Same budgeted budgeted input qty allowed for lump sum

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Same Budgeted | |Budgeted Input Qty. Allowed for | | | |Lump Sum | |Actual Output | | | |(as in Static Budget) Regardless of | |[pic] Budgeted Rate | | | |Output Level | | | | | | | | |8,800 units [pic] 0.70 hrs./unit [pic] $5/hr. | | | | | | |6,160 hrs. [pic] $5/hr. | |$38,600 | | |$35,000 | |$30,800 | $3,600 U$4,200 U Spending varianceProduction-volume variance 3.The spending variances for variable and fixed overhead are both unfavorable. This means that MOW had increases over budget in either or both the cost of individual items (such as telephone calls and gasoline) in the overhead cost pools, or the usage of these individual items per unit of the allocation base (delivery time). The favorable efficiency variance for variable overhead costs results from more efficient use of the cost allocation 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. 8-25 (40(50 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 Costs |Actual Input |Actual Output | |Incurred |× Budgeted Rate |× Budgeted Rate | |(4,820 hrs. × $16.80) |(4,820hrs. × $16.00*) |(4,700 hrs. × $16.00*) | |$80,976* |$77,120 | $75,200 | * 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 = $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. Let D = denominator level in input units [pic]= $11.20=$47,040 ÷ D

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