costacctg13_sm_ch08

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 8­1 Effect ive planning of variable overhead costs invo lves: 1. Planning to undertake only those variable overhead act ivit ies that add value for customers using the product or service, and 2. Planning to use the drivers of costs in those activit ies in the most efficient way. 8­2 At the start of an accounting period, a larger percentage of fixed overhead costs are locked­in than is the case wit h variable overhead costs. When planning fixed overhead costs, a company must choose the appropriate level o f capacit y or invest ment that will benefit the company over a long time. This is a strategic decis io n. 8­3 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 cost­allocat ion rate × Standard quant it y of cost­allocat ion base allowed for actual output Direct costs Indirect costs 8­4 Steps in developing a budgeted variable­overhead cost rate are: 1. Choose the period to be used for the budget, 2. Select the cost­allocat ion bases to use in allocat ing variable overhead costs to the output produced, 3. Ident ify the variable overhead costs associated with each cost­allocat ion base, and 4. Compute the rate per unit of each cost­allocat ion 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 relat ive to budgeted prices. b. Percentage change in the actual quant it y used of individual items included in variable overhead cost pool, relat ive to the percentage change in the quant it y of the cost driver of the variable overhead cost pool. Possible reasons for a favorable variable­overhead efficiency variance are: · Workers more skillful in using machines than budgeted, · Production scheduler was able to schedule jo bs better than budgeted, result ing in lower­than­budgeted machine­hours, · Machines operated with fewer slowdowns than budgeted, and · Machine time standards were overly lenient. 8­5 8­6 8­1 8­7 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 allo cat ion base was used than was budgeted for the actual output achieved. 8­8 Steps in developing a budgeted fixed­overhead rate are 1. Choose the period to use for the budget, 2. Select the cost­allocat ion base to use in allocat ing fixed overhead costs to output produced, 3. Ident ify the fixed­overhead costs associated with each cost­allocat ion base, and 4. Compute the rate per unit of each cost­allocat ion base used to allocate fixed overhead costs to output produced. The relat ionship for fixed­manufacturing overhead variances is: Flexible­budget variance 8­9 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 wit h an amount that is fixed regardless of the output level. The result is that the flexible­budget variance amount is the same as the spending variance for fixed­ manufacturing overhead. 8­10 For planning and control purposes, fixed overhead costs are a lump sum amount that is not controlled on a per­unit basis. In contrast, for inventory costing purposes, fixed overhead costs are allocated to products on a per­unit basis. 8­11 An important caveat is what change in selling price might have been necessary to attain the level of sales assumed in the deno minator of the fixed manufacturing overhead rate. For example, the entry of a new low­price co mpetitor may have reduced demand below the deno minator level if the budgeted selling price was maintained. An unfavorable production­ vo lume variance may be small relat ive to the selling­price variance had prices been dropped to attain the deno minator level o f unit sales. 8­2 8­12 A strong case can be made for writ ing off an unfavorable production­vo lume variance to cost of goods sold. The alternat ive 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 capacit y, i.e., for the units not produced. But, if we take the view that the denominator level is a “so ft” number—i.e., it is only an est imate, and it is never expected to be reached exact ly, then it makes more sense to prorate the production vo lume variance—whether favorable or not—among the inventory stock and cost of goods sold. Prorating a favorable variance is also more conservat ive: it results in a lower operating inco me than if the favorable variance had all been written off to cost of goods sold. Finally, prorating also dampens the efficacy o f any steps taken by co mpany management to manage operating inco me through manipulat ion o f the production vo lume variance. In sum, a production­vo lume variance need not always be written off to cost of goods sold. 8­13 The four variances are: · Variable manufacturing overhead costs - spending variance - efficiency variance · Fixed manufacturing overhead costs - spending variance - production­vo lume variance 8­14 Interdependencies among the variances could arise for the spending and efficienc y variances. For example, if the chosen allocat ion base for the variable overhead effic ienc y 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 misclassificat ions o f costs as fixed when they are variable, and vice versa. 8­15 Flexible­budget variance analysis can be used in the control of costs in an act ivit y area by iso lat ing spending and effic iency variances at different levels in the cost hierarchy. For example, an analysis o f batch costs can show the price and efficiency variances fro m being able to use lo nger production runs in each batch relat ive to the batch size assumed in the flexible budget. 8­3 8­16 (20 min.) Variable manufacturing overhead, variance analysis. 1. 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 Flexible­budget 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 labor­hour versus $12 budgeted. It had an unfavorable efficiency variance of $2,592 U because each suit averaged 4.2 labor­hours (4,536 hours ÷ 1,080 suits) versus 4.0 budgeted labor­hours. 8­4 8­17 (20 min.) Fixed­manufacturing overhead, variance analysis (continuation of 8­16). 1 & 2. Budgeted fixed overhead $62 400 , = rate per unit of 1 040 ´ 4 , allocation base $ , 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 Never a variance 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 $2,400 F Production­volume variance $2,400 F Production­volume variance $1,516 U Flexible­budget 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 production­vo lume variance is $2,400 F. This arises because Esquire utilized its capacit y more intensively than budgeted (the actual production of 1,080 suits exceeds the budgeted 1,040 suits). This results in overallo cated fixed manufacturing overhead of $2,400 (4 × 40 × $15). Esquire would want to understand the reasons for a favorable production­vo lume variance. Is the market growing? Is Esquire gaining market share? Will Esquire need to add capacit y? 8­5 8­18 (30 min.) Variable manufacturing overhead variance analysis. 1. Deno minator level = (3,200,000 × 0.02 hours) = 64,000 hours 2. 1. Output units (baguettes) 2. Direct manufacturing labor­hours 3. Labor­hours per output unit (2 ¸1) 4. Variable manuf. overhead (MOH) costs 5. Variable MOH per labor­hour (4 ¸2) 6. Variable MOH per output unit (4 ¸1) a Actual Results 2,800,000 50,400 0.018 $680,400 $13.50 $0.243 Flexible Budget Amounts 2,800,000 a 56,000 0.020 $560,000 $10 $0.200 2,800,000 ´ 0.020= 56,000 hours Variable Manufacturing Overhead Variance Analysis for French Bread Co mpany 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 Flexible­budget variance Never a variance 3. Spending variance of $176,400U. It is unfavorable because variable manufacturing overhead was 35% higher than planned. A possible explanat ion could be an increase in energy rates relat ive to the rate per standard labor­hour assumed in the flexible budget. Efficiency variance of $56,000F. It is favorable because the actual number of direct manufacturing labor­hours required was lower than the number of hours in the flexible budget. Labor was more efficient in producing the baguettes than management had ant icipated in the budget. This could occur because o f improved morale in the co mpany, which could result fro m an increase in wages or an improvement in the compensat ion scheme. Flexible­budget variance o f $120,400U. It is unfavorable because the favorable efficiency variance was not large enough to compensate for the large unfavorable spending variance. 8­6 8­19 (30 min.) Fixed manufacturing overhead variance analysis (continuation of 8­18). 1. Budgeted standard direct manufacturing labor used = 0.02 per baguette Budgeted output = 3,200,000 baguettes Budgeted standard direct manufacturing labor­hours = 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 Production­volume variance $32,000 U Production­volume variance Never a variance $16,000 U Flexible­budget variance $48,000 U Underallocated fixed overhea d (Total fixed overhea d variance) 2. 3. The fixed manufacturing overhead is underallocated by $48,000. The production­volume variance o f $32,000U captures the difference between the budgeted 3,200,0000 baguettes and the lower actual 2,800,000 baguettes produced—the fixed cost capacit y 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, mo nthly leasing rates for baguette­making machines may have increased above those in the budget for 2009. 8­7 8­20 (30–40 min.) Manufacturing overhead, variance analysis. 1. The summary informat ion is: Flexible Budget 216 c 432 2.00 $ 30.00 e $12,960 $19,200 Static Budget 200 a 400 2.00 $ 30.00 f $12,000 $19,200 h $ 48.00 The Solutions Corporation (June 2009) Outputs units (number of assembled unit s) Hours of assembly t ime 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 t ime a b c Actual 216 411 b 1.90 d $ 30.20 $12,420 $20,560 g $ 50.02 200 units ´ 2 assembly hours per unit = 400 hours 411 hours ¸ 216 units = 1.90 assembl y hours per unit $12,420 ¸ 411 assembly hours = $30.22 per assembl y hour 216 units ´ 2 assembly hours per unit = 432 hours 432 assembl y hours ´ $30 per assembl y hour = $12,960 $20,560 ¸ 411 assembly hours = $50 per assembl y hour $19,200 ¸ 400 assembly hours = $48 per assembl y hour d e f 400 assembl y hours ´ $30 per assembl y hour = $12,000 g h 8­8 Actual Costs Incurred Variable Manufacturing Overhead $12,420 Actual Input Qty. ´ 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 $30.00 ´ assy. hrs. per assy. hr. $12,960 $630 F Allocated: Budgeted Input Qty. Allowed Budgeted for Actual Output ´ Rate 432 ´ $30.00 assy. hrs. per assy. hr. $12,960 Spending variance $540 F Efficiency variance Never a variance Never a variance Flexible­budget variance $540 F Overallocated variable overhead 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 432 ´ $48.00 assy. hrs. per assy. hr. $20,736 $1,536 F Spending Variance $1,360 U Never a Variance Production­volume variance $1,536 F Production­volume variance Flexible­budget variance $176 F Overallocated fixed overhead 8­9 The summary analysis is: Spending Variance Variable Manufacturing Overhead Fixed Manufacturing Overhead $90 U Efficiency Variance $630 F Production­Volume 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. Work­in­Process Control Variable Manufacturing Overhead Allocated To record variable manufacturing overhead allo cated. c. Variable Manufacturing Overhead Allocated Variable Manufacturing Overhead Spending Variance Variable Manufacturing Overhead Control Variable Manufacturing Overhead Efficiency Variance To iso late 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. 8­10 Fixed Manufacturing Costs and Variances a. Fixed Manufacturing Overhead Control Salaries Payable, Acc. Depreciat ion, various other accounts To record actual fixed manufacturing overhead costs incurred. b. Work­in­Process Control Fixed Manufacturing Overhead Allocated To record fixed manufacturing overhead allocated. c. Fixed Manufacturing Overhead Allocated Fixed Manufacturing Overhead Spending Variance Fixed Manufacturing Overhead Production­Volume Variance Fixed Manufacturing Overhead Control To iso late 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 Production­Vo lume 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 long­run and a short­run focus. It invo lves Solut ions planning to undertake only value­added overhead act ivit ies (a long­run view) and then managing the cost drivers of those activit ies in the most efficient way (a short­run view). Planning and control of fixed manufacturing overhead costs at Solut ions have primarily a long­run focus. It invo lves undertaking only value­added fixed­overhead activit ies for a budgeted level o f output. Solut ions makes most of the key decis io ns that determine the level of fixed­overhead costs at the start of the accounting period. 8­11 8­21 (10-15 min.) 4­variance 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 Production­vo lume variance Flexible­budget variance Underallocated (overallo cated) MOH These relat ionships could be presented in the same way as in Exhibit 8­4. 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 Flexible­budget variance Never a variance $8,700 U Underallocated variable over head (Total variable over head variance) Flexible Budget: Same Budgeted Lump S um (as in Static Budget) Regardless of Output Level (3) $15,000 Fixed MOH Actual Costs Incurred (1) $18,000 Same Budgeted Lump S um (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 Production­volume variance $600 U Production­volume variance $3,000 U Flexible­budget variance $3,600 U Underallocated fixed overhea d (Total fixed overhea d variance) 8­12 An overview of the 4 overhead variances is: Production­ Volume Variance Never a variance $600 U 4­Variance Analysis Variable Overhead Fixed Overhead Spending Variance $4,200 U $3,000 U Efficiency Variance $4,500 U Never a variance 8­22 (20–30 min.) Straightforward 4­variance overhead analysis. 1. The budget for fixed manufacturing overhead is 4,000 units × 6 machine­hours × $15 machine­hours/unit = $360,000. An overview of the 4­variance analysis is: 4­Variance Analysis Variable Manufacturing Overhead Fixed Manufacturing Overhead Spending Variance $17,800 U Efficiency Variance $16,000 U Production­ Volume Variance Never a Variance $13,000 U Never a Variance $36,000 F Solution Exhibit 8­22 has details o f these variances. A detailed comparison of actual and flexible budgeted amounts is: Output units (auto parts) Allocat ion base ( machine­hours) Allocat ion base per output unit Variable MOH Variable MOH per hour Fixed MOH Fixed MOH per hour a b 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 – 4,400 units × 6.00 machine­hours/unit = 26,400 machine­hours 28,400 ÷ 4,400 = 6.45 machine­hours per unit c 4,400 units × 6.00 machine­hours per unit × $8.00 per machine­hour = $211,200 d $245,000 ÷ 28,400 = $8.63 e 4,000 units × 6.00 machine­hours per unit × $15 per machine­hour = $360,000 f $373,000 ÷ 28,400 = $13.13 8­13 2. Variable Manufacturing Overhead Control Accounts Payable Control and other accounts Work­in­Process 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. Work­in­Process 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 Production­Vo lume Variance Fixed Manufacturing Overhead Control 36,000 373,000 3. Individual fixed manufacturing overhead items are not usually affected very much by day­to­day control. Instead, they are controlled periodically through planning decisio ns and budget ing procedures that may so met imes have horizons covering six mo nths or a year (for example, management salaries) and so met imes covering many years (for example, long­term leases and depreciat ion on plant and equipment). 4. The fixed overhead spending variance is caused by the actual realizat ion 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 vo lume variance is caused by production being over or under expected capacit y. You may be under capacit y when demand drops from expected levels, or if there are problems with production. Over capacit y is usually driven by favorable demand shocks or a desire to increase inventories. The fact that there is a favorable vo lume variance indicates that production exceeded the expected level o f output (4,400 units actual relat ive to a deno minator level o f 4,000 output units). 8­14 SOLUTION EXHIBIT 8­22 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 $16,000 U Spending variance Efficiency variance $33,800 U Flexible­budget variance Never a variance Never a variance $33,800 U Underallocated variable over head (Total variable over head variance) Flexible Budget: Same Budgeted Lump S um (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 S um (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 Production­volume variance $13,000 U $36,000 F Production­volume Flexible­budget variance variance $23,000 F Overallocated fixed overhea d (Total fixed overhea d variance) 8­15 8­23 (30-40 min.) Straightforward coverage of manufacturing overhead, standard­ costing system. 1. Solution Exhibit 8­23 shows the computations. Summary details are: Actual 41,000 13,300 b 0.32 $155,100 $11.66 $401,000 e $30.15 d Output units Allocat ion base ( machine­hours) Allocat ion 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 4­variance analysis is: 4­Variance 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 8­16 2. Variable Manufacturing Overhead Control Accounts Payable Control and other accounts Work­in­Process 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 Depreciat ion Control, etc. Work­in­Process Control Fixed Manufacturing Overhead Allocated Fixed Manufacturing Overhead Allocated Fixed Manufacturing Overhead Spending Variance Fixed Manufacturing Overhead Production­Vo lume 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 o f variable manufacturing overhead requires the ident ificat ion of the cost drivers for such items as energy, supplies, and repairs. Control often entails mo nitoring nonfinancial measures that affect each cost item, one by one. Examples are kilowatt­hours used, quant it ies o f 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 invest igate 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 variet y of reasons, such as the ut ilit y rates being lower than est imated or the indirect materials costs per unit of denominator activit y being less than estimated. The variable overhead efficiency variance is unfavorable, which implies that the estimated deno minator activit y was too low. Since the denominator activit y is machine hours, this could be the result of ineffic ient use of machines, poorly scheduled production runs, or machines that need maintenance and thus are not working at the expected level o f efficiency. 8­17 SOLUTION EXHIBIT 8­23 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 Over head $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 Flexible­budget variance Never a variance $7,500 U Underallocated variable over head (Total variable over head variance) Flexible Budget: Same Budgeted Same Budgeted Lump S um Lump S um (as in Static Budget) (as in Static Budget) Regardless of Regardless of Output Level Output Level (2) (3) $390,000 $390,000 Actual Costs Incurred (1) Fixed Manufacturing Over head $401,000 Allocated: Budgeted Input Allowed for Actual Output × Budgeted Rate (4) (12,300 × $30) $369,000 $11,000 U Spending variance $21,000 U* Never a variance Production­volume variance $21,000 U* Production­volume variance $11,000 U Flexible­budget variance $32,000 U Underallocated fixed overhea d (Total fixed overhea d variance) Fixed ma nufacturing over hea d $390,000 = = $30 per machine­hour. budgeted rate 13,000 machine ­ hours *Alternative computation: 13,000 denominator hours – 12,300 budgeted hours allowed = 700 hours; 700 hours × $30 per machine­hour = $21,000 U 8­18 8­24 (20–25 min.) Overhead variances, service sector. 1. Meals on Wheels (May 2009) Output units (number of deliveries) Hours per delivery Hours of delivery t ime Variable overhead costs per delivery hour Variable overhead (VOH) costs Fixed overhead costs Fixed overhead cost per hour a Actual Results 8,800 a 0.65 5,720 c $1.80 $10,296 $38,600 Flexible Budget 8,800 0.70 b 6,160 $1.50 d $9,240 $35,000 Static Budget 10,000 0.70 b 7,000 $1.50 d $10,500 $35,000 e $5.00 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 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 S um (as in Static Budget) Regardless of Output Level Actual Costs Incurred $38,600 $3,600 U Spending variance $35,000 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 Production­volume variance 8­19 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 gaso line) in the overhead cost pools, or the usage of these individual items per unit of the allocation base (delivery t ime). The favorable efficiency variance for variable overhead costs results fro m more efficient use of the cost allocat ion base––each delivery takes 0.65 hours versus a budgeted 0.70 hours. MOW can best manage its fixed overhead costs by lo ng­term planning of capacit y rather than day­to­day decisio ns. This invo lves planning to undertake only value­added fixed­overhead activit ies and then determining the appropriate level for those activit ies. Most fixed overhead costs are committed well before they are incurred. In contrast, for variable overhead, a mix o f lo ng­run planning and daily mo nitoring of the use of individual items is required to manage costs efficient ly. MOW should plan to undertake only value­added variable­overhead act ivit ies (a lo ng­run focus) and then manage the cost drivers of those activit ies in the most efficient way (a short­run focus). There is no production­vo lume variance for variable overhead costs. The unfavorable production­vo lume variance for fixed overhead costs arises because MOW has unused fixed overhead resources that it may seek to reduce in the long run. 8­20 8­25 (40-50 min.) Total overhead, 3­variance analysis. 1. This problem has two major purposes: (a) to give experience wit h 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 deno minator level. An analysis o f 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 analyt ical 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 fo llows: 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 Flexible­budget 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 labor­hour * * = $79,040 – 4,000 × ($8.00) = $47,040 If total overhead is allocated at 120% of direct labor­cost, 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 labor­hour. 8­21 Let D = denominator level in input units Budgeted fixed overhead rate per input unit $11.20 D = Budgeted fixed overhead costs Deno minator level in input units = $47,040 ÷ D = 4,200 direct labor­hours 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 3­variance analysis for October fo llows: Actual Costs Incurred * $99,600 Actual Inputs × Budgeted Rate ($47,040 + (4,820 × $8.00) $85,600 $14,000 U Spending variance $960 U Efficiency variance $5,600 F* Production­volume variance $5,600 F* Production­volume variance $14,960 U Flexible­budget variance * Known figure An overview of the 3­variance analysis using the block format in the text is: 3­Variance 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 ident ificat ion of the cost drivers for such items as energy, supplies, equipment, and maintenance. Control o ften entails mo nitoring nonfinancial measures that affect each cost item, one by one. Examples are kilowatts used, quant it ies o f lubricants used, and equipment parts and hours used. The most convincing way to discover why overhead performance did not agree with a budget is to investigate possible causes, line item by line item. Individual fixed manufacturing overhead items are not usually affected very much by day­ to­day control. Instead, they are controlled periodically through planning decisio ns and budget ing that may sometimes have horizons covering six mo nths or a year (for example, management salaries) and so metimes covering many years (for example, long­term leases and depreciat ion on plant and equipment). 8­22 8­26 (30 min.) Overhead variances, missing information. 1. In the columnar presentation of variable overhead variance analysis, all numbers shown in bo ld are calculated from the given informat ion, 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) Flexible­budget variance a. 15,000 machine­hours ´ $6 per machine­hour = $90,000 b. Actual VMOH = $90,000 – $375F (VOH spending variance) = $89,625 c. 14,850 machine­hours ´ $6 per machine­hour = $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 o f $89,100. The actual variable overhead cost is $89,625. Therefore, variable overhead is underallocated by $525. 8­23 2. In the columnar presentation o f fixed overhead variance analys is, all numbers shown in bo ld are calculated from the given informat ion, in the order (a) – (e). FIXED MANUFACTURING OVERHEAD Flexible Budget: Allocated: Static Budget Lump S um Budgeted Input Qty. Regardless of Output Allowed for Budgeted Level Actual Output ´ Rate (b) 14,850 $1.60* (c) ´ mach. hrs. per mach. hr. $28,800 $23,760 $5,040 U (d) Production­volume variance Actual Costs Incurred (a) $30,375 $1,575 U Spending variance $1,575 U (e) Flexible­budget variance a. Actual FOH costs = $120,000 total overhead costs – $89,625 VOH costs = $30,375 b. Static budget FOH lump sum = $30,375 – $1,575 spending variance = $28,800 c. *FOH allo cat ion rate = $28,800 FOH static­budget lump sum ¸ 18,000 static­budget machine­hours = $1.60 per machine­hour Allocated FOH = 14,850 machine­hours ´ $1.60 per machine­hour = $23,760 d. PVV = $28,800 – $23,760 = $5,040U e. FOH flexible budget variance = FOH spending variance = $1,575 U Allocated fixed overhead is $23,760. The actual fixed overhead cost is $30,375. Therefore, fixed overhead is underallo cated by $6,615. 8­24 8­27 (15 min.) Identifying favorable and unfavorable variances. VOH Spending Variance Cannot be deter mined: no infor mation on actual versus budgeted VOH rates Cannot be deter mined: no infor mation on actual versus budgeted VOH rates Cannot be deter mined: no infor mation on actual versus budgeted VOH rates Cannot be deter mined: no infor mation on actual versus budgeted VOH rates VOH Efficiency Variance Cannot be deter mined: no infor mation on actual versus flexible­budget machine­hours Favorable: actual machine­hours less than flexible­ budget machine­ hours FOH Spending Variance Unfa vorable: actual fixed costs are mor e than budgeted fixed costs FOH Production­ Volume Variance Favorable: output is more tha n budgeted causing FOH costs to be overallocated Scenario Production output is 5% mor e than budgeted, and actual fixed ma nufacturing overhea d costs are 6% mor e tha n budgeted Production output is 10% mor e than budgeted; actual machine hours are 5% less than budgeted Cannot be deter mined: no infor mation on actual versus budgeted FOH costs Cannot be deter mined: no infor mation on actual versus budgeted FOH costs Cannot be deter mined: no infor mation on actual versus budgeted FOH costs Favorable: output is more tha n budgeted causing FOH costs to be overallocated Production output is 8% less than budgeted Actual machine hours are 15% greater than flexible­budget machine hours Cannot be deter mined: no infor mation on actual machine­ hours versus flexible­budget machine­hours Unfa vorable: more machine­hours used relative to flexible budget Unfa vorable: output less than budgeted will cause FOH costs to be underallocated Relative to the flexible budget, actual machine hours are 10% greater and actual variable ma nufacturing overhea d costs are 15% gr eater Unfa vorable: actual VOH rate gr eater than budgeted VOH rate Unfa vorable: actual machine­hours gr eater than flexible­budget machine­hours Cannot be deter mined: no infor mation on actual versus budgeted FOH costs Cannot be deter mined: no infor mation on flexible­budget machine­hours relative to static­ budget machine­ hours Cannot be deter mined: no infor mation on actual output relative to budgeted output 8­25 8­28 (35 min.) Flexible­budget variances, review of Chapters 7 and 8. 1. Solut ion Exhibit 8­28 contains a co lumnar presentation of the variances for Doorknob Design Company (DDC) for April 2009. SOLUTION EXHIBIT 8­28 Actual Costs Incurred: Actual Input Q ty. × Actual Rate (50,000 ´ $22.0) $1,100,000 Flexible Budget: Budgeted Input Q ty. Allowed for Actual Output × Budgeted Price (47,500 ´ $20.0) $950,000 Direct Materials Actual Input Q ty. ´ 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 Q ty. ´ Budgeted Rate (45,000 ´ $10.0) $450,000 Flexible Budget: Budgeted Input Q ty. Allowed for Actual Output ´ Budgeted Rate (47,500 ´ $10.0) $475,000 Allocated: (Budgeted Input Q ty. 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 * $12,500 U Never a variance g. Production volume variance Denominator level in hours: 100,000 x .5 = 50,000 hours Budgeted Fixed Overhead: 50,000 x $5/hr = $250,000 8­26 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 qualit y of brass, it may explain why the y used less brass than expected (leading to a favorable material effic iency variance). In turn, since variable manufacturing overhead is assigned based on pounds of materials used, this direct ly led to the favorable variable overhead efficiency variance. The purchase of a better qualit y o f 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. 8­29 (30 min.) Comprehensive variance analysis. 1. Budgeted number of machine­hours planned can be calculated by mult iplying the number of units planned (budgeted) by the number of machine­hours allocated per unit: 888 units ´ 2 machine­hours per unit = 1,776 machine­hours. 2. Budgeted fixed MOH costs per machine­hour can be co mputed by dividing the flexible budget amount for fixed MOH (which is the same as the static budget) by the number o f machine­hours planned (calculated in (a.)): $348,096 ÷ 1,776 machine­hours = $196.00 per machine­hour 3. Budgeted variable MOH costs per machine­hour are calculated as budgeted variable MOH costs divided by the budgeted number of machine­hours planned: $71,040 ÷ 1,776 machine­hours = $40.00 per machine­hour. 4. Budgeted number of machine­hours allowed for actual output achieved can be calculated by dividing the flexible­budget amount for variable MOH by budgeted variable MOH costs per machine­hour: $76,800 ÷ $40.00 per machine­hour= 1,920 machine­hours allowed 5. The actual number of output units is the budgeted number of machine­hours allowed for actual output achieved divided by the planned allo cation rate of machine hours per unit: 1,920 machine­hours ÷ 2 machine­hours per unit = 960 units. 6. The actual number of machine­hours used per output unit is the actual number of machine hours used (given) divided by the actual number of unit s manufactured: 1,824 machine­hours ÷ 960 units = 1.9 machine­hours used per output unit. 8­27 8­30 (60 min.) Journal entries (continuation of 8­29). 1. Key informat ion underlying the computation of variances is: Actual Flexible­Budget Results Amount 1. Output units (food processors) 960 960 2. Machine­hours 1,824 1,920 3. Machine­hours per output unit 1.90 2.00 4. Variable MOH costs 5. Variable MOH costs per machine­ hour (Row 4 ÷ Row 2) 6. Variable MOH costs per unit (Row 4 ÷ Row 1) 7. Fixed MOH costs 8. Fixed MOH costs per machine­ hour (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 Static­Budget Amount 888 1,776 2.00 $71,040 $40.00 $80.00 $348,096 $196.00 $392.00 Solution Exhibit 8­30 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 Work­in­Process Control Variable MOH Allocated Variable MOH Allocated Variable MOH Spending Variance Variable MOH Control Variable MOH Efficiency Variance 76,608 76,608 76,800 76,800 76,800 3,648 76,608 3,840 Journal entries for fixed MOH, year ended December 31, 2010: Fixed MOH Control Wages Payable, Accumulated Depreciat ion, etc. Work­in­Process Control Fixed MOH Allo cated Fixed MOH Allocated Fixed MOH Spending Variance Fixed MOH Control Fixed MOH Production­Vo lume Variance 350,208 350,208 376,320 376,320 376,320 2,112 350,208 28,224 8­28 2. Adjustment of COGS Variable MOH Efficiency Variance Fixed MOH Production­Volume 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 8­30 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 Production­volume variance 8­29 8­31 (30-40 min.) Graphs and overhead variances. 1. Variable Manufacturing Overhead Costs Total Varia ble Manu f. Overhea d Costs $18,000,000 Graph for planning and control and inventory costing purposes at $9 per machine­hour $9,000,000 1,000,000 Machine­Hour s Fixed Manufacturing Overhead Costs Total Fixed Manu f. Overhea d Costs $18,000,000 Graph for planning and control purpose Graph for inventory costing purpose ($18 per machine­hour) $9,000,000 1,000,000 Machine­Hour s * Budgeted fixed manufacturing overhead rate per hour Budgeted fixed manufacturing overhead Deno minator level = $18,000,000/ 1,000,000 machine hours = $18 per machine­hour = 8­30 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 Flexible­budget variance $1,150,000 U Underallocated variable over head (Total variable over head 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 Production­volume variance $50,000 U Flexible­budget variance * $2,250,000 U Production­volume variance $2,300,000 U Underallocated fixed overhea d (Total fixed overhea d variance) * Alter native computation: 1,000,000 denominator hrs. – 875,000 budgeted hrs. allowed = 125,000 hrs. 125,000 ´ $18 = $2,250,000 U 8­31 3. The underallocated manufacturing overhead was: variable, $1,150,000 and fixed, $2,300,000. The flexible­budget variance and underallocated overhead are always the same amount for variable manufacturing overhead, because the flexible­budget 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 co incide when the budgeted input of the allocat ion base for the actual output level achieved exactly equals the deno minator level. 4. The choice of the deno minator level will affect inventory costs. The new fixed manufacturing overhead rate would be $18,000,000 ÷ 750,000 = $24 per machine­hour. In turn, the allocated amount of fixed manufacturing overhead and the production­vo lume 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* Flexible­budget variance Prodn. volume variance $2,950,000 F Total fixed overhea d variance * Alternate computation: (750,000 – 875,000) × $24 = $3,000,000 F The major point of this requirement is that inventory costs (and, hence, inco me determination) can be heavily affected by the cho ice of the deno minator level used for setting the fixed manufacturing overhead rate. 8­32 8­32 (30 min.) 4­variance 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 $1,125 U Spending variance Efficiency variance Never a variance Fixed Manufacturing Overhead $26,500* (Lump sum) $25,000* (Lump sum) $25,000* (1,250 × $20 ) $25,000* a $1,500 U Spending variance Never a variance $0 Production­volume 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 (Lump sum) b $17,500 (1,625* ´ $10) $16,250 $750 F* Spending variance Never a variance $1,250 U* Production­volume variance Deno minator level = Budgeted FMOH costs ÷ Budgeted FMOH rate = $17,500 ÷ $10 = 1,750 hours 8­33 Actual Costs Incurred Case C: Variable Manufacturing Overhead Flexible Budget: Allocated: Budgeted Input Budgeted Input Qty. Qty. Actual Input Allowed for Allowed for Qty. Actual Output Actual Output × Budgeted Rate × Budgeted Rate × Budgeted Rate $15,500 (2,925 ´ $5.00*) $14,625 (2,875 ´ $5.00*) (2,875 ´ $5.00*) c c $14,375 $14,375 $875 U* $250 U* Spending variance Efficiency variance Never a variance Fixed Manufacturing Overhead $30,000* $27,500* $27,500* $28,750 d $2,500 U Spending variance Never a variance $1,250 F* Production­volume variance Total budgeted manufacturing overhead = $14,375 + $27,500 = $41,875 a b Budgeted FMOH rate = Budgeted FMOH costs ÷ Denominator level = $25,000 ÷ 1,250 = $20 Budgeted Budgeted Budgeted total overhead = fixed manuf. overhead + variable manuf. 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*) = $28,750 8­34 8­33 (15-25 min.) Flexible budgets, 4­variance analysis. 1. 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 Solut ion Exhibit 8­33 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 8­5 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 4­variance analysis using the block format of the text is: Production­ Volume Variance 4­Variance 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 8­35 SOLUTION EXHIBIT 8­33 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 Production­volume variance Alternate computation of the production vo lume variance: = éæ Budgeted hours ö æDenominatoröù éBudgeted ù fixed çallowed for actual ÷ – êç ç hours ÷ú ´ ê overhead ú ÷ ëè output achieved ø è øû ë rate û é æ 3, 600, 000 ö ù ÷ ú × $ 0.61 ê( 330,000 ) - ç 12 è ø û ë = (330,000 – 300,000) × $0.61 = $18,300 F = 8­36 8­34 (20 min.) Variances 1. Direct Manufacturing Labor and Variable Manufacturing Overhead Direct Manufacturing Labor variance analysis for Sarah Beth’s Art Supply Co mpany 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 Actual Input Qty. ´ Budgeted Rate 13,000 × 0.75 × 20 $195,000 $65,000 U Efficiency variance 2. Variable Manufacturing Overhead variance analys is for Sarah Beth’s Art Supply Co mpany 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 Actual Input Qty. ´ Budgeted Rate 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 negat ive 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 emplo yees, 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 effic iency variances are related to factors other than the cost of the labor or overhead. 4. If the variable overhead consisted only o f costs that were related to direct manufacturing labor, then Sarah is correct ­ both the labor effic iency 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 funct ion of factors other than direct labor (e.g., the costs of energy or the usage of indirect materials). In this case, allocat ing variable overhead using direct labor as the only base will inflate the effect of ineffic ient labor usage on the variable overhead efficiency variance. The real effect on firm profitabilit y will be lower, and will likely be captured in a favorable spending variance for variable overhead. 8­37 8­35 (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 Analys is 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 Production­vo lume 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 horse­guest 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 negat ive 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 o f 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 production­vo lume variance of $2,700 exists because the fixed overhead rate was based on the forecasted number of horse guest­weeks, 40, while the fixed overhead was applied using the actual number of horse guest­weeks, 38. The overest imat ion of the number of horse guests in August would lead to an under­absorption of fixed overhead, result ing in the unfavorable production­vo lume variance. If the est imate was too far off fro m the actual number of horses, HHS might potent ially not charge enough to cover their costs. 8­38 8­36 (20 min.) 1. Activity­based costing, batch­level 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 Analys is for Rica’s Fleet Feet Inc. for 2008 Actual Fixed Overhead $55,000 Static Budget Fixed Overhead $60,000 Budgeted hours allowed for Actual output × Budgeted Rate (15,000 × 1.2 ×$2.5) $45,000 $5,000 F Spending variance $15,000 U Production vo lume variance 8­39 8­37 (30 min.) Activity­based costing, batch­level 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 setup­hour × Budgeted number of setup­hours = $100 × 6 = $600. Budgeted total overhead cost of a setup = Budgeted variable overhead cost + Fixed overhead rate × Budgeted number of setup­hours = $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 Co mpany 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 8­40 7. Fixed Setup Overhead Variance Analysis for Jo Nathan Publishing Company for 2009 Actual Fixed Overhead $79,000 Static Budget Fixed Overhead $72,000 Standard hours x Budgeted Rate (432 × 6.0 × $30) $77,760 $7,000 U Spending variance $5,760 F Production­vo lume variance 8. Reject ing an order may have implicat ions 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 relat ively new, Jo Nathan might consider running a full batch and ho lding the extra books in case of a second special order or just hold the extra books until next semester. If the special order comes at heavy vo lume t imes, Jo should look at the opportunit y cost of filling it, i.e., accepting the order may interfere with or delay the pr int ing of other books. 8­41 8­38 (35 min.) Production­Volume Variance Analysis and Sales Volume Variance. 1. and 2. Fixed Overhead Variance Analys is for Dawn Floral Creat ions, 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 $3,600 U Production­vo lume variance * fixed overhead rate = (budgeted fixed overhead)/(budgeted DL hours at capacit y) = $9,000/(1000 x 1.5 hours) = $9,000/1,500 hours = $6/hour 3. An unfavorable production­volume variance measures the cost of unused capacit y. Production at capacit y would result in a production­vo lume variance of 0 since the fixed overhead rate is based upon expected hours at capacit y production. However, the existence of an unfavorable vo lume variance does not necessarily imply that management is do ing a poor job or incurr ing unnecessary costs. Using the suggest ions in the problem, two reasons can be identified. a. For most products, demand varies fro m month to month while commit ment to the factors that determine capacit y, e.g. size of workshop or supervisory staff, tends to remain relat ively constant. If Dawn wants to meet demand in high demand mo nths, it will have excess capacit y in low demand mo nths. In addit ion, forecasts of future demand contain uncertaint y due to unknown future factors. Having so me excess capacit y would allow Dawn to produce enough to cover peak demand as well as slack to deal wit h unexpected demand surges in non­peak months. b. Basic econo mics provides a demand curve that shows a tradeoff between price charged and quant it y demanded. Potentially, Dawn could have a lower net revenue if they produce at capacit y and sell at a lower price than if they sell at a higher price at some level below capacit y. In addit ion, the unfavorable production­vo lume variance may not represent a feasible cost savings associated with lower capacit y. Even if Dawn could shift to lower fixed costs by lowering capacit y, the fixed cost may behave as a step funct ion. If so, fixed costs would decrease in fixed amounts associated with a range of production capacit y, not a specific production vo lume. The production­vo lume variance would only accurately identify potential cost savings if the fixed cost funct ion is cont inuous, not discrete. 8­42 4. The static­budget operating inco me for February is: Revenues $55 × 1,000 Variable costs $25 × 1,000 Fixed overhead costs Static­budget operating income The flexible­budget operating income for February is: Revenues $55 × 600 Variable costs $25 × 600 Fixed overhead costs Flexible­budget operating income $55,000 25,000 9,000 $ 21,000 $33,000 15,000 9,000 $ 9,000 The sales­vo lume variance represents the difference between the static­budget operating inco me and the flexible­budget operating inco me: Static­budget operating income Flexible­budget operating income Sales­vo lume variance $21,000 9,000 $12,000 U Equivalent ly, the sales­volume variance captures the fact that when Dawn sells 600 unit s 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 contribut ion margin per unit times the shortfall in output relat ive to budget. Budgeted Budgeted variable cost selling price – per unit Difference in quant ity o f × units so ld relative to the static budget Sales­vo lume variance = = ($55 – $25) × 400 = $30 × 400 = $12,000 U In contrast, we computed in requirement 2 that the production­vo lume variance was $3,600U. This captures only the portion of the budgeted fixed overhead expected to be unabsorbed because of the 400­unit shortfall. To compare it to the sales­vo lume variance, consider the fo llowing: 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 $12,600 8­43 The $3,600 U production­vo lume variance explains the difference between operating inco me based on the budgeted profit per unit and the flexible­budget operating inco me: Operating income based on budgeted profit per unit Production­vo lume variance Flexible­budget operating income $12,600 3,600 U $ 9,000 Since the sales­vo lume variance represents the difference between the static­ and flexible­budget operating inco mes, the difference between the sales­vo lume and production­vo lume variances, which is referred to as the operating­inco me vo lume variance is: Operating­inco me vo lume variance = Sales­vo lume variance – Production­vo lume variance = Static­budget operating inco me ­ Operating income based on budgeted profit per unit = $21,000 U – $12,600 U = $8,400 U. The operating­inco me vo lume variance explains the difference between the static­budget operating inco me and the budgeted operating income for the units actually so ld. The static­ budget operating inco me is $21,000 and the budgeted operating inco me for 600 units would have been $12,600 ($21 operating inco me per unit ´ 600 units). The difference, $8,400 U, is the operating­income vo lume variance, i.e., the 400 unit drop in actual vo lume relat ive to budgeted vo lume would have caused an expected drop of $8,400 in operating income, at the budgeted operating inco me of $21 per unit. The operating­inco me vo lume variance assumes that $50,000 in fixed cost ($9 per unit ´ 400 units) would be saved if production and sales vo lumes decreased by 400 units. 8­44 8­39 (30-40 min.) Comprehensive review of Chapters 7 and 8, working backward from given variances. 1. a. b. c. d. Solution Exhibit 8­39 outlines the Chapter 7 and 8 framework underlying this so lut ion. 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 labor­hours = $522,750 ÷ $20.50 = 25,500 hours Standard variable manufacturing overhead rate = $480,000 ÷ 40,000 = $12 per direct manuf. labor­hour Variable manuf. overhead effic iency 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. labor­hour Fixed manufacturing overhead allocated = $16 ´ 24,000 hours = $384,000 Production­volume variance = $640,000 – $384,000 = $256,000 U e. f. 2. The control o f variable manufacturing overhead requires the ident ificat ion 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, quantit ies o f 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 invest igate possible causes, line item by line item. Individual fixed overhead items are not usually affected very much by day­to­day control. Instead, they are controlled periodically through planning decisio ns and budgeting procedures that may so met imes have planning horizons covering six mo nths or a year (for example, management salaries) and so met imes covering many years (for example, long­term leases and depreciat ion on plant and equipment). 8­45 SOLUTION EXHIBIT 8­39 Actual Costs Incurred (Actual Input Qty. ´ Actual Rate) 160,000 ´ $10.40 $1,664,000 Flexible Budget: Budgeted Input Qty. Actual Input Qty. Allowed for Actual Output ´ Budgeted Rate Purchases Usage ´ Budgeted Rate 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 Materials Direct Manuf. Labor 0.85 ´ 30,000 ´ $20.50 $522,750 $12,750 U Price variance $30,000 U Efficiency variance $42,750 U Flexible­budget variance Variable MOH 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 0.85 ´ 30,000 ´ $11.70 0.85 ´ 30,000 ´ $12 0.80 ´ 30,000 ´ $12 0.80 ´ 30,000 ´ $12 $298,350 $306,000 $288,000 $288,000 $7,650 F Spending variance $18,000 U Efficiency Never a variance Never a variance $10,350 U Flexible­budget variance Actual Costs Incurred (1) Fixed MOH $597,460 Flexible Budget: Same Budgeted Same Budgeted Lump S um Lump S um (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 Never a variance Spending variance $42,540 F Flexible­budget variance $256,000 U $256,000 U Production volume variance 8­46 8­40 (30-50 min.) Review of Chapters 7 and 8, 3­variance analysis. 1. 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 fo llowing is for later use: Fixed manufacturing overhead, a lump­sum budget * $ 117,000 585,000 234,000 312,000 $1,248,000 * $320,000 Fixed manufacturing overhea d rate = $8.00 = Budgeted fixed ma nufacturing over head Denominator level Budget 40,000 hours Budget = 40,000 hours ´ $8.00 = $320,000 2. Solution Exhibit 8­40 presents a columnar presentation of the variances. An overview of the 3­variance analys is using the block format of the text is: 3­Variance Analysis Total Manufacturing Overhead Spending Variance $39,400 U Efficiency Variance $6,600 U Production Volume Variance $8,000 U 8­47 SOLUTION EXHIBIT 8­40 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 $1,500F 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: Allocated: Budgeted Input Qty. (Budgeted Input Qty. Allowed for Allowed for Actual Output Actual Output ´ Budgeted Rate ´ Budgeted Rate) (39,000 ´ $6.00) $234,000 (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. Over head * $8,000 U Prodn. volume variance (given) $600,000 ($240,600 + $320,000) $560,600 ($234,000 + $320,000) ($234,000 + $312,000) $554,000 $546,000 $8,000 U g. Prodn. volume variance $39,400 U e. Spending variance * $6,600 U f. Efficiency variance Denominator level in hours Production volume in standard hours allowed Production­volume variance 40,000 39,000 1,000 hours x $8.00 = $8,000 U 8­48 8­41 (20 minutes) Non­financial variances 1. Variance Analysis o f Inspect ion Hours for Daisy Canine Products for May Actual Pounds 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 Actual Hours For Inspections 210 hours 10 hours U 25 hours F Efficiency Variance 2. Quantity Variance Variance Analysis o f Pounds Failing Inspect ion for Daisy Canine Products for May Actual pounds 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 Actual Pounds Failing Inspections 3,500 lbs 500 lbs F 500 lbs F Efficiency Variance Quantity Variance 8­49 8­42 (20 minutes) Non­financial performance measures 1. The cost of the ball bearings would be indirect materials if it is eit her not possible to trace the costs to individual products, or if the cost is so small relative to other costs that it is impract ical 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 relat ively 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. Non­financial performance measures for Department B might include: Number or proportion of wheels sent back for rework and/or amount or proportion o f 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. 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 re­examine 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 qualit y goods in a timely manner. Rollie might slow down the process in Depart ment B so it takes a little longer to make each good wheel, but the number of good wheels will be higher and ma y 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 intent ional down t ime for more efficient processing. If the amount of unintent ional down t ime is significant they might bring in the mechanics during the day to fix a machine that goes down during a production run. Finally, Ro llie might consider determining a better measure of ball bearings to requisit io n each day so that fewer are discarded, and might also keep any leftover ball bearings for use the next day. 8­50 Collaborative Learning Problem 8­43 (45 min.) Overhead variances, ethics. 1. a. Total budgeted overhead Budgeted variable overhead ($10 budgeted rate per machine­hour × 2,500,000 budgeted machine­hours) Budgeted fixed overhead $31,250,000 25,000,000 $ 6,250,000 Budgeted fixed OH rate = $6,250,000 budgeted amount = $2.50 per machine­hour 2,500,000 budgeted machine­hours b. 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. Production­vo lume variance = Budgeted fixed overhead = = = * Fixed overhead allocated using budgeted – input allowed for actual output units produced * $6,250,000 – ($2.50 per machine­hour × 2 machine­hours per unit × 1,245,000 units) $6,250,000 – $6,225,000 $25,000 U Budgeted variable overhead per unit = $20 Budgeted variable overhead rate = $10 per machine­hour Therefore, budgeted machine hours allowed per unit = $20/$10 = 2 machine­hours 2. Variable overhead spending variance: Actual variable Budgeted variable overhead cost – overhead cost per un it of cost per unit of allocation base cost­allocation base Actual quantity of variable overhead × cost­allocation base used for actual output é $25,200,000 budget amount ù =ê - $10 per machine­hour ú ´ 2, 400, 000 machine­hours ë 2,400,000 actual machine­hours û = ($10.50 – $10) × 2,400,000 = $1,200,000 U 8­51 Variable overhead efficiency variance: Actual unit s of variable overhead cost­allocation base used for actual output – Budgeted units of variable overhead cost­allocation 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 act ion 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 effect ively. Another probable adverse outcome o f Remich’s act ions 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 decisio ns. 8­52 ...
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