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CHAPTER 8 FLEXIBLE BUDGETS, STANDARD COSTS, AND VARIANCE ANALYSIS


Key Terms and Concepts to Know
Static or Planning Budgets Used for planning purposes Prepared at the beginning of the period Based on one projected level of activity Flexible Budgets Used for control purposes Prepared at the end of the period Flexed to accommodate actual level of production Use costs (variable and fixed) and revenue formulas from static budgets Revenue Variance Difference between how much the revenue should have been at the actual level of activity and the actual revenue for the period. Favorable revenue variance occurs when the revenue is greater than expected at the actual level of activity for the period. Unfavorable revenue variance occurs when the revenue is less than expected at the actual level of activity for the period. Spending Variance Difference between how much anexpense should have been at the actual level of activity and the actual amount of expense incurred. Favorable spending variance occurs when the cost is less than expected at the actual level of activity for the period. Unfavorable spending variance occurs when the cost is greater than expectedat the actual level of activity for the period.

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Standards: Standards are benchmarks or norms for measuring performance. Standards relate to the quantity and costs of inputs used in manufacturing goods or providing services. Price Standards specify how much should be paid for each unit of the input. Quantity Standards specify how much of an input such as raw material should be used to make a product or provide service. Standard Costing: Standard costing allows companies to compare the actual results to expected or standard results and to analyze the differences or variances between them. If there is a significant variance between the standard and actual results, managers may investigate the discrepancy to find the underlying cause of the variance. Standard costs are used to value raw materials inventory, work-in-process inventory, finished goods inventory and cost of goods sold. All Variances: Variances are computed for each manufacturing cost: direct material, direct labor, variable overhead and fixed overhead. The total variance for each manufacturing cost is the difference between the actual costs incurred and the flexible budget costs (the standard costs that should have been incurred for the actual level of production). o Actual cost incurred is the actual price x the actual quantity for the good unit produced. o The flexible budget amount is the standard price x standard quantity allowed. o Standard quantity allowed is the good units produced x standard quantity per unit. The total variance is divided into price and quantity variances for each manufacturing cost. All variances are favorable or unfavorable. o Favorable if actual price or quantity is less than the standard price or quantity. o Unfavorable if actual price or quantity is greater than the standard price or quantity.

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The general variance model is: StandardQuantity X Standard Price Actual Quantity X Standard Price Actual Quantity X Actual Price Price Variances AQ (AP SP) DM Price DL Rate VOH Spending FOH Budget

Quantity Variances SP (AQ - SQ) DM Quantity DL Efficiency VOH Efficiency FOH Volume

Key Topics to Know


Actual Performance vs. Planning Budget
The planning or static budget is a best guess as to what the actual performance will be during the budget period. Needless to say, rarely does actual performance match the planning budget. The differences between the planning budget and actual performance are due to two basic causes: differences in activity level and differences in spending. To bridge the gap between planning budget and actual performance and to isolate each difference, a flexible budget is constructed based on the actual level of activity and the revenue and cost formulas from the planning budget. The revenue and cost formulas are developed as follows; o If the static budget expected to sell 100 units at a price of $30 per unit, then $30 would be the per-unit revenue formula for any number of units sold. o If the static budget expected total variable costs to be 100 units sold at a cost of $18 per unit, then $18 would be the per-unit variable cost formula for any number of units sold. o If the static budget expected total fixed costs to be $700, then $700 will be the budgeted fixed costs at any level of activity within the relevant range of activity. The differences between the static and flexible budgets are due to the difference between planned (static) activity and actual (flexible) activity. These differences are labeled activity variances. The differences between the flexible budget and the actual performance are due to differences in selling price per unit for revenue and spending per unit for expenses. These differences are labeled revenue and spending variances. Note that for overhead costs and selling and administrative expenses, spending variances result from both the cost per item and the number of items used. Page 3 of 26

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Example #1: The May 2009 income statement for Trajan Inc. is shown below: Units sold Sales Variable expenses Contribution margin Fixed expenses Operating income Required: a) Determine what the operating income should have been for the actual units sold. b) Reconcile the difference between static budget and actual operating income. Solution #1: Revenue and Cost Formula Units sold Sales Variable expenses Contribution margin Fixed expenses Operating income $30 $18 $700 in total Actual 110 $3,200 $1,920 $1,280 $680 $600 Flexible Budget 110 $3,300 1,980 1,320 700 $620 Static Budget 100 $3,000 $1,800 $1,200 $700 $500 Actual 110 $3,200 $1,920 $1,280 $680 $600 Static Budget 100 $3,000 $1,800 $1,200 $700 $500

Step 1: Revenue and cost formula = static budget / units sold for revenue and variable expenses and total static budget fixed costs Step 2: Create flexible budget based on actual units sold and the revenue and cost formula. Trajan should have had an operating income of $620. The static budget and actual operating income may be reconciled as follows: Static budget income + Increase due to 10 additional units sold = Flexible budget income - Decrease due to reductions in actual selling price per unit = Actual income
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$500 $120 $620 $20 $600

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Example #2: Jansen Corporations data concerning the companys monthly revenues and costs appear below. Variable Cost Fixed Cost Formula Formula Revenue $15.00/unit Costs of material $7.25/unit Wages and salaries $20,000 Utilities $0.45/unit $1,200 Rent $10,000 Miscellaneous $0.90/unit $2,000 Required: a) Prepare the companys planning budget assuming that 10,000 units were manufactured. b) Assume that 9,900 units were actually manufactured. Prepare the flexible budget for this level of activity. c) Prepare a flexible budget performance report for the company using the actual income statement information shown below. Revenue Costs of materials Salaries Utilities Rent Miscellaneous Solution #2: a) Planning Budget and b) Flexible Budget Revenue and Cost Formula $15.00/unit $7.25/unit $20,000 $.45/unit+$1,200 $10,000 $.90/unit+$2,000 Planning Budget Income Statement 10,000 $150,000 72,500 20,000 5,700 10,000 11,000 $119,200 $30,800 $149,200 73,200 19,500 5,800 10,000 12,000 Flexible Budget Income Statement 9,900 $148,500 71,775 20,000 5,655 10,000 10,910 $118,340 $30,160

Budgeted number of units sold Revenue Expenses: Cost of materials Salaries Utilities Rent Miscellaneous Total expenses Net Operating Income

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b) Flexible budget Performance Report (1) Planning Budget Number of Units Revenues Expenses: Cost of materials Salaries Utilities Rent Miscellaneous Total Expense Net Operating Income (2) Flexible Budget Revenue and Spending Variances (3) - (2) (3) Actual Results

10,000 9,900 $15.00/unit $150,000 $148,500 $7.25/unit $20,000 $.45/unit+ $1,200 $10,000 $.90/unit+ $2,000 72,500 20,000 5,700 10,000 11,000 119,200 $30,800 71,775 20,000 5,655 10,000 10,910 118,340 $30,160

9,900 $700 F $149,200 1,425 U 500 F 145 U 0 1,090 U 2,160 U 1,460 U 73,200 19,500 5,800 10,000 12,000 120,500 $28,700

Direct Materials Variances


Materials Quantity Variance o The difference between the actual quantity of materials used in production and the standard quantity allowed for the actual output, multiplied by the standard price per unit of materials. o May result from many factors such as shortchanging the actual amount of material used, fewer rejects or spoilage than expected, faulty machines, inferior materials quality, untrained workers, and poor supervision. o Identified at time of usage; formula is SP (AQ - SQ) Materials Price Variance o The difference between the actual unit price paid and the standard price per unit of direct materials, multiplied by the quantity purchased. o May result from many factors such as receiving more cash or quantity discounts than expected, price reductions or increases from the supplier or purchasing a different quality of materials. o Identified at time of purchase; formula is AQ (AP - SP)

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Example #3: Harmon Household, Inc. manufactures a number of consumer items for general household use. During the recent month, the company manufactured 4,000 chopping blocks using 11,000 feet of hardwood. The hardwood cost the company $18,700 when purchased. According to the standard cost card, each chopping block requires 2.5 board feet of hardwood, at a cost of $1.80 per board feet. Required: Compute the materialsquantity variance and materialsprice variance. Solution #3: SQ4,000 x 2.5 X SP $1.80 = $18,000 AQ 11,000 X SP $1.80 = $19,800 AQ11,000 X AP $1.70 = $18,700 $1,100 F Price Variance AQ (AP SP) 11,000($1.70-$1,80)

$1,800 U Quantity Variance SP (AQ - SQ) $1.80(11,000 10,000)

Direct Labor Variances


Labor Efficiency Variance o The difference between the actual hours worked and the standard hours allowed for the actual output, multiplied by the standard hourly labor rate. o May result from many factors such as poorly trained or motivated workers, materials of a different quality than standard, faulty equipment causing breakdowns and work interruptions,fewer equipment breakdowns than expected, poor supervision of workers, or using workers with different level of skills than expected. o Identified when direct labor hours are worked; formula is SR (AH - SH). Labor Rate Variance o The difference between the actual hourly labor rate and the standard rate per hour, multiplied by the actual number of hours worked during the period. o May result from many factors such as using workers with different wage rates than expected, different benefits costs per hour, annual wage rate increases more or less than expected, or a different number of overtime hours than expected. o Identified when direct labor hours are worked; formula is AH (AR - SR)

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Example #4: China Inc. produces custom-painted cake plates for a number of major department stores. During the most recent week, the company prepared 6,000 platesusing 1,150 direct labor-hours. The company paid its direct labor workers at an average pay rate of $10.00 per hour. According to the standard cost card, each plate should require .20 direct-hours at a cost of $9.50 per hour. Required: Compute the labor efficiency variance and a labor rate variance. Solution #4: SH 6,000 x .20 X SR $9.50 = $11,400 AH 1,150 X SR $9.50 = $10,925 AH 1,150 X AR $10.00 = $11,500 $575 U Rate Variance AH (AR SR) 1,150($10.00-$9.50)

$475 F EfficiencyVariance SR (AH - SH) $9.50(1,150-1,200)

Overhead Variances
Overhead variances have a somewhat different meaning than direct materials and direct labor variances for two reasons: o overhead is an indirect cost whereas materials and labor are direct costs o overhead includes both variable and fixed costs For overhead variance analysis the standard or pre-determined overhead rate based on total overhead costs is divided into variable and fixed rates, which are calculated by dividing budgeted variable or budgeted fixed overhead by the budgeted allocation base (now referred to as the denominator activity). The price variances (rate, or spending, or budget) may result from many factors such as a difference in price for the overhead items purchased and a difference in the quantity of overhead items purchased. In other words, they contain the same information as the price and quantity variances for direct materials and direct labor. The quantity variances (efficiency and volume) do not measure how efficiently variable overhead was used or incurred or the difference between how much fixed overhead was incurred vs. how much fixed overhead should have been incurred. The quantity variances (efficiency and volume) measure the variance in the actual vs. allowed denominator activity (variable overhead) or the difference between
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the budgeted and allowed denominator activity (fixed overhead) valued at the variable or fixed standard (pre-determined) overhead rate.

Variable Overhead Variances


Variable Overhead Efficiency Variance o The difference between the actual activity and the standard activity allowed for the actual output, multiplied by the standard variable overhead rate. o Identified when variable overhead costs are incurred; o formula is SR (AH - SH) Variable Overhead Rate Variance o The difference between the actual variable overhead cost incurred during a period and the standard cost that should have been incurred based on the actual activity of the period, multiplied by the standard variable overhead rate. o Identified when variable overhead costs are incurred; o formula is AH (AR - SR) o Variable overhead costs incurred are frequently reported as total costs rather than AH x AR. Example #5: Order Up, Inc. provides order fulfillment services for e-commerce merchants. The company maintains warehouses that stock items carried by its clients. In the most recent month, 140,000 items were shipped to customers using 5,800 direct labor-hours. The company incurred a total of $15,950 in variable overhead costs. According to the companys standards, 0.04 direct labor-hours are required to fulfill an order for one item. For the year, Order Up expects to incur 60,000 direct labor hours and $168,000 of variable overhead costs. Required: Compute variable overhead spending variance and variable overhead efficiency variance.

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Solution #5: SH 140,000 x .04 X SR $2.80 = $15,680

AH 5,800 X SR $2.80 = $16,240

AH X AR = $15,950 $290 F Rate Variance AH (AR SR) $15,950- 5,800x$2.80

$560 U Efficiency Variance SR (AH - SH) $2.80(5,800-5,600)

Fixed Overhead Variances


Fixed Overhead Volume Variance o The difference between the Budgeted Fixed Overhead and the Fixed Overhead Applied to Work in Process; o Formula is Fixed Component of the Predetermined Overhead Rate x (Denominator hours Standard Hours allowed for Actual Output) Fixed Overhead Budget Variance o The difference between the Actual Fixed Overhead and the Budgeted Fixed Overhead; In a standard cost system overhead is applied based on the standard hours allowed for actual output. Example #6: ABC Manufacturing uses a standard costing system. It applies overhead to products based on machine-hours. Data for the year are as follows: Total budgeted fixed overhead $300,000 Actual fixed overhead costs incurred $275,000 Total budgeted (denominator) machine-hours 50,000 Actual machine-hours 54,000 Standard machine-hours allowed for the actual output 52,000 Required: Compute the fixed portion of the predetermined overhead rate for the year. Compute the fixed overhead budget and volume variances.

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Solution #6: Pre-determined overhead rate (fixed portion) = Estimated fixed overhead cost Estimated amount of the allocation base (denominator activity)

Pre-determined overhead rate fixed portion = $300,000/50,000 MHs = $6 per MH

Fixed overhead applied to work in process $6x52,000 = $312,000

Budgeted fixed overhead = $300,000

Actual fixed overhead = $275,000 $25,000 F BudgetVariance

$12,000 F Volume Variance Total Variance = $37,000 F

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Practice Problems
Practice Problem #1: A partially completed flexible overhead budget for Sunflowers Inc. is shown below: Cost Formula Variable overhead: Supplies Utilities Repairs Total variable overhead Fixed overhead: Depreciation Salaries Rent Total fixed overhead Total overhead Required: Fill in the missing data. Practice Problem #2: Johnson, Inc.s has provided the following information regarding Junes results. Revenue and Cost Formula $13.00/unit $3.25/unit $8,000 $600 + $0.50/unit $5,000 $800 + $0.80/unit Actual Results $28,000 7,000 7,600 1,550 5,000 2,500 Activity Level in Units 8,000 12,000 16,000 $108,000 60,000 24,000 $192,000 $15,000 96,000 44,000 $155,000 $347,000

Revenue Conversion costs Salaries Utilities Rent Miscellaneous Required:

a) Prepare the companys planning budget assuming that 2,000 units were manufactured. b) Assume that 2,100 units were actually manufactured. Prepare the flexible budget for this level of activity. c) Compute the revenue and spending variances for June.

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Practice Problem #3: Conway manufactures a number of consumer items for general household use. During the recent month, the company manufactured 5,000 units using 12,000 pounds of material. The 14,000 pounds purchased cost the company $21,000. According to the standard cost card, each unit requires 2.2 pounds, at a cost of $1.40 per pound. Required: Compute the material price variance and material quantity variance. Practice Problem #4: Czar Nicholas Chocolatier, Ltd. makes premium chocolate in Chicago. One of the companys products is the Bango Mint. Bango Mints are packed 24 per box. During June, 4,000 boxes were produced. The company paid its direct labor workers a total of $14,280 for their work or $11.90 per hour. According to the standard cost card for Bango Mints, each box should require 0.3 direct labor hours at a cost of $12.00 per hour. Required: Compute the labor rate variance and a labor efficiency variance. Practice Problem #5: Universal Parcel provides parcel delivery services to many merchants. The company maintains warehouses that store and distribute items carried by all the different merchants. In the most recent month, 12,000 orders were shipped to customers using $50,000 of direct labor and 2,500 direct labor hours. The company incurred a total of $20,000 in variable overhead costs. According to the companys standards, 0.2 direct labor-hours are required to fulfill an order at a rate of $20.00 per hour. The variable overhead rate is 45%of the direct labor cost. Required: Compute variable overhead spending variance and a variable overhead efficiency variance.

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Sample True / False Questions


1. 2. A static budget is a series of static budgets at different levels of activities. True False Flexible budgeting relies on the assumption that unit variable costs will remain constant within the relevant range of activity. True False Flexible budgets are widely used in production and service departments. True False A static budget is an effective means to evaluate a manager's ability to control costs, regardless of the actual activity level. True False A flexible budget is a budget that is designed to cover a range of activity. True False Static budget is prepared at the end of the period. True False Flexible budget is prepared at the end of the period. True False Flexible budget is used for control purposes. True False A quantity standard allowed for actual output is the amount of input that should go into a single unit of the product. True False

3. 4.

5. 6. 7. 8. 9.

10. A standard cost card shows what the company should spend to produce a single unit of product based on expected production and sales for the coming period. True False 11. The direct material quantity variance is the difference between the actual quantity and the standard quantity of materials multiplied by the actual price. True False

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12. The variable overhead rate variance is the difference between the actual variable overhead rate and the standard variable overhead rate multiplied by the actual value of the cost driver. True False 13. In calculating the material price variance, the actual quantity is equal to the quantity of material that the company used in production. True False 14. An unfavorable labor efficiency variance indicates that the actual number of direct labor hours worked was greater than the number of direct labor hours that should have been worked for the output attained. True False 15. 16. True 17. True 18. 19. True 20. True False False True False False False True False

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Sample Multiple Choice Questions


1. A static budget Should not be prepared in a company. Is useful in evaluating a manager's performance by comparing actual variable costs and planned variable costs. Shows planned results at the original budgeted activity level. Is changed only if the actual level of activity is different than originally budgeted. What is the primary difference between a static budget and a flexible budget? The static budget contains only fixed costs, while the flexible budget contains only variable costs. The static budget is adjusted for different activity levels, while a flexible budget is prepared for a single level of activity. The static budget is prepared for a single level of activity, while a flexible budget is adjusted for different activity levels. Both the static budget and the flexible budget are adjusted for different activity levels. Star Lite Manufacturing Company prepared a static budget of 50,000 direct labor hours, with estimated overhead costs of $250,000 for variable overhead and $60,000 for fixed overhead. Trepid then prepared a flexible budget at 38,000 labor hours. How much is total overhead costs at this level of activity? $190,000 $247,000 $250,000 $260,000 True Masons budgeted costs for 30,000 linear feet of block are: Fixed manufacturing costs $12,000 per month Variable manufacturing costs $16.00 per linear True Masons installed 25,000 linear feet of block during March. What are the budgeted total manufacturing costs in March? $320,000 $360,000 $400,000 $412,000

2.

3.

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5.

Wayman Company uses flexible budgets. At normal capacity of 10,000 units, budgeted manufacturing overhead is: $50,000 variable and $135,000 fixed. If Wayman had actual overhead costs of $187,500 for 11,000 units produced, what is the difference between actual and flexible budget costs? $2,500 unfavorable $2,500 favorable $4,500 unfavorable $6,000 favorable A companys static budget estimate of total overhead costs was $100,000 based on the assumption that 10,000 units would be produced and sold. The company estimates that 30% of its overhead is variable and the remainder is fixed. What would be the total overhead costs according to the flexible budget if 12,000 units were produced and sold? $96,000 $100,000 $106,000 $116,000 Which of the following statements is false? A flexible budget is used for control purpose and a static budget is used for planning purposes. A flexible budget is prepared at the end of the period and a static budget is prepared at the beginning of the period. A flexible budget is not useful for controlling variable costs. A static budget provides budgeted estimates for one level of activity. A flexible budget Is prepared when management cannot agree on objectives for the company. Projects budget data for various levels of activity. Is only useful in controlling fixed costs. Cannot be used for evaluation purposes because budgeted data are adjusted to reflect actual results. What budgeted amounts appear on the flexible budget? Original budgeted amounts at the static budget activity level Actual costs for the budgeted activity level Budgeted amounts for the actual activity level achieved Actual costs for the estimated activity level

6.

7.

8.

9.

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10. A favorable variance occurs when actual costs are less than static costs standard costs are less than actual costs standard costs are less than static costs actual costs are less than standard costs 11. The difference between the actual price and the standard price, multiplied by the actual quantity of materials purchased is the direct materials spending variance direct materials volume variance direct materials price variance direct materials quantity variance 12. The difference between the actual quantity used in production and the standard quantity allowed for actual output, multiplied by the standard price is the direct materials spending variance direct materials volume variance direct materials price variance direct materials quantity variance 13. Albertville has a material standard of 1 pound per unit of output. Each pound has a standard price of $25 per pound. During July, Albertville paid $127,250 for 4,950 pounds, which they used to produce 4,700 units. What is the direct materials price variance? $3,500 unfavorable $2,600 favorable $12,600 unfavorable $10,000 unfavorable 14. Courtville has a material standard of 1 pound per unit of output. Each pound has a standard price of $25 per pound. During July, Albertville paid $118,800 for 4,950 pounds, which they used to produce 4,900 units. What is the direct materials quantity variance? $1,250 favorable $2,600 favorable $1,250 unfavorable $1,520 unfavorable

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15. Burnet Company has a direct material standard of 1 gallons of input at a cost of $7.50 per gallon. During July, Burnet Company purchased and used 3,300 gallons, paying $46,600. The direct materials quantity variance was $750 unfavorable. How many units were produced? 6,500 units 3,300 units 3,107 units 3,200 units Use the following information for questions 1619: Bridgetown Corporation produces a product that requires 2.5 pounds of materials per unit. The allowance for waste and spoilage per unit is .4 pounds and .1 pounds, respectively. The purchase price is $4 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.15 per pound. The hourly wage rate is $9.00 per hour, but a raise which will average $.50 will go into effect soon. Fringe benefits average $2.00 per hour. Standard production time is 2 hours per unit, and the allowances for rest periods and setup are .1 hours and .2 hours. 16. The standard direct materials price per pound is $3.92 $4.00 $4.17 $4.25 17. The standard direct materials quantity per unit is 2.6 pounds 2.7 pounds 2.9 pounds 3.0 pounds 18. The standard direct labor rate per hour is $ 9.00 $ 9.50 $11.00 $11.50 19. The standard direct labor hours per unit is 2 hour 2.1 hours 2.3 hours 3.2 hours
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Use the following information for questions 20-22: A Company has a standard of 1 hours of labor per unit, at $12 per hour. In producing 4,000 units, Company used 3,850 hours of labor at a total cost of $46,970. 20. Companys labor rate variance is $770 F $770 U $1,030 F $1,930 F 21. Companys labor efficiency variance is $770 U $1,030 F $1,800 F $1,930 F 22. Companys total labor variance is $770 U $800 U $1,030 F $1,930 F Use the following information for questions 23-24: The actual direct labor wage rate is $8.50 and 4,500 direct labor-hours were actually worked during the month. The standard direct labor wage rate is $8.00 and the standard quantity of hours allowed for the actual level of output was 5,000 direct labor-hours. The standard variable overhead per direct labor-hour is $5.00. 23. What is the variable overhead spending variance if the variable manufacturing overhead costs were $24,750? $2,250 U $2,250 F $2,500 F $2,500 U 24. What is the variable overhead efficiency variance? $5,000 F $5,000 U $2,500 U $2,500 F
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Solutions to Practice Problems


Practice Problem #1: Cost Formula Activity Level in Units 8,000 12,000 16,000 $72,000 40,000 16,000 $128,000 $15,000 96,000 44,000 $155,000 $283,000 $108,000 60,000 24,000 $192,000 $15,000 96,000 44,000 $155,000 $347,000 $144,000 80,000 32,000 $256,000 $15,000 96,000 44,000 $155,000 $411,000

Variable overhead: Supplies $9.00 Utilities $5.00 Repairs $2.00 Total variable overhead Fixed overhead: Depreciation Salaries Rent Total fixed overhead Total overhead

Variable overhead cost formula = variable overhead cost / activity level Fixed overhead costs do not change as the level of activity changes.

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Practice Problem #2: a) Planning Budget and b) Flexible Budget Revenue and Cost Formula Budgeted number of units sold Revenue Expenses: Conversion costs Salaries Utilities Rent Miscellaneous Total expenses Net Operating Income $13.00/unit $3.25/unit $8,000 $.50/unit+$600 $5,000 $.80/unit+$800 Planning Budget Income Statement 2,000 $26,000 6,500 8,000 1,600 5,000 2,400 $23,500 $2,500 Flexible Budget Income Statement 2,100 $27,300 6,825 8,000 1,650 5,000 2,480 $23,955 $3,345

c) Flexible budget Performance Report (1) Flexible Budget Number of Units Revenues $13.00/unit Expenses: Cost of materials $3.25/unit Salaries $8,000 Utilities $.50/unit+$600 Rent $5,000 Miscellaneous $.80/unit+$800 Total Expense Net Operating Income 2,100 $27,300 6,825 8,000 1,650 5,000 2,480 $23,955 $3,345 Revenue and Spending Variances (2) - (1) $700 F 175 U 400 F 100 F 0 20 U $305 F $1,005 F (2) Actual Results 2,100 $28,000 7,000 7,600 1,550 5,000 2,500 23,650 $4,350

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Practice Problem #3: SQ 5,000 x 2.2 X SP $1.40 = $15,400 AQ 12,000 X SP $1.40 = $16,800 AQ 14,000 X AP $1.50 = $21,000

$1,400 U Quantity Variance SP (AQ - SQ) $1.40(12,000-11,000) AQ 14,000 X SP $1.40 = $19,600 $1,400 U Price Variance AQ (AP SP) 14,000($1.50-$1.40) Practice Problem #4: SH 4,000 x .30 X SR $12.00 = $14,400 AH 1,200 X SR $12.00 = $14,400 AH 1,200 X AR $11.90 = $14,280 $120 F Rate Variance AH (AR SR) 1,200($11.90-$12.00)

$0 Efficiency Variance SR (AH - SH) $12.00(1,200-1,200)

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Practice Problem #5: SH 12,000 x .2 X SR $20 x .45 = $21,600 AH 2,500 X SR $20 x .45 = $22,500 $900 U Efficiency Variance SR (AH - SH) $9(2,500-2,400) $2,500 F Rate Variance AH (AR SR) 2,500($8-$9) AH 2,500 X AR $8 = $20,000

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Solutions to True / False Problems


1. 2. 3. 4. False - A static budget is based on one level of activity. True True False - A static budget is suitable for planning but is inappropriate for evaluating how well costs are controlled. If the actual level of activity differs from what was planned, it would be misleading to compare actual costs to the static budget. True False - The static budget is prepared at the beginning of the period. True True False - The standard quantity allowed is the amount that should go into the actual number of good units produced. True False - The material quantity variance is calculated using the standard price per unit. True False - The material price variance is based on the quantity of material purchased. True

5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

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Solutions to Multiple Choice Questions


1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. C C C D B C C B C D C D A C D C D D C B C C A D

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