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Unformatted text preview: Chapter 15 - Operational Performance Measurement: Indirect-Cost Variances and Resource- Capacity Management CHAPTER 15: OPERATIONAL PERFORMANCE MEASUREMENT: INDIRECT-COST VARIANCES AND RESOURCE-CAPACITY MANAGEMENT QUESTIONS 15-1 a. Yes, the factory manager has done a good job in controlling factory overhead costs if all factory overhead costs are fixed. Even though the actual production is only at the 85 percent level of the budgeted production level, the total fixed factory overhead should remain unchanged as long as the operation falls within the relevant range of operations. b. No, the total factory overhead cost incurred during the period should have been less than the budgeted amount. The variable factory overhead cost should have been approximately 85 percent of the budgeted variable factory overhead, or $51,000, and the total factory overhead around $71,000. 15-2 Both the variable factory overhead efficiency variance and the direct labor efficiency variance will be in the same direction. The variable factory overhead efficiency variance will be favorable if the firm has a favorable direct labor efficiency variance and unfavorable if its direct labor efficiency variance is unfavorable. Furthermore, the relative amount of the variable factory overhead efficiency variance to the direct labor efficiency variance will be the same as the ratio of the variable factory overhead rate per direct labor hour to the standard hourly wage rate per direct labor hour. 15-3 The total factory overhead spending variance is a term used in a 3-variance analysis of the total overhead variance to represent the sum of the variable overhead spending variance and the fixed overhead spending variance. The determination of the variable factory overhead efficiency variance is independent of the procedure or factors involved in determining any of the factory overhead spending variances. 15-4 A factory overhead flexible-budget variance is the difference between the amount of factory overhead incurred in a period and the flexible-budget for factory overhead based on output (i.e., based on units produced or, equivalently, based on standard activity units allowed for the output of the period). This variance is also referred to as the controllable (overhead) variance. This variance can be decomposed into three variances: fixed overhead spending variance; variable overhead spending variance; and, variable overhead efficiency variance. 15-1 Chapter 15 - Operational Performance Measurement: Indirect-Cost Variances and Resource- Capacity Management 15-5 Any significant variance, be it favorable or unfavorable, should be investigated. It might be argued that significant favorable variances should not be investigated since such variances serve to increase operating income for the period. Nonetheless, an organization would be more likely to benefit from the good fortune in the future if it knows the factors that led to the favorable variance. Thus, managers should also investigate the cause or causes that led to all significant variances, whether they are...
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This note was uploaded on 03/09/2012 for the course ACCT 310 taught by Professor Achem during the Winter '12 term at DeVry Addison.
- Winter '12