costacctg13_sm_ch08 - CHAPTER 8 FLEXIBLE BUDGETS, OVERHEAD...

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Unformatted text preview: CHAPTER 8 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: 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 Direct costs Indirect costs 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- 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- 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 variance—whether favorable or not—among 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- 8-16 1. (20 min.) Variable manufacturing overhead, variance analysis. Variable Manufacturing Overhead Variance Analysis for Esquire Clothing for June 2009 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- 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 = Fixed Manufacturing Overhead Variance Analysis for Esquire Clothing for June 2009 Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $62,400 Actual Costs Incurred (1) $63,916 Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $62,400 Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (4) (4 × 1,080 × $15) $64,800 $1,516 U Spending variance Never a variance $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 2009. 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- 8-18 (30 min.) Variable manufacturing overhead variance analysis. 1. Denominator level = (3,200,000 × 0.02 hours) = 64,000 hours 2. 1. 2. 3. 4. 5. 6. 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 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 a2,800,000 Variable Manufacturing Overhead Variance Analysis for French Bread Company for 2009 Flexible Budget: Allocated: Actual Costs Budgeted Input Qty. Budgeted Input Qty. Incurred Allowed for Allowed for Actual Input Qty. Actual Input Qty. Actual Output Actual Output × Actual Rate × Budgeted Rate × Budgeted Rate × Budgeted Rate (1) (2) (3) (4) (50,400 × $13.50) (50,400 × $10) (56,000 × $10) (56,000 × $10) $680,400 $504,000 $560,000 $560,000 $176,400 U Spending variance $56,000 F Efficiency variance Never a variance $120,400 U Flexible-budget variance Never a 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- 8-19 1. (30 min.) Fixed manufacturing overhead variance analysis (continuation of 8-18). 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 Fixed Manufacturing Overhead Variance Analysis for French Bread Company for 2009 Flexible Budget: Same Budgeted Same Budgeted Allocated: Lump Sum Lump Sum Budgeted Input Qty. (as in Static Budget) (as in Static Budget) Allowed for Actual Costs Regardless of Regardless of Actual Output Incurred Output Level Output Level × Budgeted Rate (1) (2) (3) (4) (2,800,000 × 0.02 × $4) $272,000 $256,000 $256,000 $224,000 $16,000 U Spending variance $32,000 U Production-volume variance $32,000 U Production-volume variance Never a variance $16,000 U Flexible-budget variance $48,000 U Underallocated fixed overhead (Total fixed overhead variance) 2. 3. The fixed manufacturing overhead is underallocated by $48,000. 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 produced—the 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 2009. 8- 8-20 1. (30–40 min.) Manufacturing overhead, variance analysis. The summary information is: Flexible Budget 216 432c 2.00 $ 30.00 $12,960e $19,200 Static Budget 200 400a 2.00 $ 30.00 $12,000f $19,200 $ 48.00h The Solutions Corporation (June 2009) Outputs units (number of assembled units) Hours of assembly time Assembly hours per unit Variable mfg. overhead cost per hour of assembly time Variable mfg. overhead costs Fixed mfg. overhead costs Fixed mfg. overhead costs per hour of assembly time a Actual 216 411 1.90b $ 30.20d $12,420 $20,560 $ 50.02g 200 units 2 assembly hours per unit = 400 hours hours b 411 c 216 216 units = 1.90 assembly hours per unit units 2 assembly hours per unit = 432 hours d $12,420 e 432 f 400 411 assembly hours = $30.22 per assembly hour assembly hours $30 per assembly hour = $12,960 assembly hours $30 per assembly hour = $12,000 411 assembly hours = $50 per assembly hour h $19,200 400 assembly hours = $48 per assembly hour g $20,560 8- Actual Input Qty. Actual Costs Incurred Variable Manufacturing Overhead $12,420 Budgeted Rate 411 $30.00 assy. hrs. per assy. hr. $12,330 $90 U Flexible Budget: Budgeted Input Qty. Allowed Budgeted for Actual Output Rate 432 assy. hrs. Allocated: Budgeted Input Qty. Allowed Budgeted for Actual Output Rate 432 assy. hrs. $12,960 $12,960 $30.00 per assy. hr. $30.00 per assy. hr. $630 F Efficiency variance $540 F Flexible-budget variance $540 F Overallocated variable overhead Never a variance Never a variance Spending variance Flexible Budget: Actual Costs Incurred Fixed Manufacturing Overhead Static Budget Lump Sum Regardless of Output Level Static Budget Lump Sum Regardless of Output Level $20,560 $1,360 U $19,200 $19,200 Allocated: Budgeted Input Allowed Budgeted for Actual Output Rate $48.00 432 assy. hrs. per assy. hr. $20,736 $1,536 F Spending Variance $1,360 U Never a Variance Production-volume variance $1,536 F Production-volume variance Flexible-budget variance $176 F Overallocated fixed overhead 8- The summary analysis is: Spending Variance Variable Manufacturing Overhead Fixed Manufacturing Overhead $90 U Efficiency Variance $630 F Production-Volume Variance Never a variance $1,360 U Never a variance $1,536 F 2. Variable Manufacturing Costs and Variances 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. 12,420 12,420 12,960 12,960 12,960 90 12,420 630 d. Variable Manufacturing Overhead Efficiency Variance 630 Variable Manufacturing Overhead Spending Variance 90 Cost of Goods Sold 540 To write off variable manufacturing overhead variances to cost of goods sold. 8- 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. 20,560 20,560 20,736 20,736 20,736 1,360 1,536 20,560 d. Fixed Manufacturing Overhead Production-Volume Variance 1,536 Fixed Manufacturing Overhead Spending Variance Cost of Goods Sold To write off fixed manufacturing overhead variances to cost of goods sold. 1,360 176 3. Planning and control of variable manufacturing overhead costs has both a long-run and a short-run focus. It involves Solutions 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 Solutions have primarily a long-run focus. It involves undertaking only value-added fixed-overhead activities for a budgeted level of output. Solutions makes most of the key decisions that determine the level of fixed-overhead costs at the start of the accounting period. 8- 8-21 (1015 min.) 4-variance analysis, fill in the blanks. Variable $4,200 U 4,500 U NEVER 8,700 U 8,700 U Fixed $3,000 U NEVER 600 U 3,000 U 3,600 U 1. 2. 3. 4. 5. 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 8-4. Flexible Budget: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (3) $27,000 Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (4) $27,000 Variable MOH Actual Costs Incurred (1) $35,700 Actual Input Qty. × Budgeted Rate (2) $31,500 $4,200 U Spending variance $4,500 U Efficiency variance Never a variance $8,700 U Flexible-budget variance Never a variance $8,700 U Underallocated variable overhead (Total variable overhead variance) Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $15,000 Fixed MOH Actual Costs Incurred (1) $18,000 Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $15,000 Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (4) $14,400 $3,000 U Spending variance Never a variance $600 U Production-volume variance $600 U Production-volume variance $3,000 U Flexible-budget variance $3,600 U Underallocated fixed overhead (Total fixed overhead variance) 8- An overview of the 4 overhead variances is: ProductionVolume Variance Never a variance $600 U 4-Variance Analysis Variable Overhead Fixed Overhead Spending Variance $4,200 U $3,000 U Efficiency Variance $4,500 U Never a variance 8-22 (20–30 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 a4,400 Actual 4,400 28,400 b 6.45 $245,000 d $8.63 $373,000 f $13.13 Flexible Budget 4,400 a 26,400 6.00 c $211,200 $8.00 e $360,000 – units × 6.00 machine-hours/unit = 26,400 machine-hours ÷ 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 b28,400 8- 2. Variable Manufacturing Overhead Control Accounts Payable Control and other accounts 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 245,000 245,000 211,200 211,200 211,200 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. 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). 4. The fixed overhead spending variance is caused by the actual realization of fixed costs differing from the budgeted amounts. Some fixed costs are known because they are contractually specified, such as rent or insurance, although if the rental or insurance contract expires during the year, the fixed amount can change. Other fixed costs are estimated, such as the cost of managerial salaries which may depend on bonuses and other payments not known at the beginning of the period. In this example, the spending variance is unfavorable, so actual FOH is greater than the budgeted amount of FOH. The fixed overhead production volume variance is caused by production being over or under expected capacity. You may be under capacity when demand drops from expected levels, or if there are problems with production. Over capacity is usually driven by favorable demand shocks or a desire to increase inventories. The fact that there is a favorable volume variance indicates that production exceeded the expected level of output (4,400 units actual relative to a denominator level of 4,000 output units). 8- 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 Flexible-budget variance variance $23,000 F Overallocated fixed overhead (Total fixed overhead variance) 8- 8-23 (3040 min.) Straightforward coverage of manufacturing overhead, standardcosting system. 1. Solution Exhibit 8-23 shows the computations. Summary details are: Actual 41,000 13,300 0.32b $155,100 $11.66 $401,000 e $30.15 d Output units Allocation base (machine-hours) Allocation base per output unit Variable MOH Variable MOH per hour Fixed MOH Fixed MOH per hour a b c Flexible Budget 41,000 a 12,300 0.30 c $147,600 $12.00 $390,000 – 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 8- 2. Variable Manufacturing Overhead Control Accounts Payable Control and other accounts Work-in-Process Control Variable Manufacturing Overhead Allocated 155,100 155,100 147,600 147,600 Variable Manufacturing Overhead Allocated 147,600 Variable Manufacturing Overhead Efficiency Variance 12,000 Variable Manufacturing Overhead Spending Variance Variable Manufacturing Overhead Control Fixed Manufacturing 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 Manufacturing Overhead Production-Volume Variance Fixed Manufacturing Overhead Control 401,000 4,500 155,100 401,000 369,000 369,000 369,000 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. 4. The variable overhead spending variance is favorable. This means the actual rate applied to the manufacturing costs is lower than the budgeted rate. Since variable overhead consists of several different costs, this could be for a variety of reasons, such as the utility rates being lower than estimated or the indirect materials costs per unit of denominator activity being less than estimated. The variable overhead efficiency variance is unfavorable, which implies that the estimated denominator activity was too low. Since the denominator activity is machine hours, this could be the result of inefficient use of machines, poorly scheduled production runs, or machines that need maintenance and thus are not working at the expected level of efficiency. 8- 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 Fixed manufacturing overhead = = $30 per machine-hour. 13,000 machine - hours budgeted rate *Alternative computation: 13,000 denominator hours – 12,300 budgeted hours allowed = 700 hours; 700 hours × $30 per machine-hour = $21,000 U 8- 8-24 1. (20–25 min.) Overhead variances, service sector. Meals on Wheels (May 2009) 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 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 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 b VARIABLE OVERHEAD Actual Input Qty. Budgeted Rate Actual Costs Incurred $10,296 5,720 hrs $1.50 per hr. $8,580 $1,716 U Spending variance Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate 6,160 hrs $1.50 per hr. $9,240 $660 F Efficiency variance 2. FIXED OVERHEAD Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level 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 Actual Costs Incurred $38,600 $3,600 U Spending variance $35,000 8- 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 base––each 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- 8-25 (4050 min.) 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 $3,856 from $5,776. The complete picture is as follows: Flexible Budget: Budgeted Input Allowed for Actual Output × Budgeted Rate (4,700 hrs. × $16.00*) $75,200 Actual Costs Incurred (4,820 hrs. × $16.80) $80,976* Actual Input × Budgeted Rate (4,820hrs. × $16.00*) $77,120 $3,856 U* Price variance $1,920 U Efficiency variance $5,776 U* Flexible-budget variance * Given Direct Labor calculations Actual input × Budgeted rate = Actual costs – Price variance = $80,976 – $3,856 = $77,120 Actual input = $77,120 ÷ Budgeted rate = $77,120 ÷ $16 = 4,820 hours Budgeted input × Budgeted rate = $77,120 – Efficiency variance = $77,120 – $1,920 = $75,200 Budgeted input = $75,200 ÷ Budgeted rate = $75,200 ÷ 16 = 4,700 hours Production Overhead Variable overhead rate Budgeted fixed overhead costs = $25,600* ÷ 3,200* hrs. = $8.00 per standard labor-hour = $79,040* – 4,000* × ($8.00) = $47,040 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. 8- Let D = denominator level in input units Budgeted fixed overhead rate per input unit $11.20 D = Budgeted fixed overhead costs Denominator level in input units = $47,040 ÷ D = 4,200 direct labor-hours Flexible Budget: Budgeted Input Allowed for Actual Output × Budgeted Rate $47,040 + ($8 × 4,700) $84,640 Allocated: Budgeted Input Allowed for Actual Output × Budgeted Rate (4,700 hrs. × $19.20) $90,240 A summary 3-variance analysis for October follows: Actual Costs Incurred $99,600* Actual Inputs × Budgeted Rate ($47,040 + (4,820 × $8.00) $85,600 $14,000 U $960 U $5,600 F* Production-volume variance $5,600 F* Production-volume variance Spending variance $14,960 U Efficiency variance 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 $14,000 U Efficiency Variance $960U Production Volume Variance $5,600 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- 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). Actual Costs Incurred (b) VARIABLE MANUFACTURING OVERHEAD Flexible Budget: Budgeted Input Qty. Actual Input Qty. Allowed for Budgeted Budgeted Rate Actual Output Rate (a) (c) 15,000 mach. hrs. $6.00 per mach. hr. $90,000 14,850 mach. hrs. $89,100 $6.00 per mach. hr. $89,625 $375 F Spending variance $900 U (d) Efficiency variance $525 U (e) Flexible-budget variance a. 15,000 machine-hours $6 per machine-hour = $90,000 b. Actual VMOH $89,625 = $90,000 – $375F (VOH spending variance) = c. 14,850 machine-hours $6 per machine-hour = $89,100 d. VOH efficiency variance = $90,000 – $89,100 = $900U e. VOH flexible budget variance = $900U – $375F = $525U Allocated variable overhead will be the same as the flexible budget variable overhead of $89,100. The actual variable overhead cost is $89,625. Therefore, variable overhead is underallocated by $525. 8- 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) 14,850 mach. hrs. $28,800 $23,760 $5,040 U (d) Production-volume variance Actual Costs Incurred (a) Budgeted Rate $1.60* (c) per mach. hr. $30,375 $1,575 U Spending variance $1,575 U (e) Flexible-budget variance a. b. c. Actual FOH costs = $120,000 total overhead costs – $89,625 VOH costs = $30,375 Static budget FOH lump sum = $30,375 – $1,575 spending variance = $28,800 *FOH allocation rate = $28,800 FOH static-budget lump sum 18,000 static-budget machine-hours = $1.60 per machine-hour Allocated FOH = 14,850 machine-hours $1.60 per machine-hour = $23,760 PVV = $28,800 – $23,760 = $5,040U FOH flexible budget variance = FOH spending variance = $1,575 U d. e. Allocated fixed overhead is $23,760. The actual fixed overhead cost is $30,375. Therefore, fixed overhead is underallocated by $6,615. 8- 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 Cannot be determined: no information on actual versus flexiblebudget machine-hours Favorable: actual machine-hours less than flexiblebudget machine-hours FOH Spending Variance Unfavorable: actual fixed costs are more than budgeted fixed costs FOH ProductionVolume Variance Favorable: output is more than budgeted causing FOH costs to be overallocated Scenario Production output is 5% more than budgeted, and actual fixed manufacturing overhead costs are 6% more than budgeted Production output is 10% more than budgeted; actual machine hours are 5% less than budgeted Production output is 8% less than budgeted 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 FOH costs Cannot be determined: no information on actual versus budgeted FOH costs Favorable: output is more than budgeted causing FOH costs to be overallocated Actual machine hours are 15% greater than flexible-budget machine hours Cannot be determined: no information on actual versus budgeted VOH rates Cannot be determined: no information on actual machine-hours versus flexiblebudget machine-hours Unfavorable: more machinehours used relative to flexible budget Unfavorable: output less than budgeted will cause FOH costs to be underallocate d Cannot be determined: no information on actual versus budgeted FOH costs Relative to the flexible budget, actual machine hours are 10% greater and actual variable manufacturing o Unfavorable: actual VOH rate greater than budgeted VOH rate Unfavorable: actual machine-hours greater than flexiblebudget machine-hours Cannot be determined: no information on actual versus budgeted FO Cannot be determined: no information on flexiblebudget machine-hours relative to static-budget machine-hours Cannot be determined: no information on actual output relative to b 8- verhead costs are 15% greater H costs udgeted output 8- 8-28 (35 min.) Flexible-budget variances, review of Chapters 7 and 8. 1. Solution Exhibit 8-28 contains a columnar presentation of the variances for Doorknob Design Company (DDC) for April 2009. SOLUTION EXHIBIT 8-28 Actual Costs Incurred: Actual Input Qty. × Actual Rate (50,000 $22.0) $1,100,000 Flexible Budget: Budgeted Input Qty. Allowed for Actual Output × Budgeted Price (47,500 $20.0) $950,000 Direct Materials Actual Input Qty. Budgeted Price Purchases Usage (50,000 $20.0) (45,000 $20.0) $1,000,000 $900,000 $100,000 U a. Price variance Direct Manufacturing Labor $50,000 F b. Efficiency variance $650,000 (20,000 $30.0) $600,000 (23,750 $30.0) $712,500 $50,000 U c. Price variance $112,500 F d. Efficiency variance Actual Costs Incurred Variable Manufacturing Overhead Actual Input Qty. Budgeted Rate (45,000 $10.0) $450,000 Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate (47,500 $10.0) $475,000 Allocated: (Budgeted Input Qty. Allowed for Actual Output Budgeted Rate) (47,500 $10.0) $475,000 $400,000 $50,000 F e. Spending variance $25,000 F f. Efficiency variance Never a variance Fixed Manufacturing Overhead $350,000 $250,000* $250,000 (47,500 $5.0) $237,500 $100,000 U h. Spending variance Never a variance $12,500 U g. Production volume variance *Denominator level in hours: 100,000 x .5 = 50,000 hours Budgeted Fixed Overhead: 50,000 x $5/hr = $250,000 8- 2. The direct materials price variance indicates that DDC paid more for brass than they had planned. If this is because they purchased a higher quality of brass, it may explain why they used less brass than expected (leading to a favorable material efficiency variance). In turn, since variable manufacturing overhead is assigned based on pounds of materials used, this directly led to the favorable variable overhead efficiency variance. The purchase of a better quality of brass may also explain why it took less labor time to produce the doorknobs than expected (the favorable direct labor efficiency variance). Finally, the unfavorable direct labor price variance could imply that the workers who were hired were more experienced than expected, which could also be related to the positive direct material and direct labor efficiency variances. 8-29 1. (30 min.) Comprehensive variance analysis. 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: 888 units 2 machine-hours per unit = 1,776 machine-hours. 2. 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.)): $348,096 ÷ 1,776 machine-hours = $196.00 per machine-hour 3. Budgeted variable MOH costs per machine-hour are calculated as budgeted variable MOH costs divided by the budgeted number of machine-hours planned: $71,040 ÷ 1,776 machine-hours = $40.00 per machine-hour. 4. 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: $76,800 ÷ $40.00 per machine-hour= 1,920 machine-hours allowed 5. 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: 1,920 machine-hours ÷ 2 machine-hours per unit = 960 units. 6. The actual number of machine-hours used per output unit is the actual number of machine hours used (given) divided by the actual number of units manufactured: 1,824 machine-hours ÷ 960 units = 1.9 machine-hours used per output unit. 8- 8-30 (60 min.) Journal entries (continuation of 8-29). 1. Key information underlying the computation of variances is: Actual Flexible-Budget Results Amount 1. Output units (food processors) 960 960 2. Machine-hours 1,824 1,920 3. Machine-hours per output unit 1.90 2.00 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) $76,608 $42.00 $79.80 $350,208 $192.00 $364.80 $76,800 $40.00 $80.00 $348,096 $181.30 $362.60 Static-Budget Amount 888 1,776 2.00 $71,040 $40.00 $80.00 $348,096 $196.00 $392.00 Solution Exhibit 8-30 shows the computation of the variances. Journal entries for variable MOH, year ended December 31, 2010: 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 Journal entries for fixed MOH, year ended December 31, 2010: 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 350,208 350,208 376,320 376,320 376,320 2,112 350,208 28,224 76,608 76,608 76,800 76,800 76,800 3,648 76,608 3,840 8- 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 3,840 28,224 3,648 2,112 26,304 SOLUTION EXHIBIT 8-30 Variable Manufacturing Overhead Flexible Budget: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (3) (1,920 $40) $76,800 Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (4) (1,920 $40) $76,800 Actual Costs Incurred (1) (1,824 $42) $76,608 Actual Input Qty. × Budgeted Rate (2) (1,824 $40) $72,960 $3,648 U Spending variance $3,840 F Efficiency variance Never a variance Fixed Manufacturing Overhead Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $348,096 Actual Costs Incurred (1) $350,208 Same Budgeted Lump Sum (as in Static Budget) Regardless Of Output Level (2) $348,096 Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (4) (1,920 × $196) $376,320 $2,112U Spending variance Never a variance $28,224 F Production-volume variance 8- 8-31 1. (3040 min.) Graphs and overhead variances. Variable Manufacturing Overhead Costs Total Variable Manuf. Overhead Costs $18,000,000 Graph for planning and control and inventory costing purposes at $9 per machine-hour $9,000,000 1,000,000 Machine-Hours Fixed Manufacturing Overhead Costs Total Fixed Manuf. Overhead Costs $18,000,000 Graph for planning and control purpose Graph for inventory costing purpose ($18 per machine-hour) $9,000,000 1,000,000 Machine-Hours * Budgeted fixed manufacturing overhead rate per hour = Budgeted fixed manufacturing overhead Denominator level = $18,000,000/ 1,000,000 machine hours = $18 per machine-hour 8- 2. (a) Variable Manufacturing Overhead Variance Analysis for Fresh, Inc. for 2009 Flexible Budget: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (3) (875,000 $9) $7,875,000 Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (4) (875,000 $9) $7,875,000 Actual Costs Incurred (1) $9,025,000 Actual Input Qty. × Budgeted Rate (2) (950,000 $9) $8,550,000 $475,000 U Spending variance $675,000 U Efficiency variance Never a variance $1,150,000 U Flexible-budget variance $1,150000 U Underallocated variable overhead (Total variable overhead variance) Never a variance (b) Fixed Manufacturing Overhead Variance Analysis for Fresh, Inc. for 2009 Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $18,000,000 Actual Costs Incurred (1) $18,050,000 Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $18,000,000 Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (4) (875,000 × $18) $15,750,000 $50,000 U Spending variance Never a variance $2,250,000 U* Production-volume variance $2,250,000 U* Production-volume variance $50,000 U Flexible-budget variance $2,300,000 U Underallocated fixed overhead (Total fixed overhead variance) *Alternative computation: 1,000,000 denominator hrs. – 875,000 budgeted hrs. allowed = 125,000 hrs. 125,000 $18 = $2,250,000 U 8- 3. The underallocated manufacturing overhead was: variable, $1,150,000 and fixed, $2,300,000. 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 $18,000,000 ÷ 750,000 = $24 per machine-hour. In turn, the allocated amount of fixed manufacturing overhead and the production-volume variance would change as seen below: Actual $18,050,000 Budget $18,000,000 Allocated 875,000 × $24 = $21,000,000 $50,000 U $3,000,000 F* Flexible-budget variance Prodn. volume variance $2,950,000 F Total fixed overhead variance *Alternate computation: (750,000 – 875,000) × $24 = $3,000,000 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- 8-32 (30 min.) 4-variance analysis, find the unknowns. Known figures denoted by an * Flexible Budget: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate Actual Costs Incurred Case A: Variable Manufacturing Overhead Actual Input Qty. × Budgeted Rate $15,000* (1,325 × $15) $19,875 (1,250* × $15) $18,750* (1,250* × $15) $18,750* $4,875* F Spending variance $1,125 U Efficiency variance Never a variance Fixed Manufacturing Overhead $26,500* (Lump sum) $25,000* $1,500 U Spending variance (Lump sum) $25,000* (1,250 × $20 ) $25,000* a Never a variance $0 Production-volume variance Total budgeted manufacturing overhead = $18,750 + $25,000 = $43,750 Case B: Variable Manufacturing Overhead $13,813 (1,625 $8.50*) $13,813 (1,625* $8.50*) (1,625* $8.50*) $13,813 $13,813 Never a variance $0* $0 Spending variance Efficiency variance Fixed Manufacturing Overhead $16,750 (Lump sum) b $17,500 $750 F* Spending variance (Lump sum) b $17,500 (1,625* $10) $16,250 Never a variance $1,250 U* Production-volume variance Denominator level = Budgeted FMOH costs ÷ Budgeted FMOH rate = $17,500 ÷ $10 = 1,750 hours 8- Actual Costs Incurred Case C: Variable Manufacturing Overhead Actual Input Qty. × Budgeted Rate Flexible Budget: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate $15,500 (2,925 $5.00*) $14,625 (2,875 $5.00*) (2,875 $5.00*) c c $14,375 $14,375 Never a variance $875 U* $250 U* Spending variance Efficiency variance Fixed Manufacturing Overhead $30,000* $27,500* $2,500 U Spending variance $27,500* $28,750 $1,250 F* Production-volume variance d Never a variance Total budgeted manufacturing overhead = $14,375 + $27,500 = $41,875 aBudgeted b FMOH rate = Budgeted FMOH costs ÷ Denominator level = $25,000 ÷ 1,250 = $20 Budgeted Budgeted Budgeted = + fixed manuf. overhead variable manuf. overhead total overhead $31,313* = BFMOH + (1,625 $8.50) BFMOH = $17,500 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 $27,500 ÷ 2,750 = $10, and the allocated amount is $28,750, the budgeted hours allowed for the actual output achieved must be 2,875 ($28,750 $10). d 2,875 ($27,500* ÷ 2,750*) = $28,750 8- 8-33 1. (1525 min.) Flexible budgets, 4-variance analysis. Budgeted hours allowed per unit of output = = Budgeted DLH Budgeted actual output 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: ProductionVolume Variance 4-Variance Analysis Variable Manufacturing Overhead Spending Variance Efficiency Variance $150 U $8,850 F Never a variance Fixed Manufacturing Overhead $6,000 U Never a variance $18,300 F 8- 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 Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $183,000 Actual Costs Incurred (1) $189,000 Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $183,000 Allocated: Budgeted Input Allowed for Actual Output × Budgeted Rate (4) (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: = 错误!未指定开关参数。 错误!未指定开关参数。 3, 600, 000 = 330,000 × $ 0.61 12 = (330,000 – 300,000) × $0.61 = $18,300 F 8- 8-34 (20 min.) Variances 1. Direct Manufacturing Labor and Variable Manufacturing Overhead Direct Manufacturing Labor variance analysis for Sarah Beth’s Art Supply Company Actual Input Qty. Budgeted Rate Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Price 13,000 × 0.5 × 20.0 $130,000 Actual Costs Incurred 13,000 × 0.75 × 20.2 $196,950 $1,950 U Price variance 13,000 × 0.75 × 20 $195,000 $65,000 U Efficiency variance 2. Variable Manufacturing Overhead variance analysis for Sarah Beth’s Art Supply Company Actual Input Qty. Budgeted Rate Flexible Budget: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate 13,000 × 0.5 × 10.0 $65,000 Actual Costs Incurred 13,000 × 0.75 × 9.75 $95,062.5 $2,437.5 F Spending variance 13,000 × 0.75 × 10.0 $97,500 $32,500 U Efficiency variance 3. The favorable spending variance for variable manufacturing overhead suggests that less costly items were used, which could have a negative impact on labor efficiency. But note that the workers were paid a higher rate than budgeted, which, if it indicates the hiring of more qualified employees, should lead to favorable labor efficiency variances. Moreover, the price variance and the spending variance are both very small, approximately 1% and 2.5% respectively, while the efficiency variances are very large, each equaling 50% of expected costs. It is clear therefore that the efficiency variances are related to factors other than the cost of the labor or overhead. 4. If the variable overhead consisted only of costs that were related to direct manufacturing labor, then Sarah is correct - both the labor efficiency variance and the variable overhead efficiency variance would reflect real cost overruns due to the inefficient use of labor. However, a portion of variable overhead may be a function of factors other than direct labor (e.g., the costs of energy or the usage of indirect materials). In this case, allocating variable overhead using direct labor as the only base will inflate the effect of inefficient labor usage on the variable overhead efficiency variance. The real effect on firm profitability will be lower, and will likely be captured in a favorable spending variance for variable overhead. 8- 8-35 (30 min.) Causes of Indirect Variances 1. Variable Overhead Variance Analysis for Heather’s Horse Spa for August 2009 Actual Variable Overhead $7,500 Actual input x Budgeted rate (950 × 38 × $0.2) $7,220 Budgeted input allowed for Actual output x Budgeted rate (900 × 38 × $0.2) $6,840 $280 U Spending variance 2. $380 U Efficiency variance Fixed Overhead Variance Analysis for Heather’s Horse Spa for August 2009 Actual Fixed Overhead $50,000 Static Budget Fixed Overhead (900 x 40 x $1.5) $54,000 Budgeted input allowed for Actual output x Budgeted Rate (900 × 38 × $1.5) 51,300 $4,000 F Spending variance $2,700 U Production-volume variance 3. The variable overhead spending variance arises from the fact that the cost of horse feed, shampoo, ribbons and other supplies was higher, per weighted average horse-guest week, than expected ($7,500/(950×38)lbs = $0.208 per lb > $0.2 per lb). Unlike the material and labor price variances, which only reflect the prices paid, the spending variance could have both a cost and usage component. HHS would have a negative spending variance if they paid more for feed than expected or if the horses ate more feed than expected. 4. The $380 unfavorable variable overhead efficiency variance reflects the fact that the average weight of a horse was higher than expected. HHS expected horses to weigh an average of 900 lbs but during August, the horses weighed an average of 950 lbs. Larger horses are expected to consume more variable overhead, such as horse feed and shampoo, hence the unfavorable nature of the variance. 5. Fixed overhead is fixed with respect to horse weight. This does not mean that it can be forecasted with 100% accuracy. For example, salaries or actual costs for advertising may have been higher than expected, leading to the $4,000 unfavorable variance. 6. The production-volume variance of $2,700 exists because the fixed overhead rate was based on the forecasted number of horse guest-weeks, 40, while the fixed overhead was applied using the actual number of horse guest-weeks, 38. The overestimation of the number of horse guests in August would lead to an under-absorption of fixed overhead, resulting in the unfavorable production-volume variance. If the estimate was too far off from the actual number of horses, HHS might potentially not charge enough to cover their costs. 8- 8-36 1. (20 min.) Activity-based costing, batch-level variance analysis Static budget number of crates = Budgeted pairs shipped / Budgeted pairs per crate = 240,000/12 = 20,000 crates Flexible budget number of crates = Actual pairs shipped / Budgeted pairs per crate = 180,000/12 = 15,000 crates Actual number of crates shipped = Actual pairs shipped / Actual pairs per box = 180,000/10 = 18,000 crates Static budget number of hours = Static budget number of crates × budgeted hours per box = 20,000 × 1.2 = 24,000 hours Fixed overhead rate = Static budget fixed overhead / static budget number of hours = 60,000/24,000 = $2.50 per hour 2. 3. 4. 5. Variable Overhead Variance Analysis for Rica’s Fleet Feet Inc. for 2008 Actual Variable Overhead (18,000 × 1.1 × $21) $415,800 Actual hours x Budgeted rate (18,000 × 1.1 × $20) $396,000 Budgeted hours allowed for Actual output x Budgeted rate (15,000 × 1.2 × $20) $360,000 $19,800 U Spending variance $36,000 U Efficiency variance 6. Fixed Overhead Variance Analysis for Rica’s Fleet Feet Inc. for 2008 Actual Fixed Overhead $55,000 Static Budget Fixed Overhead $60,000 $5,000 F Spending variance Budgeted hours allowed for Actual output × Budgeted Rate (15,000 × 1.2 ×$2.5) $45,000 $15,000 U Production volume variance 8- 8-37 (30 min.) Activity-based costing, batch-level variance analysis 1. Static budget number of setups = Budgeted books produced/ Budgeted books per setup = 200,000 ÷ 500 = 400 setups 2. Flexible budget number of setups = Actual books produced / Budgeted books per setup = 216,000 ÷ 500 = 432 setups 3. Actual number of setups = Actual books produced / Actual books per setup = 216,000/480 = 450 setups 4. Static budget number of hours = Static budget # of setups × Budgeted hours per setup = 400 × 6 = 2,400 hours Fixed overhead rate = Static budget fixed overhead / Static budget number of hours = 72,000/2,400 = $30 per hour 5. Budgeted variable overhead cost of a setup = Budgeted variable cost per setup-hour × Budgeted number of setup-hours = $100 × 6 = $600. Budgeted total overhead cost of a setup = Budgeted variable overhead cost + Fixed overhead rate ? Budgeted number of setup-hours = $600 + $30 × 6 = 780. So, the charge of $700 covers the budgeted incremental (i.e., variable overhead) cost of a setup, but not the budgeted full cost. 6. Variable Setup Overhead Variance Analysis for Jo Nathan Publishing Company for 2009 Actual Variable Overhead (450 × 6.5 × $90) $263,250 Actual hours x Budgeted rate (450 × 6.5 × $100) $292,500 Standard hours x Standard rate (432 × 6.0 × $100) $259,200 $29,250F Spending variance $33,300U Efficiency variance 8- 7. Fixed Setup Overhead Variance Analysis for Jo Nathan Publishing Company for 2009 Actual Fixed Overhead $79,000 Static Budget Fixed Overhead $72,000 $7,000 U Spending variance Standard hours x Budgeted Rate (432 × 6.0 × $30) $77,760 $5,760 F Production-volume variance 8. Rejecting an order may have implications for future orders (i.e., professors would be reluctant to order books from this publisher again). Jo Nathan should consider factors such as prior history with the customer and potential future sales. If a book is relatively new, Jo Nathan might consider running a full batch and holding the extra books in case of a second special order or just hold the extra books until semester. next If the special order comes at heavy volume times, Jo should look at the opportunity cost of filling it, i.e., accepting the order may interfere with or delay the printing of other books. 8- 8-38 (35 min.) Production-Volume Variance Analysis and Sales Volume Variance. Fixed Overhead Variance Analysis for Dawn Floral Creations, Inc. for February Actual Fixed Overhead $9,200 Static Budget Fixed Overhead $9,000 $200 U Spending variance Standard Hours × Budgeted Rate (600 × 1.5 × $6*) $5,400 1. and 2. $3,600 U Production-volume variance * fixed overhead rate = (budgeted fixed overhead)/(budgeted DL hours at capacity) = $9,000/(1000 x 1.5 hours) = $9,000/1,500 hours = $6/hour 3. An unfavorable production-volume variance measures the cost of unused capacity. Production at capacity would result in a production-volume variance of 0 since the fixed overhead rate is based upon expected hours at capacity production. However, the existence of an unfavorable volume variance does not necessarily imply that management is doing a poor job or incurring unnecessary costs. Using the suggestions in the problem, two reasons can be identified. a. For most products, demand varies from month to month while commitment to the factors that determine capacity, e.g. size of workshop or supervisory staff, tends to remain relatively constant. If Dawn wants to meet demand in high demand months, it will have excess capacity in low demand months. In addition, forecasts of future demand contain uncertainty due to unknown future factors. Having some excess capacity would allow Dawn to produce enough to cover peak demand as well as slack to deal with unexpected demand surges in non-peak months. b. Basic economics provides a demand curve that shows a tradeoff between price charged and quantity demanded. Potentially, Dawn could have a lower net revenue if they produce at capacity and sell at a lower price than if they sell at a higher price at some level below capacity. In addition, the unfavorable production-volume variance may not represent a feasible cost savings associated with lower capacity. Even if Dawn could shift to lower fixed costs by lowering capacity, the fixed cost may behave as a step function. If so, fixed costs would decrease in fixed amounts associated with a range of production capacity, not a specific production volume. The production-volume variance would only accurately identify potential cost savings if the fixed cost function is continuous, not discrete. 8- 4. The static-budget operating income for February is: Revenues $55 × 1,000 Variable costs $25 × 1,000 Fixed overhead costs Static-budget operating income The flexible-budget operating income for February is: Revenues $55 × 600 Variable costs $25 × 600 Fixed overhead costs Flexible-budget operating income $55,000 25,000 9,000 $ 21,000 $33,000 15,000 9,000 $ 9,000 The sales-volume variance represents the difference between the static-budget operating income and the flexible-budget operating income: Static-budget operating income Flexible-budget operating income Sales-volume variance $21,000 9,000 $12,000 U Equivalently, the sales-volume variance captures the fact that when Dawn sells 600 units instead of the budgeted 1,000, only the revenue and the variable costs are affected. Fixed costs remain unchanged. Therefore, the shortfall in profit is equal to the budgeted contribution margin per unit times the shortfall in output relative to budget. Sales-volume = variance Budgeted Budgeted – variable cost selling price per unit × Difference in quantity of units sold relative to the static budget = ($55 – $25) × 400 = $30 × 400 = $12,000 U In contrast, we computed in requirement 2 that the production-volume variance was $3,600U. This captures only the portion of the budgeted fixed overhead expected to be unabsorbed because of the 400-unit shortfall. To compare it to the sales-volume variance, consider the following: Budgeted selling price Budgeted variable cost per unit Budgeted fixed cost per unit ($9,000 ÷ 1,000) Budgeted cost per unit Budgeted profit per unit Operating income based on budgeted profit per unit $21 per unit × 600 units $55 $25 9 34 $ 21 $12,600 8- The $3,600 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 $12,600 3,600 U $ 9,000 Since the sales-volume variance represents the difference between the static- and flexible-budget operating incomes, the difference between the sales-volume and production-volume variances, which is referred to as the operating-income volume variance is: Operating-income volume variance = Sales-volume variance – Production-volume variance = Static-budget operating income - Operating income based on budgeted profit per unit = $21,000 U – $12,600 U = $8,400 U. 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 $21,000 and the budgeted operating income for 600 units would have been $12,600 ($21 operating income per unit 600 units). The difference, $8,400 U, is the operating-income volume variance, i.e., the 400 unit drop in actual volume relative to budgeted volume would have caused an expected drop of $8,400 in operating income, at the budgeted operating income of $21 per unit. The operating-income volume variance assumes that $50,000 in fixed cost ($9 per unit 400 units) would be saved if production and sales volumes decreased by 400 units. 8- 8-39 (3040 min.) Comprehensive review of Chapters 7 and 8, working backward from given variances. 1. a. b. c. d. 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 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 8- Direct Materials Actual Costs Incurred (Actual Input Qty. Actual Rate) 160,000 $10.40 $1,664,000 Flexible Budget: Budgeted Input Qty. Allowed for Actual Input Qty. Actual Output Budgeted Rate Budgeted Rate Purchases Usage 160,000 $11.50 96,000 $11.50 3 30,000 $11.50 $1,840,000 $1,104,000 $1,035,000 $69,000 U $176,000 F Efficiency variance Price variance 0.85 30,000 $20 $510,000 0.80 30,000 $20 $480,000 Direct Manuf. Labor 0.85 30,000 $20.50 $522,750 $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 Output Budgeted Rate 0.80 30,000 $12 $288,000 Allocated: Budgeted Input Qty. Allowed for Actual Output Budgeted Rate 0.80 30,000 $12 $288,000 Variable MOH Actual Input Qty. Budgeted Rate 0.85 30,000 $12 $306,000 $7,650 F Spending variance $18,000 U Efficiency $10,350 U variance Flexible-budget 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 $42,540 F Spending variance volume variance Never a variance $42,540 F Flexible-budget variance $256,000 U $256,000 U Production volume variance 8- 8-40 1. (3050 min.) Review of Chapters 7 and 8, 3-variance analysis. 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 *Fixed $ 117,000 585,000 234,000 312,000 $1,248,000 $320,000* manufacturing overhead rate = Budgeted fixed manufacturing overhead Denominator level Budget 40,000 hours $8.00 = Budget = 40,000 hours $8.00 = $320000 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 8- SOLUTION EXHIBIT 8-40 Flexible Budget: Actual Costs Budgeted Input Qty. Incurred: Actual Input Qty. Allowed for Actual Input Qty. Budgeted Price Actual Output × Actual Rate Purchases Usage × Budgeted Price Direct (25,000 $5.20) (25,000 $5.00) (23,100 $5.00) (23,400 $5.00) Materials $130,000 $125,000 $115,500 $117,000 $5,000 U $1,500 F a. Price variance 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 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 (not given) $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 $8,000 U* Prodn. volume variance (given) $600,000 ($240,600 + $320,000) $560,600 ($234,000 + $320,000) $554,000 ($234,000 + $312,000) $546,000 $39,400 U e. Spending variance *Denominator $6,600 U f. Efficiency variance $8,000 U g. Prodn. volume variance 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- 8-41 (20 minutes) Non-financial variances 1. Variance Analysis of Inspection Hours for Daisy Canine Products for May Actual Pounds Actual Hours For Inspections 210 hours Standard Pounds Inspected Inspected/Budgeted for Actual Output /Budgeted Pounds per hour Pounds per hour 200,000lbs/1,000 lbs per hour (2,250,000 x .1)/1,000 lbs per hour 200 hours 225 hours 10 hours U 25 hours F Efficiency Variance 2. Quantity Variance Variance Analysis of Pounds Failing Inspection for Daisy Canine Products for May Actual pounds Actual Pounds Failing Inspections 3,500 lbs Inspected x Budgeted Inspection Failure Rate (200,000lbs x .02) 4,000 lbs Standard Pounds Inspected for Actual Output x Budgeted Inspection Failure Rate (2,250,000 x .1 x .02) 4,500 lbs 500 lbs F 500 lbs F Efficiency Variance Quantity Variance 8- 8-42 (20 minutes) Non-financial performance measures 1. The cost of the ball bearings would be indirect materials if it is either not possible to trace the costs to individual products, or if the cost is so small relative to other costs that it is impractical to do so. Since Department B makes a fairly constant number of finished products (400 units) each day, it would be easy to trace the cost of bearings to the wheels completed daily. However, the fact that Rollie measures ball bearings by weight and discards leftover bearings at the end of each day suggests that they are a relatively inexpensive item and not worth the effort to restock or track in inventory. As such, it could be argued that ball bearings should be classified as overhead (e.g., indirect materials). 2. Non-financial performance measures for Department B might include: Number or proportion of wheels sent back for rework and/or amount or proportion time spent on rework; Number of wheels thrown away, ratio of wheels thrown away to wheels reworked, and/or ratio of bad to good wheels; Amount of down time for broken machines during the day; Weight of ball bearings discarded, or ratio of weights used and discarded. of 3. If the number of wheels thrown away is significant relative to the number of reworked wheels, then it is not efficient to rework them and so Rollie should re-examine the rework process or even just throw away all the bad wheels without rework. If the amount of rework is significant then the original process is not turning out quality goods in a timely manner. Rollie might slow down the process in Department B so it takes a little longer to make each good wheel, but the number of good wheels will be higher and may even save time overall if rework time drops considerably. They might also need to service the machines more often than just after the total daily production run, in which case they will trade off intentional down time for more efficient processing. If the amount of unintentional down time is significant they might bring in the mechanics during the day to fix a machine that goes down during a production run. Finally, Rollie might consider determining a better measure of ball bearings to requisition each day so that fewer are discarded, and might also keep any leftover ball bearings for use the next day. 8- Collaborative Learning Problem 8-43 1. a. (45 min.) Overhead variances, ethics. Total budgeted overhead Budgeted variable overhead ($10 budgeted rate per machine-hour × 2,500,000 budgeted machine-hours) Budgeted fixed overhead $31,250,000 25,000,000 $ 6,250,000 Budgeted fixed OH rate b. $6,250,000 budgeted amount = $2.50 per machine-hour 2,500,000 budgeted machine-hours 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 = $6,250,000 + $1,500,000 = $7,750,000 c. Production-volume variance = Budgeted fixed overhead – Fixed overhead allocated using budgeted input allowed for actual output units produced = = = * Budgeted $6,250,000 – ($2.50 per machine-hour × 2 machine-hours per unit* × 1,245,000 units) $6,250,000 – $6,225,000 $25,000 U variable overhead per unit = $20 Budgeted variable overhead rate = $10 per machine-hour Therefore, budgeted machine hours allowed per unit = $20/$10 = 2 machine-hours 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 $25,200,000 budget amount $10 per machine-hour 2, 400, 000 machine-hours 2,400,000 actual machine-hours = ($10.50 – $10) × 2,400,000 = $1,200,000 U 8- 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 = = = (2,400,000 – (2 × 1,245,000)) × $10 (2,400,000 – 2,490,000) × $10 $900,000 F 3. By manipulating, Remich has created a sizable unfavorable fixed overhead spending variance or, at least, has increased its magnitude. Jack Remich’s 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 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. 8- ...
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This note was uploaded on 11/18/2009 for the course FINANCE CS-1212 taught by Professor Mr.lincolen during the Spring '09 term at Pennsylvania College of Optometry.

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costacctg13_sm_ch08 - CHAPTER 8 FLEXIBLE BUDGETS, OVERHEAD...

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