 direct labor-hours
Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate $117,600 + ($8 11,750) $211,600 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (11,750 hrs. $19.20) $225,600
A summary 3-variance analysis for October follows:
Actual Costs Incurred $249,000*
Actual Inputs Budgeted Rate ($117,600 + (12,050 $8.00) $214,000
$35,000 U Spending variance
$2,400 U Efficiency variance
$14,000 F* Production-volume variance $14,000 F* Production-volume variance
$37,400 U Flexible-budget variance
*
Known figure
An overview of the 3-variance analysis using the block format in the text is: 3-Variance Analysis Total Overhead Spending Variance $35,000 U Efficiency Variance $2,400 U Production Volume Variance $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 dayto-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).
8-26
(30 min.) Overhead variances, missing information.
1. In the columnar presentation of variable overhead variance analysis, all numbers shown in bold are calculated from the given information, in the order (a) (e).
VARIABLE MANUFACTURING OVERHEAD Flexible Budget: Budgeted Input Qty. Actual Input Qty. Allowed for Budgeted Budgeted Rate Actual Output Rate (a) (c) 10,000 $6.00 9,900 $6.00 mach. hrs. per mach. hr. mach. hrs. per mach. hr. $60,000 $59,400 $600 U (d) Efficiency variance $350 U (e) Flexible-budget variance
Actual Costs Incurred (b)
$59,750
$250 F Spending variance
a. b. c. d. e.
10,000 machine-hours $6 per machine-hour = $60,000 Actual VMOH = $60,000 $250F (VOH spending variance) = $59,750 9,900 machine-hours $6 per machine-hour = $59,400 VOH efficiency variance = $60,000 $59,400 = $600U VOH flexible budget variance = $600U $250F = $350U
Allocated variable overhead will be the same as the flexible budget variable overhead of $59,400. The actual variable overhead cost is $59,750. Therefore, variable overhead is underallocated by $350.
2. In the columnar presentation of fixed overhead variance analysis, all numbers shown in bold are calculated from the given information, in the order (a) (e).
FIXED MANUFACTURING OVERHEAD Flexible Budget: Allocated: Static Budget Lump Sum Budgeted Input Qty. Regardless of Output Allowed for Level Actual Output (b) 9,900 mach. hrs. $19,200 $15,840 $3,360 U (d) Production-volume variance
Actual Costs Incurred (a) $20,250
Budgeted Rate $1.60* (c) per mach. hr.
$1,050 U Spending variance $1,050 U (e) Flexible-budget variance
a.
Actual FOH costs = $80,000 total overhead costs $59,750 VOH costs = $20,250 Static budget FOH lump sum = $20,250 $1,050 spending variance = $19,200 *FOH allocation rate = $19,200 FOH static-budget lump sum 12,000 static-budget machine-hours = $1.60 per machine-hour Allocated FOH = 9,900 machine-hours $1.60 per machine-hour = $15,840 PVV = $19,200 $15,840 = $3,360U FOH flexible budget variance = FOH spending variance = $1,050 U
b.
c.
d.
e.
Allocated fixed overhead is $15,840. The actual fixed overhead cost is $20,250. Therefore, fixed overhead is underallocated by $4,410.
8-27
(15 min.) Identifying favorable and unfavorable variances.
VOH Spending Variance Cannot be determined: no information on actual versus budgeted VOH rates VOH Efficiency Variance Unfavorable: more machine-hours used relative to flexible budget FOH Spending Variance Cannot be determined: no information on actual versus budgeted FOH costs FOH ProductionVolume Variance Cannot be determined: no information on flexible-budget machine-hours relative to staticbudget machinehours Unfavorable: output less than budgeted will cause FOH costs to be underallocated Favorable: output is more than budgeted causing FOH costs to be overallocated
Scenario Actual machine hours are 10% greater than flexiblebudget machine hours
Production output is 20% less than budgeted
Production output is 10% more than budgeted; actual machine hours are 5% less than budgeted Production output is 15% more than budgeted and actual fixed overhead is 6% more than budgeted Relative to the flexible budget, actual machine hours are 10% greater and actual variable overhead costs are 8% greater
Cannot be determined: no information on actual versus budgeted VOH rates Cannot be determined: no information on actual versus budgeted VOH rates Cannot be determined: no information on actual versus budgeted VOH rates Favorable: actual VOH rate less than budgeted VOH rate
Cannot be determined: no information on actual machine-hours versus flexible-budget machine-hours Favorable: actual machine-hours less than flexible-budget machine-hours
Cannot be determined: no information on actual versus budgeted FOH costs Cannot be determined: no information on actual versus budgeted FOH costs Unfavorable: actual fixed costs are more than budgeted fixed costs Cannot be determined: no information on actual versus budgeted FOH costs
Cannot be determined: no information on actual versus flexiblebudget machinehours Unfavorable: actual machine-hours greater than flexiblebudget machinehours
Favorable: output is more than budgeted causing FOH costs to be overallocated Cannot be determined: no information on actual output relative to budgeted output
8-28 1.
(40 min.) Flexible-budget variances, review of Chapters 7 and 8. Flexible Budget 320,000 16,000,000c $ $ $ 192,000f 64,000i 90,000 Static Budget 300,000 50a 15,000,000 $ 0.012d $ 180,000 $ 0.0040g $ 60,000 $ 90,000 $ 0.0060j
No. of copies Newsprint pages per copy Number of pages of newsprint Cost per newsprint page Cost of newsprint (direct materials) VOH cost per newsprint page Variable overhead Fixed overhead FOH allocated per newsprint page
a b
Actual 320,000 54b 17,280,000 $ 0.013e $ 224,640 $ 0.0037h $ 63,936 $ 97,000
Budgeted newsprint pages per copy = 15,000,000 300,000 = 50 Actual newsprint pages per copy = 17,280,000 320,000 = 54 c 50 newsprint pages per copy 320,000 copies = 16,000,000 newsprint pages d Budgeted cost per newsprint page = $180,000 15,000,000 = $0.012 per page e Actual cost per newsprint page = $224,640 17,280,000 = $0.013 per page f Flexible budget cost of newsprint = $0.012 16,000,000 = $192,000 g Budgeted VOH per newsprint page = $60,000 15,000,000 = $0.0040 per page h Actual VOH per newsprint page = $63,936 17,280,000 = $0.0037 per page i Flexible budget VOH = $0.0040 16,000,000 = $64,000 j FOH allocated per page = $90,000 15,000,000 = $0.0060 per page
Actual 224,64 Direct materials 0 $ Variable overhead 63,936
Price Variance $17,280 U $ 5,184 F Spending Variance $ 7,000 U
Actual Input Qty. Budgeted Price $207,360a $ 69,120b Static/Flexible Budget Lump Sum $ 90,000
Efficiency Variance $15,360 $ 5,120 Production Volume Variance $ 6,000 F U U
Flexible Budget $192,000 $ overhead
a
Actual 64,000
Fixed $ 97,000
Allocated $ 96,000c
17,280,000 pages 17,280,000 pages c 16,000,000 pages
b
$0.012 DM per page = $207,360 $0.0040 VOH per page = $69,120 $0.0060 per page = $96,000
2. The largest individual variance category is for direct materialscomprising a $17,280 U price variance (the actual cost per page of $0.013 exceeds the budgeted $0.012 per page) and a $15,360 U efficiency variance (the 1,280,000 (17,280,00 16,000,000) unusable pages $0.012 budgeted cost). The variable overhead spending variance of $5,184 F is due to the actual variable overhead costs per newsprint page being less than budgeted ($0.0037 versus $0.0040). The unfavorable variable overhead efficiency variance of $5,120 U is due to 1,280,000 extra pages being used (the cost allocation base) over that budgeted for the actual level of output. The fixed overhead spending variance is due to actual costs being $7,000 above the budgeted $90,000. An analysis of the line items in this budget would help assist in determining the causes of this variance. The production-volume variance of $6,000 F arises because the denominator used to allocate the $90,000 of fixed indirect costs is 15,000,000 budgeted newsprint pages rather than the 16,000,000 actual newsprint pages which are used because actual output is 320,000 newspapers versus 300,000 budgeted.
8-29
(30 min.) 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.
8-30
(60 min.) Journal entries (continuation of 8-29).
1. Key information underlying the computation of variances is: Actual Results 19,200 36,480 1.90 $1,532,160 $42.00 $79.80 $7,004,160 $192.00 $364.80 Flexible Budget Amount 19,200 38,400 2.00 $1,536,000 $40.00 $80.00 $6,961,920 $181.30 $362.60 Static-Budget Amount 17,760 35,520 2.00 $1,420,800 $40.00 $80.00 $6,961,920 $196.00 $392.00
1. Output units (panels) 2. Machine-hours 3. Machine-hours per panel 4. Variable MOH costs 5. Variable MOH costs per machinehour (Row 4 Row 2) 6. Variable MOH costs per unit (Row 4 Row 1) 7. Fixed MOH costs 8. Fixed MOH costs per machinehour (Row 7 Row 2) 9. Fixed MOH costs per unit (7 1)
Solution Exhibit 8-30 shows the computation of the variances. Journal entries for variable MOH, year ended December 31, 2006: Variable MOH Control Accounts Payable Control and Other Accounts Work-in-Process Control Variable MOH Allocated Variable MOH Allocated Variable MOH Spending Variance Variable MOH Control Variable MOH Efficiency Variance 1,532,160 1,532,160 1,536,000 1,536,000 1,536,000 72,960 1,532,160 76,800
Journal entries for fixed MOH, year ended December 31, 2006: Fixed MOH Control Wages Payable, Accumulated Depreciation, etc. Work-in-Process Control Fixed MOH Allocated Fixed MOH Allocated Fixed MOH Spending Variance Fixed MOH Control Fixed MOH Production-Volume Variance 7,004,160 7,004,160 7,526,400 7,526,400 7,526,400 42,240 7,004,160 564,480
2. Adjustment of COGS Variable MOH Efficiency Variance Fixed MOH Production-Volume Variance Variable MOH Spending Variance Fixed MOH Spending Variance Cost of Goods Sold SOLUTION EXHIBIT 8-30 Variable Manufacturing Overhead Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (3) (38,400 $40) $1,536,000 Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (4) (38,400 $40) $1,536,000 76,800 564,480 72,960 42,240 526,080
Actual Costs Incurred (1) (36,480 $42) $1,532,160
Actual Input Qty. Budgeted Rate (2) (36,480 $40) $1,459,200
$72,960 U Spending variance
$76,800 F Efficiency variance
Never a variance
Fixed Manufacturing Overhead Same Budgeted Lump Sum (as in Static Budget) Regardless Of Output Level (2) $6,961,920 Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $6,961,920 Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (4) (38,400 $196) $7,526,400
Actual Costs Incurred (1) $7,004,160
$42,240 U Spending variance
Never a variance
$564,480 F Production-volume variance
8-31 1.
(30 min.) Graphs and overhead variances. 40 Variable Manufacturing Overhead Costs
Total Variable Manuf. Overhead Costs $72,000,000
Graph for planning and control and inventory costing purposes at $9 per machine-hour
$36,000,000
4,000,000 Machine-Hours
Fixed Manufacturing Overhead Costs
Total Fixed Manuf. Overhead Costs $72,000,000
Graph for planning and control purpose Graph for inventory costing purpose ($18 per machine-hour)
$36,000,000
4,000,000 Machine-Hours
= $72,000,000 4,000,000 machine-hours = $18 per machine-hour =
2. Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (3) (3,500,000 $9) $31,500,000 Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (4) (3,500,000 $9) $31,500,000
Actual Costs Incurred (1) $36,100,000
Actual Input Qty. Budgeted Rate (2) (3,800,000 $9) $34,200,000
$1,900,000 U Spending variance
$2,700,000 U Efficiency variance
Never a variance
$4,600,000 U Flexible-budget variance $4,600,000 U Underallocated variable overhead (Total variable overhead variance)
Never a variance
Actual Costs Incurred (1) $72,200,000
Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $72,000,000
Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $72,000,000
Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (4) (3,500,000 $18) $63,000,000
$200,000 U Spending variance
Never a variance
$9,000,000 U* Production-volume variance $9,000,000 U* Production-volume variance
$200,000 U Flexible-budget variance
$9,200,000 U Underallocated fixed overhead (Total fixed overhead variance)
*
Alternative computation: 4,000,000 denominator hrs. 3,500,000 budgeted hrs. allowed = 500,000 hrs. 500,000 $18 = $9,000,000 U
3. The underallocated manufacturing 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 manufacturing overhead, because the flexible-budget amount of variable manufacturing overhead and the allocated amount of variable manufacturing overhead coincide. In contrast, the budgeted and allocated amounts for fixed manufacturing overhead only coincide 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 manufacturing overhead rate would be $72,000,000 3,000,000 = $24 per machine-hour. In turn, the allocated amount of fixed manufacturing overhead and the production-volume variance would change as seen below: Actual $72,200,000 Budget $72,000,000 Allocated 3,500,000 $24 = $84,000,000
$200,000 U $12,000,000 F* Flexible-budget variance Prodn. 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.
8-32
(30 min.) 4-variance analysis, find the unknowns. Flexible Budget: Allocated: Budgeted Input Qty. Budgeted Input Qty. Allowed for Allowed for Actual Output Actual Output Budgeted Rate Budgeted Rate (500* $15) $7,500* (500* $15) $7,500*
Known figures denoted by an *
Actual Costs Incurred Case A: Variable Manufacturing Overhead
Actual Input Qty. Budgeted Rate (530 $15) $7,950
$7,000*
$950* F Spending variance
$450 U Efficiency variance
Never a 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
$0* $0 Spending variance Efficiency variance
Never a 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
Denominatorlevel=BudgetedFMOHcostsBudgetedFMOHrate=$7,000$10=700hours
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* $100 U* Spending variance 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
aBudgeted b
FMOH rate = Budgeted FMOH costs Denominator level = $10,000 500 = $20 =
Budgeted Budgeted + fixed manuf. overhead variable manuf. overhead
$12,525* = BFMOH + (650 $8.50) BFMOH = $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 ($11,500 $10). d 1,150 ($11,000* 1,100*) = $11,500
8-33 1.
(15 min.) Flexible budgets, 4-variance analysis. 25 = = 3,600,000 = 5 hours per unit 720,000
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 8-33 Variable manuf. overhead rate per DLH = $0.25 + $0.34 = $0.59 Fixed manuf. overhead rate per DLH = $0.18 + $0.15 + $0.28 = $0.61 Fixed manuf. overhead budget for May = ($648,000 + $540,000 + $1,008,000) 12 = $2,196,000 12 = $183,000 or, Fixed manuf. overhead budget for May = $54,000 + $45,000 + $84,000 = $183,000 Using the format of Exhibit 8-5 for variable manufacturing overhead and then fixed manufacturing overhead: Actual variable manuf. overhead: $75,000 + $111,000 = $186,000 Actual fixed manuf. 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 Variable Manufacturing Overhead Fixed Manufacturing Overhead Spending Variance $150 U Efficiency Variance $8,850 F ProductionVolume Variance Never a variance
$6,000 U
Never a variance
$18,300 F
SOLUTION EXHIBIT 8-33 Variable Manufacturing Overhead Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (3) (330,000 $0.59) $194,700 Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (4) (330,000 $0.59) $194,700
Actual Costs Incurred (1) $186,000
Actual Input Qty. Budgeted Rate (2) (315,000 $0.59) $185,850
$150 U Spending variance
$8,850 F Efficiency variance
Never a variance
Fixed Manufacturing Overhead Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $183,000 Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $183,000 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (330,000 $0.61) $201,300
Actual Costs Incurred (1) $189,000
$6,000 U Spending variance
Never a variance
$18,300 F Production-volume variance
Alternate computation of the production volume variance: = 3, 600, 000 = ( 330,000 ) $ 0.61 12 = (330,000 300,000) $0.61 = $18,300 F
8-34 1.
(20 min.) Overhead analysis, sensitivity to denominator volume.
Production and sales in units Machine hours Fixed manuf. overhead Variable manuf. overhead Variable manuf. overhead rate = VMOH machine-hours Fixed Overhead Rate = FMOH machine-hours
a
Actual 110,000 30,000 $440,000 $960,000 $ 32.00
Flexible Budget 110,000 33,000 $450,000 $990,000a
Static Budget 120,000 36,000 $ 450,000 $1,080,000b $ $ 30.00 12.50 per machine-hour per machine-hour
$30 per machine-hour x 33,000 machine-hours = $990,000 $30 per machine-hour x 36,000 machine-hours = $1,080,000
b
Variable Manufacturing Overhead Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate 33,000 mach. hrs.
$30/mach. hr.
Actual Costs $960,000
Actual Input Qty. Budgeted Rate 30,000 mach. hrs.
$30/mach. hr.
$900,000
$60,000 U Spending variance $90,000 F Efficiency variance
$990,000
2. Fixed Manufacturing Overhead Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level $450,000
$10,000 F Spending variance
Actual Costs $440,000
Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate 30,000 mach. hrs.
$12.50/mach. hr.
$375,000
$75,000 U Production volume variance
3. Production and sales in units Machine hours Fixed manuf. overhead Variable manuf. overhead Variable manuf. overhead rate = VMOH machine hours Fixed overhead rate = FMOH machine hours
a
Actual 110,000 30,000 $440,000 $960,000 $32.00
Flexible Budget 110,000 33,000 $450,000 $990,000
Static Budget 150,000 45,000 $450,000 $1,350,000a $30.00 $10.00 per machine-hour per machine-hour
$30 per machine-hour 45,000 machine-hours = $1,350,000
Variable Manufacturing Overhead Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate 33,000 mach. hrs. $30/
mach. hr.
Actual Input Qty. Budgeted Rate Actual Costs $960,000
$60,000 U Spending variance 30,000 mach. hrs. $30/mach. hr.
$900,000
$90,000 F Efficiency variance
$990,000
Fixed Manufacturing Overhead Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level $450,000
$10,000 F Spending variance
Actual Costs $440,000
Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate 30,000 mach. hrs. $10/
mach. hr.)
$300,000
$150,000 U Production volume variance
Note that with the change in the denominator volume, only the FMOH production-volume variance has changed. Variable manufacturing overhead is variable so the budgeted volume change has no effect on the VMOH variances.
4. If Armstrong writes off all variances to cost of goods sold, and if there are no inventories, then the change in the production volume variance between requirement 2 and requirement 3 will not affect the cost of goods sold or the operating income. After variances have been written off, COGS will include the actual fixed overhead costs of $440,000. In the requirement 2 setting, COGS will initially have the allocated $375,000 of fixed overhead, and at the end of the accounting period U will also be debited $75,000 for the production volume variance and credited $10,000 for the spending variance, resulting in a COGS of $440,000 (the actual FOH costs). In the requirement 3 setting, COGS will initially have the allocated $300,000 of fixed overhead, and at the end of the accounting period U will also be debited $150,000 for the production volume variance and credited $10,000 for the spending variance, resulting in a COGS of $440,000 (the actual FOH costs). The end result will be the same COGS in either situation. This is not the case if Armstrong has inventories as we will see in Chapter 9.
8-35
(25 min.) Sales-volume variance, production-volume variance. $2,000,000 800,000 500,000 $ 700,000 $1,800,000 720,000 500,000 $ 580,000 $100 $40 25 65 $ 35 $630,000
1. Static-budget operating income is Revenues $100 20,000 Variable costs $40 20,000 Fixed costs Static-budget operating income Flexible-budget operating income is Revenues $100 18,000 Variable costs $40 18,000 Fixed costs Flexible-budget operating income Budgeted selling price Budgeted variable cost per unit Budgeted fixed cost per unit ($500,000 20,000) Budgeted cost per unit Budgeted profit per unit Operating income based on budgeted profit per unit $35 per unit 18,000 units
2. The sales-volume variance recognizes that when Morano sells 18,000 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 U Budgeted fixed Difference in quantity of Production-volume variance = overhead cost units sold relative to per unit the static budget = $500,000 2,000 = $25 2,000 = $50,000 U 20,000
Operating-income volume variance = Sales-volume variance Production-volume variance = $120,000 U $50,000 U = $70,000 U
Compare the sales-volume variance and the production-volume variance. The $120,000 U salesvolume variance explains the difference between the static-budget operating income and the flexible-budget operating income: Static-budget operating income Sales-volume variance Flexible-budget operating income $700,000 120,000 U $580,000
The $50,000 U 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 Production-volume variance Flexible-budget operating income $630,000 50,000 U $580,000
The operating-income volume variance explains the difference between the static-budget operating income and the budgeted operating income for the units actually sold. The staticbudget operating income is $700,000 and the budgeted operating income for 18,000 units would have been $630,000 ($35 operating income per unit 18,000 units). The difference, $70,000 U, is the operating-income volume variance i.e., the 2,000 unit drop in actual volume relative to budgeted volume would have caused an expected drop of $70,000 in operating income, at the budgeted operating income of $35 per unit. The operating-income volume variance assumes that $50,000 in fixed cost ($25 per unit 2,000 units) would be saved if production and sales volumes decreased by 2,000 units. 8-36 1. a. b. c. d. e. f. g. h. i. (40 min.) Activity-based costing, variance analysis. Static-Budget Amounts Units of TGC produced and sold 30,000 Batch size 250 Number of batches (a b) 120 Setup-hours per batch 5 Total setup-hours (c d) 600 Variable overhead cost per setup-hour $25 Variable setup overhead costs (e f) $15,000 Total fixed setup overhead costs $18,000 Fixed overhead cost per setup-hour (h e) $30 Actual Amounts 22,500 225 100 5.25 525 $24 $12,600 $17,535 $33.40
The flexible-budget is based on the budgeted number of setups for the actual output achieved: 22,500 units 250 units per batch= 90 batches
Computation of variable setup overhead cost variances follows: Allocated: Budgeted Input Qty. Actual Costs Incurred (100 5.25 $24) $12,600 $525 F Spending variance Actual Input Qty. Budgeted Rate (100 5.25 $25) $13,125 Allowed for Actual Output Budgeted Rate (90 5.0 $25) $11,250
$1,875 U Efficiency variance
The favorable spending variance is due to the actual variable overhead cost per setup-hour declining from the budgeted $25 per hour to the actual rate of $24 per hour. The unfavorable efficiency variance is due to the actual output of 22,500 units (1) requiring more setups (100) than the budgeted amount (90), and (2) each setup taking longer time (5.25 hours) than the budgeted time (5.0 hours). The flexible-budget variance of $1,350 U reflects the larger unfavorable efficiency variance not being offset by the favorable spending variance. 2. Computation of the fixed setup overhead cost variances follows: Lump Sum Actual Costs Incurred $17,535
$465 F Spending variance
Same Budgeted Budgeted Input Qty. (as in Static Budget) Regardless of Output Level $18,000
Allocated: Allowed for Actual Output Budgeted Rate (90 5.0 $30) $13,500
$4,500 U Production-volume variance
The fixed setup overhead cost spending variance is $465 F because the amount of actual costs was lower than the budgeted amount of $18,000. The production-volume variance is $4,500 U because the actual units of TGC produced and sold require fewer budgeted setup-hours than the budgeted setup-hour capacity available. Toymaster would want to evaluate why actual units sold were much less than budgeted. Was it dues to a decline in market size, loss of market share, poor quality or increased competition?
8-37 1. a. b. c. d. e. f. g. h. i.
(40 min.) Activity-based costing, variance analysis. Static-Budget Amounts Units of SFA produced and sold 21,000 Batch size 500 Number of batches (a b) 42 Testing-hours per batch 5.5 Total testing-hours (c d) 231 Variable overhead cost per testing-hour $40 Variable testing overhead costs (e f) $9,240 Total fixed testing overhead costs $28,875 Fixed overhead cost per testing-hour (h e) $125 Actual Amounts 22,000 550 40 5.4 216 $42 $9,072 $27,216 $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 Qty. Actual Costs Incurred (40 5.4 $42) $9,072 Actual Input Qty. Budgeted Rate (40 5.4 $40) $8,640 Allowed for Actual Output Budgeted Rate (44 5.5 $40) $9,680
$432 U Spending variance
$1,040 F 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 Spending variance
$1,375 F 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 budgeted testing-hours for the actual number of SFA produced and sold were more than the static budget testing-hours. 8-38 (30 min.) Comprehensive overhead variance analyses. Actual 450,000 3,000 $153,000 $960,000 Flexible Budget 450,000 3,000 a $150,000 $980,000 Static Budget 420,000 2,800 $140,000 $980,000 50 per machine-hour 350 per machine-hour
Production volume (bottles) Bottling machine hours Variable overhead Fixed overhead Variable overhead rate = Variable overhead machine-hours $ 51 $ Fixed overhead rate = Fixed overhead machine-hours $ a (2,800 machine-hours 420,000 bottles) 450,000 bottles = 3,000 machine-hours 1. Variable Overhead Flexible Budget: Budgeted Input Qty.
Allowed for Actual Input Qty. Actual Costs $153,000 $3,000 U Spending variance Actual Output Budgeted Rate
3,000 mach. hrs. $50/mach. hr.
Budgeted Rate
3,000 mach. hrs. $50/mach. hr.
$150,000
$150,000
$0 Efficiency variance 153,000
Variable Manufacturing Overhead Control 153,000 Accounts Payable Control and Various Other Accounts To record actual variable manufacturing overhead costs incurred. Work-in-Process Control Variable Manufacturing Overhead Allocated To record variable manufacturing overhead cost allocated. 150,000
150,000
Variable Manufacturing Overhead Allocated Variable Manufacturing Overhead Spending Variance Variable Manufacturing Overhead Control To isolate variances for the accounting period. 2. Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Actual Costs Output Level (1) (2) $960,000 $980,000
$20,000 F Spending variance
150,000 3,000 153,000
Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (3) 3,000 mach. hrs.
$350/mach. hr.
$1,050,000
$70,000 F Production volume variance
Fixed Manufacturing Overhead Control Salaries Payable, Accumulated Depreciation, etc. To record actual fixed overhead costs incurred. Work-in-Process Control Fixed Manufacturing Overhead Allocated To record fixed manufacturing overhead cost allocated.
960,000 960,000 1,050,000 1,050,000
Fixed Manufacturing Overhead Allocated 1,050,000 Fixed Manufacturing Overhead Spending Variance Fixed Manufacturing Overhead Production-Volume Variance Fixed Manufacturing Overhead Control To isolate variances for the accounting period. 3. Fixed Manufacturing Overhead Spending Variance Variable Manufacturing Overhead Spending Variance Cost of Goods Sold To write-off variable overhead variances and fixed overhead spending variance to Cost of Goods Sold Balances as percentage of $4,800,000 (2) 18.75% 20,000
20,000 70,000 960,000
3,000 17,000
Work-in-Process Inventory
Balances (1) $ 900,000
Production-Volume Variance Allocated (3) = $70,000 (2) $13,125
1,500,000 31.25% 21,875 2,400,00 Cost of Goods Sold 0 50.00% 35,000 $4,800,00 Total 0 $70,000 Since the production-volume variance is a favorable variance, its prorated allocation to work-inprocess inventory, finished goods inventory and cost of goods sold will result in a credit to each of those accounts. Fixed Manufacturing Overhead Production-Volume Variance 70,000 Work-in-Process Control Finished Goods Control Cost of Goods Sold To write-off the production volume variance to WIP, FG, and COGS. 13,125 21,875 35,000
Finished Good Inventory
4. If the plant managers bonus is based on controlling cost of goods sold, and if fixed overhead production volume variance is written off to cost of goods sold, there is a potential for manipulation on the part of the manager. Being knowledgeable about the production process, she could be tempted to set the plant standards such that there is often a favorable production volume variance, which would ultimately reduce the periods cost of goods sold. The proration method is less susceptible to this problem because it spreads or blunts the benefit of a favorable production volume variance. The proration method would also reduce the negative effect of an unfavorable production volume variance on cost of goods sold (relative to the full write-off). In this sense, prorating may be better, given the bonus schemeit makes manipulation less likely by reducing the upside of a favorable PVV and also reducing the downside of an unfavorable PVV.
8-39
(30 min.) Comprehensive review of Chapters 7 and 8, working backward from 40 given variances. Solution Exhibit 8-39 outlines the Chapter 7 and 8 framework underlying this solution. Pounds of direct materials purchased = $176,000 $1.10 = 160,000 pounds Pounds of excess direct materials used = $69,000 $11.50 = 6,000 pounds Variable manufacturing overhead spending variance = $10,350 $18,000 = $7,650 F 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 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 for units produced 25,500 1,500 = 24,000 hours 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
1. a. b. c. d.
e.
f.
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 8-39
Flexible Budget: Actual Costs Budgeted Input Qty. Incurred Actual Input Qty. Allowed for (Actual Input Qty. Actual Output Budgeted Rate Actual Rate) Purchases Usage Budgeted Rate 160,000 $10.40 160,000 $11.50 96,000 $11.50 3 30,000 $11.50 $1,664,000 $1,840,000 $1,104,000 $1,035,000 $69,000 U $176,000 F Efficiency variance Price variance 0.85 30,000 $20.50 $522,750 0.85 30,000 $20 $510,000 0.80 30,000 $20 $480,000
Direct Materials
Direct Manuf. Labor
$12,750 U Price variance
$30,000 U Efficiency variance
$42,750 U Flexible-budget variance Actual Costs Incurred Actual Input Qty. Actual Rate 0.85 30,000 $11.70 $298,350 Flexible Budget: Budgeted Input Qty. Allowed for Actual Input Qty. Actual Output Budgeted Rate Budgeted Rate 0.85 30,000 $12 0.80 30,000 $12 $306,000 $288,000 $18,000 U Efficiency $10,350 U variance Flexible-budget variance Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate 0.80 30,000 $12 $288,000
Variable MOH
$7,650 F Spending variance
Never a variance Never a variance
Actual Costs Incurred (1) Fixed MOH $597,460
Flexible Budget: Same Budgeted Same Budgeted Lump Sum Lump Sum (as in Static Budget) (as in Static Budget) Regardless of Regardless of Output Level Output Level (2) (3) 0.80 50,000 $16 $640,000 $640,000
Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (4) 0.80 x 30,000 $16 $384,000
$42,500 U Never a variance Spending variance $42,540 F volume variance Flexible-budget variance
$256,000 U Production $256,000 U volume Production volume variance
8-40 1.
(30 min.) Review of Chapters 7 and 8, 3-variance analysis. 50 Total standard production costs are based on 7,800 units of output. Direct materials, 7,800 $15.00 7,800 3 lbs. $5.00 (or 23,400 lbs. $5.00) Direct manufacturing labor, 7,800 $75.00 7,800 5 hrs. $15.00 (or 39,000 hrs. $15.00) Manufacturing overhead: Variable, 7,800 $30.00 (or 39,000 hrs. $6.00) Fixed, 7,800 $40.00 (or 39,000 hrs. $8.00) Total The following is for later use: Fixed manufacturing overhead, a lump-sum budget
*
$ 117,000 585,000 234,000 312,000 $1,248,000 $320,000*
Fixed manufacturing overhead rate
=
Budget 40,000 hours
$8.00 =
Budget = 40,000 hours $8.00 = $320,000
2. Solution Exhibit 8-40 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 Total Manufacturing Overhead Spending Variance $39,400 U Efficiency Variance $6,600 U Production Volume Variance $8,000 U
SOLUTION EXHIBIT 8-40 Actual Costs Incurred: Actual Input Qty. Actual Rate Direct (25,000 $5.20) Materials $130,000
$5,000 U a. Price variance
Actual Input Qty. Budgeted Price Purchases Usage (25,000 (23,100 $5.00) $5.00) $125,000 $115,500
Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Price (23,400 $5.00) $117,000
$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 c. Price variance
$16,500 U d. Efficiency variance
Actual Costs Incurred Variable Manuf. Overhead (not given)
Actual Input Qty. Budgeted Rate (40,100 $6.00) $240,600
Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (39,000 $6.00) $234,000
Allocated: (Budgeted Input Qty. Allowed for Actual Output Budgeted Rate) (39,000 $6.00) $234,000
$6,600 U Efficiency variance
Never a variance
Fixed Manuf Overhead
(not given)
$320,000
$320,000
(39,000 $8.00) $312,000
Never a variance Total Manuf. Overhead ( given) $600,000 ($240,600 + $320,000) $560,600
$8,000 U* Prodn. volume variance ($234,000 + $312,000) $546,000
($234,000 + $320,000) $554,000
$39,400 U e. Spending variance
*
$6,600 U $8,000 U f. Efficiency variance g. Prodn. volume variance 40,000 39,000 1,000 hours x $8.00 = $8,000 U
Denominator level in hours Production volume in standard hours allowed Production-volume variance
8-41 1. a.
(45 min.) Overhead variances, ethics. Total budgeted overhead Budgeted variable overhead ($10 budgeted rate per machine-hour 1,000,000 budgeted machine-hours) Budgeted fixed overhead Budgeted fixed OH rate = $12,500,000
10,000,000 $ 2,500,000
b.
$2,500,000 Budgeted amount 1,000,000 Budgeted machine - hours
= $2.50 per machine-hour c. 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 d. 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 $20 Therefore, budgeted machine hours allowed per unit = = 2 machine-hours $10
2. Variable overhead spending variance: Actual variable Budgeted variable overhead cost overhead cost per unit of cost per unit of allocation base cost-allocation base = = Actual quantity of variable overhead cost-allocation base used for actual output 960,000 machine-hours
$10,080,000 Budgeted amount $10 per machine-hour 960,000 actual machine-hours ($10.50 $10) 960,000 = $480,000 U
Variable overhead efficiency variance: Actual units of variable overhead cost-allocation base used for actual output Budgeted units of variable overhead cost-allocation base allowed for actual output Budgeted variable overhead rate
= (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 Remichs action is clearly unethical. Variances draw attention to the areas that 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 Remichs 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, Remichs unethical actions will waste top managements time and may lead to wrong decisions.
Chapter 8 Video Case The video case can be discussed using only the case writeup in the chapter. Alternatively, instructors can have students view the videotape of the company that is the subject of the case. The videotape can be obtained by contacting your Prentice Hall representative. The case questions challenge students to apply the concepts learned in the chapter to a specific business situation. TEVA SPORT SANDALS: Variable Overhead Variances 1.
Actual Costs Incurred Actual Input Qty. Budgeted Rate Flexible Budget Budgeted Input Qty. Allowed for Actual Output Budgeted Rate
(67,500 $28.889) $1,950,000
(67,500 $30.00) $2,025,000
(0.40 150,000 $30) $1,800,000
Spending variance: $1,950,000 $2,025,000 = $75,000 F (favorable effect on operating income) Efficiency variance: $2,025,000 $1,800,000 = $225,000 U (unfavorable effect on oper. income) 2. The favorable variable overhead spending variance of $75,000 means that the plant spent less on variable overhead items versus the budgeted amount. Possible reasons are that actual prices of individual variable overhead items such as energy, indirect materials, or indirect manufacturing labor were lower than budgeted prices, or relative to the flexible budget, the percentage increase in the actual quantity usage of individual items in the variable overhead costpool is less than the percentage increase in machine-hours. The unfavorable variable overhead efficiency variance of $225,000 means that more machine-hours were used to create the 150,000 pairs of sandals than were budgeted. Possible causes are less skillful workers in the use of manufacturing machines than anticipated, production was inefficiently scheduled, machines were not properly maintained for peak operating performance, or budgeted machine time standards were set without careful analysis of operating conditions. 3. The plant manager should explain that the key reason for the unfavorable flexible-budget variance is the higher-than-budgeted number of machine-hours used this month. In performing an investigation, the manager could indicate whether this was due to poorly trained labor, poor maintenance, bad production scheduling, or inaccurate budgeted machine time standards.