Acct 303 Chapter 8

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CHAPTER 8

FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND

MANAGEMENT CONTROL

8-16 (20 min.) Variabl !a"#$a%ri"' ()r*a+, )aria"% a"ali.

1. Variable Manufacturing Overhead Variance Analysis for Esuire !lothing for "une 200#

A%al C(&

I"%#rr+

A%al I"/#& 0&.

A%al Ra&

213

A%al I"/#& 0&.

B#+'&+ Ra&

243

Fl5ibl B#+'&

B#+'&+ I"/#& 0&.

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

23

All(%a&+

B#+'&+ I"/#& 0&.

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

293

($%&' *11.&0)*&2%1$

($%&' *12)*&$%$'2

($ 1%0+0 *12)*&1%+$0

($ 1%0+0 *12)*&1%+$0

2. Esuire had a favorable s,ending variance of *2%2+ because the actual variable overheadrate -as *11.&0 ,er direct manufacturing laborhour versus *12 budgeted. /t had an unfavorableefficiency variance of *2% because each suit averaged $.2 laborhours ($%&' hours 1%0+0suits) versus $.0 budgeted laborhours.

+1

*2%2+

3,ending variance

*2%

Efficiency variance

4ever a variance

*'2$

le5iblebudget variance

4ever a variance

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8-1: (20 min.) Fi5+-!a"#$a%ri"' ()r*a+, )aria"% a"ali 2%("&i"#a&i(" ($ 8-163.

1 6 2.7udgeted fi5ed overhead

rate ,er unit ofallocation base

8$0$0%1

$00%(2*

81(0%$

$00%(2*

8 *1& ,er hour

i5ed Manufacturing Overhead Variance Analysis for Esuire !lothing for "une 200#

A%al C(&

I"%#rr+

213

Sa! B#+'&+

L#!/ S#!

2a i" S&a&i% B#+'&3

R'ar+l ($

O#&/#& L)l

243

Fl5ibl B#+'&

Sa! B#+'&+

L#!/ S#!

2a i" S&a&i% B#+'&3

R'ar+l ($

O#&/#& L)l

23

All(%a&+

B#+'&+ I"/#& 0&.

All(7+ $(r A%al

O#&/#&

B#+'&+ Ra&

293

*'%#1 *2%$00 *2%$00($ 1%0+0 *1&)

*$%+00

*1%&1 *2%$00

3,ending variance 4ever a variance 9roductionvolume variance

*1%&1 *2%$00 le5iblebudget variance 9roductionvolume variance

:he fi5ed manufacturing overhead s,ending variance and the fi5ed manufacturingfle5ible budget variance are the same;;*1%&1 . Esuire s,ent *1%&1 above the *2%$00

budgeted amount for "une 200#.:he ,roductionvolume variance is *2%$00 . :his arises because Esuire utili /s Esuire gaining mar=et share> ?ill Esuire need to addca,acity>

+2

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8-18 ('0 min.) Variabl !a"#$a%ri"' ()r*a+ )aria"% a"ali.

1. @enominator level 8('%200%000 0.02 hours) 8 $%000 hours

2. A%alR#l&

Fl5ibl

B#+'& A!(#"&

1. Out,ut units (baguettes) 2%+00%000 2%+00%0002. @irect manufacturing laborhours &0%$00 &%000a

'. aborhours ,er out,ut unit (2 1) 0.01+ 0.020$. Variable manuf. overhead (MOB) costs *+0%$00 *&0%000

&. Variable MOB ,er laborhour ($ 2) *1'.&0 *10. Variable MOB ,er out,ut unit ($ 1) *0.2$' *0.200

a2%+00%000 0.0208 &%000 hours

Variable Manufacturing Overhead Variance Analysis for rench 7read !om,any for 200#

A%al C(&I"%#rr+

A%al I"/#& 0&.

A%al Ra&

213

A%al I"/#& 0&.

B#+'&+ Ra&

243

Fl5ibl B#+'&

B#+'&+ I"/#& 0&.All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

23

All(%a&+

B#+'&+ I"/#& 0&.All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

293

(&0%$00 *1'.&0)*+0%$00

(&0%$00 *10)*&0$%000

(&%000 *10)*&0%000

(&%000 *10)*&0%000

'. 3,ending variance of *1C%$00. /t is unfavorable because variable manufacturing overhead-as '&D higher than ,lanned. A ,ossible e5,lanation could be an increase in energy ratesrelative to the rate ,er standard laborhour assumed in the fle5ible budget.

Efficiency variance of *&%000. /t is favorable because the actual number of directmanufacturing laborhours reuired -as lo-er than the number of hours in the fle5ible budget.abor -as more efficient in ,roducing the baguettes than management had antici,ated in thebudget. :his could occur because of im,roved morale in the com,any% -hich could result froman increase in -ages or an im,rovement in the com,ensation scheme.

le5iblebudget variance of *120%$00. /t is unfavorable because the favorable efficiencyvariance -as not large enough to com,ensate for the large unfavorable s,ending variance.

+'

*1C%$00

3,ending variance

*&%000

Efficiency variance 4ever a variance

*120%$00 le5iblebudget variance 4ever a variance

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8-1; ('0 min.) Fi5+ !a"#$a%ri"' ()r*a+ )aria"% a"ali 2%("&i"#a&i(" ($ 8-183.

1. 7udgeted standard direct manufacturing labor used 8 0.02 ,er baguette7udgeted out,ut 8 '%200%000 baguettes7udgeted standard direct manufacturing laborhours

8 '%200%000 0.02 8 $%000 hours

7udgeted fi5ed manufacturing overhead costs 8 $%000 *$.00 ,er hour 8 *2&%000

Actual out,ut 8 2%+00%000 baguettesAllocated fi5ed manufacturing overhead

8 2%+00%000 0.02 *$ 8 *22$%000

i5ed Manufacturing Overhead Variance Analysis for rench 7read !om,any for 200#

A%al C(&

I"%#rr+

213

Sa! B#+'&+

L#!/ S#!

2a i" S&a&i% B#+'&3

R'ar+l ($

O#&/#& L)l

243

Fl5ibl B#+'&

Sa! B#+'&+

L#!/ S#!

2a i" S&a&i% B#+'&3

R'ar+l ($

O#&/#& L)l

23

All(%a&+

B#+'&+ I"/#& 0&.

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

293

*2C2%000 *2&%000 *2&%000(2%+00%000 0.02 *$)

*22$%000

2. :he fi5ed manufacturing overhead is underallocated by *$+%000.

'. :he ,roductionvolume variance of *'2%000 ca,tures the difference bet-een the budgeted'%200%0000 baguettes and the lo-er actual 2%+00%000 baguettes ,roducedthe fi5ed costca,acity not used. :he s,ending variance of *1%000 unfavorable means that the actualaggregate of fi5ed costs (*2C2%000) e5ceeds the budget amount (*2&%000). or e5am,le%monthly leasing rates for baguettema=ing machines may have increased above those in thebudget for 200#.

+$

*1%000

3,ending variance 4ever a variance

*'2%000

9roductionvolume

variance

*1%000


*'2%000 9roductionvolume

variance

*$+%000

nderallocated fi5ed overhead

(:otal fi5ed overhead variance)

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8-4< ('0;$0 min.) Ma"#$a%ri"' ()r*a+, )aria"% a"ali.

1. :he summary information isF

T* S(l#&i(" C(r/(ra&i(" 2=#" 4

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Fl5ibl B#+'& All(%a&+

A%al C(& A%al I"/#& 0&. B#+'&+ I"/#&

0&. All(7+ B#+'&+

B#+'&+ I"/#&

0&. All(7+ B#+'&+

I"%#rr+ B#+'&+ Ra& $(r A%al O#&/#& Ra& $(r A%al O#&/#& Ra&Variabl $11 *'0.00 $'2 *'0.00 $'2 *'0.00

Ma"#$a%ri"

' assy. hrs. ,er assy. hr. assy. hrs. ,er assy. hr. assy. hrs. ,er assy. hr.

O)r*a+ *12%$20 *12%''0 *12%#0 *12%#0

*#0 *'0

3,ending variance Efficiency variance 4ever a variance

*&$0

le5iblebudget variance 4ever a variance

*&$0

Overallocated variable overhead


A%al C(& S&a&i% B#+'& L#!/ S#! S&a&i% B#+'& L#!/ S#!

B#+'&+ I"/#&

All(7+ B#+'&+

I"%#rr+ R'ar+l ($ O#&/#& L)l R'ar+l ($ O#&/#& L)l $(r A%al O#&/#& Ra&Fi5+ $'2 *$+.00

Ma"#$a%ri"

' assy. hrs. ,er assy. hr.

O)r*a+ *20%&0 *1#%200 *1#%200 *20%C'

*1%'0 *1%&'

3,ending Variance 4ever a Variance 9roductionvolume variance

*1%'0 *1%&'

le5iblebudget variance 9roductionvolume variance

*1C

Overallocated fi5ed overhead

+

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:he summary analysis isF

S/"+i"'

Varia"%

E$$i%i"%

Varia"%

Pr(+#%&i("-V(l#!

Varia"%

VariableManufacturingOverhead

*#0 *'0 4ever a variance

i5ed ManufacturingOverhead *1%'0 4ever a variance *1%&'

2. Variabl Ma"#$a%ri"' C(& a"+ Varia"%

a. Variable Manufacturing Overhead !ontrol 12%

$20Accounts 9ayable !ontrol and various other accounts 12%$20

:o record actual variable manufacturing overhead costsincurred.

b. ?or=in9rocess !ontrol 12%#0Variable Manufacturing Overhead Allocated 12%#0

:o record variable manufacturing overhead allocated.

c. Variable Manufacturing Overhead Allocated 12%#0Variable Manufacturing Overhead 3,ending Variance #0

Variable Manufacturing Overhead !ontrol 12%$20Variable Manufacturing Overhead Efficiency Variance '0

:o isolate variances for the accounting ,eriod.

d. Variable Manufacturing Overhead Efficiency Variance '0Variable Manufacturing Overhead 3,ending Variance #0!ost of Goods 3old &$0

:o -rite off variable manufacturing overhead variances to cost of goods sold.

+C

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Fi5+ Ma"#$a%ri"' C(& a"+ Varia"%

a. i5ed Manufacturing Overhead !ontrol 20%&03alaries 9ayable% Acc. @e,reciation% various other accounts 20%&0

:o record actual fi5ed manufacturing overhead costs incurred.

b. ?or=in9rocess !ontrol 20%C'i5ed Manufacturing Overhead Allocated 20%C'

:o record fi5ed manufacturing overhead allocated.

c. i5ed Manufacturing Overhead Allocated 20%C'i5ed Manufacturing Overhead 3,ending Variance 1%'0

i5ed Manufacturing Overhead 9roductionVolume Variance 1%&'i5ed Manufacturing Overhead !ontrol 20%&0

:o isolate variances for the accounting ,eriod.

d. i5ed Manufacturing Overhead 9roductionVolume Variance 1%&'i5ed Manufacturing Overhead 3,ending Variance 1%'0

!ost of Goods 3old 1C:o -rite off fi5ed manufacturing overhead variances to cost of goods sold.

'. 9lanning and control of variablemanufacturing overhead costs has both a longrun and ashortrun focus. /t involves 3olutions ,lanning to underta=e only valueadded overhead activities(a longrun vie-) and then managing the cost drivers of those activities in the most efficient -ay(a shortrun vie-). 9lanning and control offixedmanufacturing overhead costs at 3olutions have,rimarily a longrun focus. /t involves underta=ing only valueadded fi5edoverhead activitiesfor a budgeted level of out,ut. 3olutions ma=es most of the =ey decisions that determine thelevel of fi5edoverhead costs at the start of the accounting ,eriod.

++

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8-41 (101& min.) 9-)aria"% a"ali, $ill i" &* bla">.

Variabl Fi5+

1. 3,ending variance2. Efficiency variance'. 9roductionvolume variance$. le5iblebudget variance&. nderallocated (overallocated) MOB

*$%200 $%&00

4EVEH+%C00 +%C00

*'%000 4EVEH

00 '%000 '%00

:hese relationshi,s could be ,resented in the same -ay as in E5hibit +$.

A%al C(&

I"%#rr+

213

A%al I"/#& 0&.

B#+'&+ Ra&

243

Fl5ibl B#+'&

B#+'&+ I"/#& 0&.

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

23

All(%a&+

B#+'&+ I"/#& 0&.

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

293

Variable

MOB

*'&%C00 *'1%&00 *2C%000 *2C%000

A%al C(&

I"%#rr+

213

Sa! B#+'&+

L#!/ S#!

2a i" S&a&i% B#+'&3

R'ar+l ($

O#&/#& L)l

243

Fl5ibl B#+'&

Sa! B#+'&+

L#!/ S#!

2a i" S&a&i% B#+'&3

R'ar+l ($

O#&/#& L)l

23

All(%a&+

B#+'&+ I"/#& 0&.

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

293

i5edMOB

*1+%000 *1&%000 *1&%000 *1$%$00

+#

*$%200

3,ending variance

*$%&00


*'%000


*00

9roductionvolume variance

*+%C00


*+%C00

nderallocated variable overhead

(:otal variable overhead variance)

*'%000


*00 9roductionvolume variance

*'%00



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An overvie- of the $ overhead variances isF

9-Varia"%

A"ali

S/"+i"'

Varia"%

E$$i%i"%

Varia"%

Pr(+#%&i("-V(l#!

Varia"%

VariableOverhead *$%200 *$%&00 4ever a variance

i5edOverhead *'%000 4ever a variance *00

8-44 (20;'0 min.) S&rai'*&$(r7ar+ 9-)aria"% ()r*a+ a"ali.

1. :he budget for fi5ed manufacturing overhead is $%000 units machinehours *1&machinehoursIunit 8 *'0%000.

An overvie- of the $variance analysis isF

9-Varia"%A"ali

S/"+i"'Varia"%

E$$i%i"%Varia"%

Pr(+#%&i("-V(l#! Varia"%


*1C%+00 *1%000 4ever a Variance

i5edManufacturingOverhead

*1'%000 4ever a Variance *'%000

3olution E5hibit +22 has details of these variances.

A detailed com,arison of actual and fle5ible budgeted amounts isF

A%al Fl5ibl B#+'&

Out,ut units (auto ,arts) $%$00 $%$00Allocation base (machinehours) 2+%$00 2%$00a

Allocation base ,er out,ut unit .$&b .00

Variable MOB *2$&%000 *211%200c

Variable MOB ,er hour *+.'d *+.00i5ed MOB *'C'%000 *'0%000e

i5ed MOB ,er hour *1'.1'f ;a

$%$00 units .00 machinehoursIunit 8 2%$00 machinehoursb2+%$00 $%$00 8 .$& machinehours ,er unitc $%$00 units .00 machinehours ,er unit *+.00 ,er machinehour 8 *211%200d *2$&%000 2+%$00 8 *+.'e $%000 units .00 machinehours ,er unit *1& ,er machinehour 8 *'0%000f *'C'%000 2+%$00 8 *1'.1'

2. Variable Manufacturing Overhead !ontrol 2$&%000Accounts 9ayable !ontrol and other accounts 2$&%000

+10

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?or=in9rocess !ontrol 211%200Variable Manufacturing Overhead Allocated 211%200

Variable Manufacturing Overhead Allocated 211%200Variable Manufacturing Overhead 3,ending Variance 1C%+00Variable Manufacturing Overhead Efficiency Variance 1%000

Variable Manufacturing Overhead !ontrol 2$&%000

i5ed Manufacturing Overhead !ontrol 'C'%000?ages 9ayable !ontrol% Accumulated @e,reciation

!ontrol% etc. 'C'%000

?or=in9rocess !ontrol '#%000i5ed Manufacturing Overhead Allocated '#%000

i5ed Manufacturing Overhead Allocated '#%000i5ed Manufacturing Overhead 3,ending Variance 1'%000

i5ed Manufacturing Overhead 9roductionVolume Variance '%000i5ed Manufacturing Overhead !ontrol 'C'%000

'. /ndividual fi5ed manufacturing overhead items are not usually affected very much bydaytoday control. /nstead% they are controlled ,eriodically through ,lanning decisions andbudgeting ,rocedures that may sometimes have hori

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SOLUTION EXHIBIT 8-44

A%al C(&

I"%#rr+

213

A%al I"/#&

B#+'&+ Ra&

243

Fl5ibl B#+'&

B#+'&+ I"/#&

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

23

All(%a&+

B#+'&+ I"/#&

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

293VariableMOB *2$&%000

(2+%$00 *+)*22C%200

($%$00 *+)*211%200

($%$00 *+)*211%200

A%al C(&

I"%#rr+

213

Sa! B#+'&+

L#!/ S#!

2a i" S&a&i% B#+'&3

R'ar+l ($

O#&/#& L)l

243

Fl5ibl B#+'&

Sa! B#+'&+

L#!/ S#!

2a i" S&a&i% B#+'&3

R'ar+l ($

O#&/#& L)l

23

All(%a&+

B#+'&+ I"/#&

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

293

i5ed

MOB *'C'%000

($%000 *1&)

*'0%000

($%000 *1&)

*'0%000

($%$00 *1&)

*'#%000

+12

*1C%+00

3,ending variance

*1%000


*1'%000


*'%000 9roductionvolume

variance

*''%+00


*''%+00

nderallocated variable overhead(:otal variable overhead variance)

*1'%000

le5iblebudget variance*'%000


*2'%000

Overallocated fi5ed overhead


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8-4 ('0$0 min.) S&rai'*&$(r7ar+ %()ra' ($ !a"#$a%ri"' ()r*a+, &a"+ar+-%(&i"' &!.

1. 3olution E5hibit +2' sho-s the com,utations. 3ummary details areF

A%al Fl5ibl B#+'&

Out,ut units $1%000 $1%000Allocation base (machinehours) 1'%'00 12%'00a

Allocation base ,er out,ut unit 0.'2b 0.'0Variable MOB *1&&%100 *1$C%00c

Variable MOB ,er hour *11.d *12.00i5ed MOB *$01%000 *'#0%000i5ed MOB ,er hour *'0.1&e ;

a $1%000 0.'0 8 12%'00 d *1&&%100 1'%'00 8 *11.b 1'%'00 $1%000 8 0.'2 e *$01%000 1'%'00 8 *'0.1&c $1%000 0.'0 *12 8 *1$C%00

An overvie- of the $variance analysis isF

9-Varia"%

A"ali

S/"+i"'

Varia"%

E$$i%i"%

Varia"%Pr(+#%&i("

V(l#! Varia"%


*$%&00 *12%000 4ever a variance

i5edManufacturingOverhead

*11%000 4ever a variance *21%000

+1'

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2. Variable Manufacturing Overhead !ontrol 1&&%100Accounts 9ayable !ontrol and other accounts 1&&%100

?or=in9rocess !ontrol 1$C%00Variable Manufacturing Overhead Allocated 1$C%00

Variable Manufacturing Overhead Allocated 1$C%00Variable Manufacturing Overhead Efficiency Variance 12%000

Variable Manufacturing Overhead 3,ending Variance $%&00Variable Manufacturing Overhead !ontrol 1&&%100

i5ed Manufacturing Overhead !ontrol $01%000?ages 9ayable !ontrol% Accumulated

@e,reciation !ontrol% etc. $01%000

?or=in9rocess !ontrol '#%000i5ed Manufacturing Overhead Allocated '#%000

i5ed Manufacturing Overhead Allocated '#%000i5ed Manufacturing Overhead 3,ending Variance 11%000i5ed Manufacturing Overhead 9roductionVolume

Variance 21%000i5ed Manufacturing Overhead !ontrol $01%000

'. :he control of variable manufacturing overhead reuires the identification of the costdrivers for such items as energy% su,,lies% and re,airs. !ontrol often entails monitoring

nonfinancial measures that affect each cost item% one by one. E5am,les are =ilo-atthours used%uantities of lubricants used% and re,air ,arts and hours used. :he most convincing -ay todiscover -hy overhead ,erformance did not agree -ith a budget is to investigate ,ossible causes%line item by line item.

$. :he variable overhead s,ending variance is favorable. :his means the actual rate a,,liedto the manufacturing costs is lo-er than the budgeted rate. 3ince variable overhead consists ofseveral different costs% this could be for a variety of reasons% such as the utility rates being lo-erthan estimated or the indirect materials costs ,er unit of denominator activity being less thanestimated.

:he variable overhead efficiency variance is unfavorable% -hich im,lies that the

estimated denominator activity -as too lo-. 3ince the denominator activity is machine hours%this could be the result of inefficient use of machines% ,oorly scheduled ,roduction runs% ormachines that need maintenance and thus are not -or=ing at the e5,ected level of efficiency.

+1$

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A%al C(&

I"%#rr+

213

A%al I"/#&

B#+'&+ Ra&

243

Fl5ibl B#+'&

B#+'&+ I"/#&

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

23

All(%a&+

B#+'&+ I"/#&

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

293VariableManufacturingOverhead

*1&&%100(1'%'00 *12)

*1%00(12%'00 *12)

*1$C%00(12%'00 *12)

*1$C%00

A%al C(&

I"%#rr+

213

Sa! B#+'&+

L#!/ S#!

2a i" S&a&i% B#+'&3

R'ar+l ($

O#&/#& L)l

243

Fl5ibl B#+'&

Sa! B#+'&+

L#!/ S#!

2a i" S&a&i% B#+'&3

R'ar+l ($

O#&/#& L)l

23

All(%a&+

B#+'&+ I"/#&

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

293

i5ed

ManufacturingOverhead

*$01%000 *'#0%000 *'#0%000

(12%'00 *'0)

*'#%000

8hours.machine1'%000

*'#0%0008 *'0 ,er machinehour.

KAlternative com,utationF 1'%000 denominator hours ; 12%'00 budgeted hours allo-ed 8 C00 hoursLC00 hours *'0 ,er machinehour 8 *21%000

+1&

*$%&00

3,ending variance

*12%000


*11%000


*21%000 K


*C%&00


*C%&00

nderallocated variable overhead

(:otal variable overhead variance)

*11%000


*21%000 K9roductionvolume variance

*'2%000



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8-49 (20;2& min.) O)r*a+ )aria"%, r)i% %&(r.

1.Mal (" ?*l

2Ma 4

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'. :he s,ending variances for variable and fi5ed overhead are both unfavorable. :his meansthat MO? had increases over budget in either or both the cost of individual items (such astele,hone calls and gasoline) in the overhead cost ,ools% or the usage of these individual items,er unit of the allocation base (delivery time). :he favorable efficiency variance for variableoverhead costs results from more efficient use of the cost allocation base;;each delivery ta=es0.& hours versus a budgeted 0.C0 hours.

MO? can best manage its fi5ed overhead costs by longterm ,lanning of ca,acity ratherthan daytoday decisions. :his involves ,lanning to underta=e only valueadded fi5edoverheadactivities and then determining the a,,ro,riate level for those activities. Most fi5ed overheadcosts are committed -ell before they are incurred. /n contrast% for variable overhead% a mi5 oflongrun ,lanning and daily monitoring of the use of individual items is reuired to manage costsefficiently. MO? should ,lan to underta=e only valueadded variableoverhead activities (alongrun focus) and then manage the cost drivers of those activities in the most efficient -ay (ashortrun focus).

:here is no ,roductionvolume variance for variable overhead costs. :he unfavorable,roductionvolume variance for fi5ed overhead costs arises because MO? has unused fi5edoverhead resources that it may see= to reduce in the long run.

+1C

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8-4@ ($0&0 min.) T(&al ()r*a+, -)aria"% a"ali.

1. :his ,roblem has t-o maor ,ur,osesF (a) to give e5,erience -ith data allocated on a totaloverhead basis instead of on se,arate variable and fi5ed bases and (b) to reinforce distinctionsbet-een actual hours of in,ut% budgeted (standard) hours allo-ed for actual out,ut% anddenominator level.

An analysis of direct manufacturing labor -ill ,rovide the data for actual hours of in,utand standard hours allo-ed. One a,,roach is to ,lug the =no-n figures (designated by asteris=s)into the analytical frame-or= and solve for the un=no-ns. :he direct manufacturing laborefficiency variance can be com,uted by subtracting *'%+& from *&%CC. :he com,lete ,icture isas follo-sF

A%al C(&

I"%#rr+

A%al I"/#&

B#+'&+ Ra&

Fl5ibl B#+'&

B#+'&+ I"/#&

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

($%+20 hrs. *1.+0)*+0%#CK

($%+20hrs. *1.00K)*CC%120

($%C00 hrs. *1.00K)*C&%200

K Given

Direct Labor calculationsActual in,ut 7udgeted rate 8 Actual costs ; 9rice variance

8 *+0%#C ; *'%+& 8 *CC%120Actual in,ut 8 *CC%120 7udgeted rate 8 *CC%120 *1 8 $%+20 hours7udgeted in,ut 7udgeted rate 8 *CC%120 ; Efficiency variance

8 *CC%120 ; *1%#20 8 *C&%2007udgeted in,ut 8 *C&%200 7udgeted rate 8 *C&%200 1 8 $%C00 hours

Production Overhead

Variable overhead rate 8 *2&%00K '%200Khrs. 8 *+.00 ,er standard laborhour8 *C#%0$0K; $%000K (*+.00) 8 *$C%0$0

/f total overhead is allocated at 120D of direct laborcost% the single overhead rate mustbe 120D of *1.00% or *1#.20 ,er hour. :herefore% the fi5ed overhead com,onent of the ratemust be *1#.20 ; *+.00% or *11.20 ,er direct laborhour.

+1+

*'%+& K

9rice variance

*1%#20

Efficiency variance

*&%CC K


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8-46 ('0 min.) O)r*a+ )aria"%, !ii"' i"$(r!a&i(".

1. /n the columnar ,resentation of variable overhead variance analysis% all numbers sho-n inbold are calculated from the given information% in the order (a) (e).

VARIABLE MANUFACTURING OVERHEAD

Fl5ibl B#+'&B#+'&+ I"/#& 0&.

A%al C(&

I"%#rr+

A%al I"/#& 0&.B#+'&+ Ra&

All(7+ $(r B#+'&+

A%al O#&/#& Ra&2b3 2a3 2%3

1&%000 *.00 1$%+&0 *.00mach. hrs. ,er mach. hr. mach. hrs. ,er mach. hr.

8;,64@ ;

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2. /n the columnar ,resentation of fi5ed overhead variance analysis% all numbers sho-n inbold are calculated from the given information% in the order (a) ; (e).

FIXED MANUFACTURING OVERHEAD


A%al C(&

S&a&i% B#+'& L#!/ S#!

R'ar+l ($ O#&/#&

B#+'&+ I"/#& 0&.

All(7+ $(r B#+'&+

I"%#rr+ L)l A%al O#&/#& Ra&2a3 2b31$%+&0 1.6

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8-4: (1& min.) I+"&i$i"' $a)(rabl a"+ #"$a)(rabl )aria"%.

Scenario

VOH

Spending

Variance

VOH

Efficiency

Variance

FOH

Spending

Variance

FOH

Production-

Volume Variance

Production output is

5% more than

budgeted, and actual

fixed manufacturing

overhead costs are 6%

more than budgeted

Cannot be

determined: no

information on

actual versus

budgeted VOH

rates

Cannot be

determined: no

information on

actual versus

flexible-budget

machine-hours

Unfavorable:

actual fixed

costs are more

than budgeted

fixed costs

Favorable: output

is more than

budgeted causing

FOH costs to be

overallocated


10% more than

budgeted; actual

machine hours are 5%

less than budgeted

Cannot be

determined: no

information on

actual versus

budgeted VOH

rates

Favorable: actual

machine-hours less

than flexible-

budget machine-

hours

Cannot be

determined: no

information on

actual versus

budgeted FOH

costs

Favorable: output

is more than

budgeted causing

FOH costs to be

overallocated


8% less than budgeted

Cannot be

determined: no

information on

actual versus

budgeted VOH

rates

Cannot be

determined: no

information on

actual machine-

hours versus

flexible-budget

machine-hours

Cannot be

determined: no

information on

actual versus

budgeted FOH

costs

Unfavorable:

output less than

budgeted will

cause FOH costs to

be underallocated

Actual machine hours

are 15% greater than

flexible-budget

machine hours

Cannot be

determined: no

information on

actual versusbudgeted VOH

rates

Unfavorable: more

machine-hours

used relative to

flexible budget

Cannot be

determined: no

information on

actual versusbudgeted FOH

costs

Cannot be

determined: no

information on

flexible-budgetmachine-hours

relative to static-

budget machine-

hours

Relative to the flexible

budget, actual machine

hours are 10% greater

and actual variable

manufacturing

overhead costs are 15%

greater

Unfavorable:

actual VOH rate

greater than

budgeted VOH

rate

Unfavorable: actual

machine-hours

greater than

flexible-budget

machine-hours

Cannot be

determined: no

information on

actual versus

budgeted FOH

costs

Cannot be

determined: no

information on

actual output

relative to

budgeted output

+22

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8-48 ('& min.) Fl5ibl-b#+'& )aria"%, r)i7 ($ C*a/&r : a"+ 8.

1. 3olution E5hibit +2+ contains a columnar ,resentation of the variances for @oor=nob @esign!om,any (@@!) for A,ril 200#.


A%al C(&

I"%#rr+

A%al I"/#& 0&.

A%al I"/#& 0&. B#+'&+ Pri%

Fl5ibl B#+'&

B#+'&+ I"/#& 0&.

All(7+ $(r

A%al O#&/#&

A%al Ra& P#r%*a Ua' B#+'&+ Pri%@irectMaterials

(&0%000 *22.0)*1%100%000

(&0%000 *20.0)*1%000%000

($&%000 *20.0)*#00%000

($C%&00 *20.0)*#&0%000

*100%000 *&0%000

a. 9rice variance b. Efficiency variance

@irectManufacturingabor *&0%000

(20%000 *'0.0)*00%000

(2'%C&0 *'0.0)*C12%&00

*&0%000 *112%&00

c. 9rice variance d. Efficiency variance

A%al C(&I"%#rr+ A%al I"/#& 0&. B#+'&+ Ra&

Fl5ibl B#+'&

B#+'&+ I"/#& 0&.

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

All(%a&+

2B#+'&+ I"/#& 0&.

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&3

VariableManufacturingOverhead *$00%000

($&%000 *10.0)*$&0%000

($C%&00 *10.0)*$C&%000

($C%&00 *10.0) *$C&%000

*&0%000 *2&%000

e. 3,ending variance f. Efficiency variance 4ever a variance

i5edManufacturing

Overhead

*'&0%000 *2&0%000K *2&0%000($C%&00 *&.0)

*2'C%&00

*100%000 *12%&00

h. 3,ending variance 4ever a variance g. 9roduction volume variance

K@enominator level in hoursF 100%000 5 .& 8 &0%000 hours7udgeted i5ed OverheadF &0%000 5 *&Ihr 8 *2&0%000

+2'

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2. :he direct materials ,rice variance indicates that @@! ,aid more for brass than they had,lanned. /f this is because they ,urchased a higher uality of brass% it may e5,lain -hy theyused less brass than e5,ected (leading to a favorable material efficiency variance). /n turn% sincevariable manufacturing overhead is assigned based on ,ounds of materials used% this directly ledto the favorable variable overhead efficiency variance. :he ,urchase of a better uality of brassmay also e5,lain -hy it too= less labor time to ,roduce the door=nobs than e5,ected (thefavorable direct labor efficiency variance). inally% the unfavorable direct labor ,rice variancecould im,ly that the -or=ers -ho -ere hired -ere more e5,erienced than e5,ected% -hich couldalso be related to the ,ositive direct material and direct labor efficiency variances.

8-4; ('0 min.) C(!/r*"i) )aria"% a"ali.

1. 7udgeted number of machinehours ,lanned can be calculated by multi,lying the numberof units ,lanned (budgeted) by the number of machinehours allocated ,er unitF

+++ units 2 machinehours ,er unit 8 1%CC machinehours.

2. 7udgeted fi5ed MOB costs ,er machinehour can be com,uted by dividing the fle5iblebudget amount for fi5ed MOB (-hich is the same as the static budget) by the number ofmachinehours ,lanned (calculated in (a.))F

*'$+%0# 1%CC machinehours 8 *1#.00 ,er machinehour

'. 7udgeted variable MOB costs ,er machinehour are calculated as budgeted variableMOB costs divided by the budgeted number of machinehours ,lannedF

*C1%0$0 1%CC machinehours 8 *$0.00 ,er machinehour.

$. 7udgeted number of machinehours allo-ed for actual out,ut achieved can be calculatedby dividing the fle5iblebudget amount for variable MOB by budgeted variable MOBcosts ,er machinehourF

*C%+00 *$0.00 ,er machinehour8 1%#20 machinehours allo-ed

&. :he actual number of out,ut units is the budgeted number of machinehours allo-ed foractual out,ut achieved divided by the ,lanned allocation rate of machine hours ,er unitF

1%#20 machinehours 2 machinehours ,er unit 8 #0 units.

. :he actual number of machinehours used ,er out,ut unit is the actual number ofmachine hours used (given) divided by the actual number of units manufacturedF

1%+2$ machinehours #0 units 8 1.# machinehours used ,er out,ut unit.

+2$

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8-< (0 min.) =(#r"al "&ri 2%("&i"#a&i(" ($ 8-4;3.

1. ey information underlying the com,utation of variances isFA%al

R#l&

Fl5ibl-B#+'&

A!(#"&

S&a&i%-B#+'&

A!(#"&

1. Out,ut units (food ,rocessors) #0 #0 +++2. Machinehours 1%+2$ 1%#20 1%CC'. Machinehours ,er out,ut unit 1.#0 2.00 2.00

$. Variable MOB costs *C%0+ *C%+00 *C1%0$0&. Variable MOB costs ,er machine hour (Ho- $ Ho- 2) *$2.00 *$0.00 *$0.00. Variable MOB costs ,er unit (Ho- $ Ho- 1) *C#.+0 *+0.00 *+0.00

C. i5ed MOB costs *'&0%20+ *'$+%0# *'$+%0#+. i5ed MOB costs ,er machine hour (Ho- C Ho- 2) *1#2.00 *1+1.'0 *1#.00#. i5ed MOB costs ,er unit (C 1) *'$.+0 *'2.0 *'#2.00

3olution E5hibit +'0 sho-s the com,utation of the variances.

=(#r"al "&ri $(r )ariabl MOH, ar "++ D%!br 1, 4

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2. A+#&!"& ($ COGS

Variable MOB Efficiency Variance '%+$0 i5ed MOB 9roductionVolume Variance 2+%22$ Variable MOB 3,ending Variance '%$+ i5ed MOB 3,ending Variance 2%112

!ost of Goods 3old 2%'0$

SOLUTION EXHIBIT 8-i"' ba%>7ar+ $r(!'i)" )aria"%.

1. 3olution E5hibit +'# outlines the !ha,ter C and + frame-or= underlying this solution.

a. 9ounds of direct materials ,urchased 8 *1C%000 *1.10 8 10%000 ,ounds

b. 9ounds of e5cess direct materials used 8 *#%000 *11.&0 8 %000 ,ounds

c. Variable manufacturing overhead s,ending variance 8 *10%'&0 ; *1+%000 8 *C%&0

d. 3tandard direct manufacturing labor rate 8 *+00%000 $0%000 hours 8 *20 ,er hourActual direct manufacturing labor rate 8 *20 N *0.&0 8 *20.&0Actual direct manufacturing laborhours 8 *&22%C&0 *20.&0

8 2&%&00 hours

e. 3tandard variable manufacturing overhead rate 8 *$+0%000 $0%000

8 *12 ,er direct manuf. laborhourVariable manuf. overhead efficiency variance of *1+%000 *12 8 1%&00 e5cess hoursActual hours ; E5cess hours 8 3tandard hours allo-ed for units ,roduced

2&%&00 ; 1%&00 8 2$%000 hours

f. 7udgeted fi5ed manufacturing overhead rate 8 *$0%000 $0%000 hours8 *1 ,er direct manuf. laborhour

i5ed manufacturing overhead allocated 8 *1 2$%000 hours 8 *'+$%000 9roductionvolume variance 8 *$0%000 ; *'+$%000 8 *2&%000

2. :he control of variable manufacturing overhead reuires the identification of the cost driversfor such items as energy% su,,lies% and re,airs. !ontrol often entails monitoring nonfinancialmeasures that affect each cost item% one by one. E5am,les are =ilo-atts used% uantities oflubricants used% and re,air ,arts and hours used. :he most convincing -ay to discover -hyoverhead ,erformance did not agree -ith a budget is to investigate ,ossible causes% line item byline item.

/ndividual fi5ed overhead items are not usually affected very much by daytoday control./nstead% they are controlled ,eriodically through ,lanning decisions and budgeting ,roceduresthat may sometimes have ,lanning hori

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SOLUTION EXHIBIT 8-;

A%al C(&

I"%#rr+

2A%al I"/#& 0&.

A%al Ra&3

A%al I"/#& 0&.

B#+'&+ Ra&

P#r%*a Ua'

Fl5ibl B#+'&

B#+'&+ I"/#& 0&.

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

@irectMaterials

10%000 *10.$0*1%$%000

10%000 *11.&0*1%+$0%000

#%000 *11.&0*1%10$%000

' '0%000 *11.&0*1%0'&%000

@irectManuf.abor

0.+& '0%000 *20.&0*&22%C&0

0.+& '0%000 *20*&10%000

0.+0 '0%000 *20*$+0%000

A%al C(&

I"%#rr+

A%al I"/#& 0&.

A%al Ra&

A%al I"/#& 0&.

B#+'&+ Ra&

Fl5ibl B#+'&

B#+'&+ I"/#& 0&.

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

All(%a&+

B#+'&+ I"/#& 0&.

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

VariableMOB

0.+& '0%000 *11.C0*2#+%'&0

0.+& '0%000 *12*'0%000

0.+0 '0%000 *12*2++%000

0.+0 '0%000 *12*2++%000

A%al C(&

I"%#rr+

213

Sa! B#+'&+

L#!/ S#!

2a i" S&a&i% B#+'&3

R'ar+l ($

O#&/#& L)l

243

Fl5ibl B#+'&

Sa! B#+'&+

L#!/ S#!

2a i" S&a&i% B#+'&3

R'ar+l ($

O#&/#& L)l

23

All(%a&+

B#+'&+ I"/#& 0&

All(7+ $(r

A%al O#&/#&

B#+'&+ Ra&

293

i5edMOB *C%$0 *$0%000

0.+0 &0%000 *1*$0%000

0.+0 5 '0%000 *1*'+$%000

+$'

*1C%000

9rice variance

*#%000

Efficiency variance

*12%C&0

9rice variance

*'0%000

Efficiency variance

*$2%C&0


*C%&0

3,ending variance

*1+%000

Efficiency 4ever a variance

*10%'&0


*2&%000

*$2%&$0


*2&%000

9roduction volume variance

4ever a variance

*$2%&$0

3,ending variance

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8-9< ('0&0 min.) R)i7 ($ C*a/&r : a"+ 8, -)aria"% a"ali.

1. :otal standard ,roduction costs are based on C%+00 units of out,ut.

@irect materials% C%+00 *1&.00

C%+00 ' lbs. *&.00 (or 2'%$00 lbs. *&.00) * 11C%000@irect manufacturing labor% C%+00 *C&.00C%+00 & hrs. *1&.00 (or '#%000 hrs. *1&.00) &+&%000

Manufacturing overheadF

Variable% C%+00 *'0.00 (or '#%000 hrs. *.00) 2'$%000i5ed% C%+00 *$0.00 (or '#%000 hrs. *+.00) '12%000

:otal *1%2$+%000

:he follo-ing is for later useFi5ed manufacturing overhead% a lum,sum budget *'20%000K

Ki5ed manufacturing overhead rate 8

*+.00 87udget

$0%000 hours

7udget 8 $0%000 hours *+.00 8 *'20,000

2. 3olution E5hibit +$0 ,resents a columnar ,resentation of the variances. An overvie- ofthe 'variance analysis using the bloc= format of the te5t isF

-Varia"%

A"ali

S/"+i"'

Varia"%

E$$i%i"%

Varia"%

Pr(+#%&i("

V(l#! Varia"%

:otal ManufacturingOverhead

*'#%$00 *%00 *+%000

+$$

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Acct 303 Chapter 8

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