CHAPTER 8

FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND

MANAGEMENT CONTROL
8-16 (20 min.) Variabl !a"#$a%&#ri"' ()r*a+, )aria"% a"al,-i-.
1. Variable Manufacturing Overhead Variance Analysis for Esuire !lothing for "une 200#
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
1 A%&#al Ra&
213
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
($%&'( ) *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 overhead
rate -as *11.&0 ,er direct manufacturing labor.hour versus *12 budgeted. /t had an unfavorable
efficiency variance of *2%&#2 0 because each suit averaged $.2 labor.hours ($%&'( hours 1 1%0+0
suits) versus $.0 budgeted labor.hours.
+.1
*2%2(+ 2
3,ending variance
*2%&#2 0
Efficiency variance
4ever a variance
*'2$ 0
2le5ible.budget variance
4ever a variance
8-1: (20 min.) Fi5+-!a"#$a%&#ri"' ()r*a+, )aria"% a"al,-i- 2%("&i"#a&i(" ($ 8-163.
1 6 2.
7udgeted fi5ed overhead
rate ,er unit of
allocation base
8
$ 0$0 % 1
$00 % (2 *

8
1(0 % $
$00 % (2 *
8 *1& ,er hour
2i5ed Manufacturing Overhead Variance Analysis for Esuire !lothing for "une 200#
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r A%&#al
O#&/#&
1 B#+'&+ Ra&
293
*('%#1( *(2%$00 *(2%$00
($ 1 1%0+0 1 *1&)
*($%+00
*1%&1( 0 *2%$00 2
3,ending variance 4ever a variance 9roduction.volume variance
*1%&1( 0 *2%$00 2
2le5ible.budget variance 9roduction.volume variance
:he fi5ed manufacturing overhead s,ending variance and the fi5ed manufacturing
fle5ible budget variance are the same;;*1%&1( 0. Esuire s,ent *1%&1( above the *(2%$00
budgeted amount for "une 200#.
:he ,roduction.volume variance is *2%$00 2. :his arises because Esuire utili<ed its
ca,acity more intensively than budgeted (the actual ,roduction of 1%0+0 suits e5ceeds the
budgeted 1%0$0 suits). :his results in overallocated fi5ed manufacturing overhead of *2%$00 ($ )
$0 ) *1&). Esuire -ould -ant to understand the reasons for a favorable ,roduction.volume
variance. /s the mar=et gro-ing> /s Esuire gaining mar=et share> ?ill Esuire need to add
ca,acity>
+.2
8-18 ('0 min.) Variabl !a"#$a%&#ri"' ()r*a+ )aria"% a"al,-i-.
1. @enominator level 8 ('%200%000 ) 0.02 hours) 8 ($%000 hours
2. A%&#al
R-#l&-
Fl5ibl
B#+'& A!(#"&-
1. Out,ut units (baguettes) 2%+00%000 2%+00%000
2. @irect manufacturing labor.hours &0%$00 &(%000
a
'. Aabor.hours ,er out,ut unit (2 1) 0.01+ 0.020
$. Variable manuf. overhead (MOB) costs *(+0%$00 *&(0%000
&. Variable MOB ,er labor.hour ($ 2) *1'.&0 *10
(. Variable MOB ,er out,ut unit ($ 1) *0.2$' *0.200
a
2%+00%000 0.0208 &(%000 hours
Variable Manufacturing Overhead Variance Analysis for 2rench 7read !om,any for 200#
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
1 A%&#al Ra&
213
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 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(%$000. /t is unfavorable because variable manufacturing overhead
-as '&D higher than ,lanned. A ,ossible e5,lanation could be an increase in energy rates
relative to the rate ,er standard labor.hour assumed in the fle5ible budget.
Efficiency variance of *&(%0002. /t is favorable because the actual number of direct
manufacturing labor.hours reuired -as lo-er than the number of hours in the fle5ible budget.
Aabor -as more efficient in ,roducing the baguettes than management had antici,ated in the
budget. :his could occur because of im,roved morale in the com,any% -hich could result from
an increase in -ages or an im,rovement in the com,ensation scheme.
2le5ible.budget variance of *120%$000. /t is unfavorable because the favorable efficiency
variance -as not large enough to com,ensate for the large unfavorable s,ending variance.
+.'
*1C(%$00 0
3,ending variance
*&(%000 2
Efficiency variance 4ever a variance
*120%$00 0
2le5ible.budget variance 4ever a variance
8-1; ('0 min.) Fi5+ !a"#$a%&#ri"' ()r*a+ )aria"% a"al,-i- 2%("&i"#a&i(" ($ 8-183.
1. 7udgeted standard direct manufacturing labor used 8 0.02 ,er baguette
7udgeted out,ut 8 '%200%000 baguettes
7udgeted standard direct manufacturing labor.hours
8 '%200%000 ) 0.02
8 ($%000 hours
7udgeted fi5ed manufacturing overhead costs
8 ($%000 ) *$.00 ,er hour
8 *2&(%000
Actual out,ut 8 2%+00%000 baguettes
Allocated fi5ed manufacturing overhead
8 2%+00%000 ) 0.02 ) *$
8 *22$%000
2i5ed Manufacturing Overhead Variance Analysis for 2rench 7read !om,any for 200#
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
*2C2%000 *2&(%000 *2&(%000
(2%+00%000 ) 0.02 ) *$)
*22$%000
2. :he fi5ed manufacturing overhead is underallocated by *$+%000.
'. :he ,roduction.volume variance of *'2%0000 ca,tures the difference bet-een the budgeted
'%200%0000 baguettes and the lo-er actual 2%+00%000 baguettes ,roducedEthe fi5ed cost
ca,acity not used. :he s,ending variance of *1(%000 unfavorable means that the actual
aggregate of fi5ed costs (*2C2%000) e5ceeds the budget amount (*2&(%000). 2or e5am,le%
monthly leasing rates for baguette.ma=ing machines may have increased above those in the
budget for 200#.
+.$
*1(%000 0
3,ending variance 4ever a variance
*'2%000 0
9roduction.volume
variance
*1(%000 0
2le5ible.budget variance
*'2%000 0
9roduction.volume
variance
*$+%000 0
0nderallocated fi5ed overhead
(:otal fi5ed overhead variance)
8-4< ('0;$0 min.) Ma"#$a%&#ri"' ()r*a+, )aria"% a"al,-i-.
1. :he summary information isF
T* S(l#&i("- C(r/(ra&i(" 2=#" 4<<;3 A%&#al
Fl5ibl
B#+'&
S&a&i%
B#+'&
Out,uts units (number of assembled units) 21( 21( 200
Bours of assembly time $11 $'2
c
$00
a

Assembly hours ,er unit 1.#0
b
2.00 2.00
Variable mfg. overhead cost ,er hour of assembly time * '0.20
d
* '0.00 * '0.00
Variable mfg. overhead costs *12%$20 *12%#(0
e
*12%000
f

2i5ed mfg. overhead costs *20%&(0 *1#%200 *1#%200
2i5ed mfg. overhead costs ,er hour of assembly time * &0.02
g
* $+.00
h

a
200 units 2 assembly hours ,er unit 8 $00 hours
b
$11 hours 21( units 8 1.#0 assembly hours ,er unit
c
21( units 2 assembly hours ,er unit 8 $'2 hours
d
*12%$20 $11 assembly hours 8 *'0.22 ,er assembly hour
e
$'2 assembly hours *'0 ,er assembly hour 8 *12%#(0
f
$00 assembly hours

*'0 ,er assembly hour 8 *12%000

g
*20%&(0 $11 assembly hours 8 *&0 ,er assembly hour
h
*1#%200 $00 assembly hours 8 *$+ ,er assembly hour
+.&
Fl5ibl B#+'&6 All(%a&+6
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 *('0 2
3,ending variance Efficiency variance 4ever a variance
*&$0 2
2le5ible.budget variance 4ever a variance
*&$0 2
Overallocated variable overhead
Fl5ibl B#+'&6 All(%a&+6
A%&#al C(-&- S&a&i% B#+'& L#!/ S#! S&a&i% B#+'& L#!/ S#!
B#+'&+ I"/#&
All(7+ B#+'&+
I"%#rr+ R'ar+l-- ($ 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 0 *1%&'( 2
3,ending Variance 4ever a Variance 9roduction.volume variance
*1%'(0 0 *1%&'( 2
2le5ible.budget variance 9roduction.volume variance
*1C( 2
Overallocated fi5ed overhead
+.(
:he summary analysis isF
S/"+i"'
Varia"%
E$$i%i"%,
Varia"%
Pr(+#%&i("-V(l#!
Varia"%
Variable
Manufacturing
Overhead
*#0 0 *('0 2 4ever a variance
2i5ed Manufacturing
Overhead *1%'(0 0 4ever a variance *1%&'( 2
2. Variabl Ma"#$a%&#ri"' C(-&- a"+ Varia"%-
a. Variable Manufacturing Overhead !ontrol
12%
$20
Accounts 9ayable !ontrol and various other accounts 12%$20
:o record actual variable manufacturing overhead costs
incurred.
b. ?or=.in.9rocess !ontrol 12%#(0
Variable Manufacturing Overhead Allocated 12%#(0
:o record variable manufacturing overhead allocated.
c. Variable Manufacturing Overhead Allocated 12%#(0
Variable Manufacturing Overhead 3,ending Variance #0
Variable Manufacturing Overhead !ontrol 12%$20
Variable Manufacturing Overhead Efficiency Variance ('0
:o isolate variances for the accounting ,eriod.
d. Variable Manufacturing Overhead Efficiency Variance ('0
Variable Manufacturing Overhead 3,ending Variance #0
!ost of Goods 3old &$0
:o -rite off variable manufacturing overhead variances to cost of goods sold.
+.C
Fi5+ Ma"#$a%&#ri"' C(-&- a"+ Varia"%-
a. 2i5ed Manufacturing Overhead !ontrol 20%&(0
3alaries 9ayable% Acc. @e,reciation% various other accounts 20%&(0
:o record actual fi5ed manufacturing overhead costs incurred.
b. ?or=.in.9rocess !ontrol 20%C'(
2i5ed Manufacturing Overhead Allocated 20%C'(
:o record fi5ed manufacturing overhead allocated.
c. 2i5ed Manufacturing Overhead Allocated 20%C'(
2i5ed Manufacturing Overhead 3,ending Variance 1%'(0
2i5ed Manufacturing Overhead 9roduction.Volume Variance 1%&'(
2i5ed Manufacturing Overhead !ontrol 20%&(0
:o isolate variances for the accounting ,eriod.
d. 2i5ed Manufacturing Overhead 9roduction.Volume Variance 1%&'(
2i5ed 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 variable manufacturing overhead costs has both a long.run and a
short.run focus. /t involves 3olutions ,lanning to underta=e only value.added overhead activities
(a long.run vie-) and then managing the cost drivers of those activities in the most efficient -ay
(a short.run vie-). 9lanning and control of fixed manufacturing overhead costs at 3olutions have
,rimarily a long.run focus. /t involves underta=ing only value.added fi5ed.overhead activities
for a budgeted level of out,ut. 3olutions ma=es most of the =ey decisions that determine the
level of fi5ed.overhead costs at the start of the accounting ,eriod.
+.+
8-41 (101& min.) 9-)aria"% a"al,-i-, $ill i" &* bla">-.
Variabl Fi5+
1. 3,ending variance
2. Efficiency variance
'. 9roduction.volume variance
$. 2le5ible.budget variance
&. 0nderallocated (overallocated) MOB
*$%200 0
$%&00 0
4EVEH
+%C00 0
+%C00 0
*'%000 0
4EVEH
(00 0
'%000 0
'%(00 0
:hese relationshi,s could be ,resented in the same -ay as in E5hibit +.$.
A%&#al C(-&-
I"%#rr+
213
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 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#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
2i5ed
MOB
*1+%000 *1&%000 *1&%000 *1$%$00
+.#
*$%200 0
3,ending variance
*$%&00 0
Efficiency variance
4ever a variance
*'%000 0
3,ending variance 4ever a variance
*(00 0
9roduction.volume variance
*+%C00 0
2le5ible.budget variance 4ever a variance
*+%C00 0
0nderallocated variable overhead
(:otal variable overhead variance)
*'%000 0
2le5ible.budget variance
*(00 0
9roduction.volume variance
*'%(00 0
0nderallocated fi5ed overhead
(:otal fi5ed overhead variance)
An overvie- of the $ overhead variances isF
9-Varia"%
A"al,-i-
S/"+i"'
Varia"%
E$$i%i"%,
Varia"%
Pr(+#%&i("-V(l#!
Varia"%
Variable
Overhead *$%200 0 *$%&00 0 4ever a variance
2i5ed
Overhead *'%000 0 4ever a variance *(00 0
8-44 (20;'0 min.) S&rai'*&$(r7ar+ 9-)aria"% ()r*a+ a"al,-i-.
1. :he budget for fi5ed manufacturing overhead is $%000 units ) ( machine.hours ) *1&
machine.hoursIunit 8 *'(0%000.
An overvie- of the $.variance analysis isF
9-Varia"%
A"al,-i-
S/"+i"'
Varia"%
E$$i%i"%,
Varia"%
Pr(+#%&i("-
V(l#! Varia"%
Variable
Manufacturing
Overhead
*1C%+00 0 *1(%000 0 4ever a Variance
2i5ed
Manufacturing
Overhead
*1'%000 0 4ever a Variance *'(%000 2
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 $%$00
Allocation base (machine.hours) 2+%$00 2(%$00
a
Allocation base ,er out,ut unit (.$&
b
(.00
Variable MOB *2$&%000 *211%200
c
Variable MOB ,er hour *+.('
d
*+.00
2i5ed MOB *'C'%000 *'(0%000
e
2i5ed MOB ,er hour *1'.1'
f
;
a
$%$00 units ) (.00 machine.hoursIunit 8 2(%$00 machine.hours
b
2+%$00 1 $%$00 8 (.$& machine.hours ,er unit
c
$%$00 units ) (.00 machine.hours ,er unit ) *+.00 ,er machine.hour 8 *211%200
d
*2$&%000 1 2+%$00 8 *+.('
e
$%000 units ) (.00 machine.hours ,er unit ) *1& ,er machine.hour 8 *'(0%000
f
*'C'%000 1 2+%$00 8 *1'.1'
2. Variable Manufacturing Overhead !ontrol 2$&%000
Accounts 9ayable !ontrol and other accounts 2$&%000
+.10
?or=.in.9rocess !ontrol 211%200
Variable Manufacturing Overhead Allocated 211%200
Variable Manufacturing Overhead Allocated 211%200
Variable Manufacturing Overhead 3,ending Variance 1C%+00
Variable Manufacturing Overhead Efficiency Variance 1(%000
Variable Manufacturing Overhead !ontrol 2$&%000
2i5ed Manufacturing Overhead !ontrol 'C'%000
?ages 9ayable !ontrol% Accumulated @e,reciation
!ontrol% etc. 'C'%000
?or=.in.9rocess !ontrol '#(%000
2i5ed Manufacturing Overhead Allocated '#(%000
2i5ed Manufacturing Overhead Allocated '#(%000
2i5ed Manufacturing Overhead 3,ending Variance 1'%000
2i5ed Manufacturing Overhead 9roduction.Volume Variance '(%000
2i5ed Manufacturing Overhead !ontrol 'C'%000
'. /ndividual fi5ed manufacturing overhead items are not usually affected very much by
day.to.day control. /nstead% they are controlled ,eriodically through ,lanning decisions and
budgeting ,rocedures that may sometimes have hori<ons covering si5 months or a year (for
e5am,le% management salaries) and sometimes covering many years (for e5am,le% long.term
leases and de,reciation on ,lant and eui,ment).
$. :he fi5ed overhead s,ending variance is caused by the actual reali<ation of fi5ed costs
differing from the budgeted amounts. 3ome fi5ed costs are =no-n because they are
contractually s,ecified% such as rent or insurance% although if the rental or insurance contract
e5,ires during the year% the fi5ed amount can change. Other fi5ed costs are estimated% such as
the cost of managerial salaries -hich may de,end on bonuses and other ,ayments not =no-n at
the beginning of the ,eriod. /n this e5am,le% the s,ending variance is unfavorable% so actual
2OB is greater than the budgeted amount of 2OB.
:he fi5ed overhead ,roduction volume variance is caused by ,roduction being over or
under e5,ected ca,acity. Jou may be under ca,acity -hen demand dro,s from e5,ected levels%
or if there are ,roblems -ith ,roduction. Over ca,acity is usually driven by favorable demand
shoc=s or a desire to increase inventories. :he fact that there is a favorable volume variance
indicates that ,roduction e5ceeded the e5,ected level of out,ut ($%$00 units actual relative to a
denominator level of $%000 out,ut units).
+.11
SOLUTION EXHIBIT 8-44
A%&#al C(-&-
I"%#rr+
213
A%&#al I"/#&
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#&
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#&
All(7+ $(r
A%&#al O#&/#&
) B#+'&+ Ra&
293
Variable
MOB *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#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#&
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
2i5ed
MOB *'C'%000
($%000 ) ( ) *1&)
*'(0%000
($%000 ) ( ) *1&)
*'(0%000
($%$00 ) ( ) *1&)
*'#(%000
+.12
*1C%+00 0
3,ending variance
*1(%000 0
Efficiency variance 4ever a variance
*1'%000 0
3,ending variance 4ever a variance
*'(%000 2
9roduction.volume
variance
*''%+00 0
2le5ible.budget variance 4ever a variance
*''%+00 0
0nderallocated variable overhead
(:otal variable overhead variance)
*1'%000 0
2le5ible.budget variance
*'(%000 2
9roduction.volume variance
*2'%000 2
Overallocated fi5ed overhead
(:otal fi5ed overhead variance)
8-48 ('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%000
Allocation base (machine.hours) 1'%'00 12%'00
a
Allocation base ,er out,ut unit 0.'2
b
0.'0
Variable MOB *1&&%100 *1$C%(00
c
Variable MOB ,er hour *11.((
d
*12.00
2i5ed MOB *$01%000 *'#0%000
2i5ed MOB ,er hour *'0.1&
e
;
a
$1%000 ) 0.'0 8 12%'00
d
*1&&%100 1 1'%'00 8 *11.((
b
1'%'00 1 $1%000 8 0.'2
e
*$01%000 1 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"al,-i-
S/"+i"'
Varia"%
E$$i%i"%,
Varia"%
Pr(+#%&i("
V(l#! Varia"%
Variable
Manufacturing
Overhead
*$%&00 2 *12%000 0 4ever a variance
2i5ed
Manufacturing
Overhead
*11%000 0 4ever a variance *21%000 0
+.1'
2. Variable Manufacturing Overhead !ontrol 1&&%100
Accounts 9ayable !ontrol and other accounts 1&&%100
?or=.in.9rocess !ontrol 1$C%(00
Variable Manufacturing Overhead Allocated 1$C%(00
Variable Manufacturing Overhead Allocated 1$C%(00
Variable Manufacturing Overhead Efficiency Variance 12%000
Variable Manufacturing Overhead 3,ending Variance $%&00
Variable Manufacturing Overhead !ontrol 1&&%100
2i5ed Manufacturing Overhead !ontrol $01%000
?ages 9ayable !ontrol% Accumulated
@e,reciation !ontrol% etc. $01%000
?or=.in.9rocess !ontrol '(#%000
2i5ed Manufacturing Overhead Allocated '(#%000
2i5ed Manufacturing Overhead Allocated '(#%000
2i5ed Manufacturing Overhead 3,ending Variance 11%000
2i5ed Manufacturing Overhead 9roduction.Volume
Variance 21%000
2i5ed Manufacturing Overhead !ontrol $01%000
'. :he control of variable manufacturing overhead reuires the identification of the cost
drivers 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-att.hours used%
uantities of lubricants used% and re,air ,arts and hours used. :he most convincing -ay to
discover -hy overhead ,erformance did not agree -ith a budget is to investigate ,ossible causes%
line item by line item.
$. :he variable overhead s,ending variance is favorable. :his means the actual rate a,,lied
to the manufacturing costs is lo-er than the budgeted rate. 3ince variable overhead consists of
several different costs% this could be for a variety of reasons% such as the utility rates being lo-er
than estimated or the indirect materials costs ,er unit of denominator activity being less than
estimated.
:he variable overhead efficiency variance is unfavorable% -hich im,lies that the
estimated denominator activity -as too lo-. 3ince the denominator activity is machine hours%
this could be the result of inefficient use of machines% ,oorly scheduled ,roduction runs% or
machines that need maintenance and thus are not -or=ing at the e5,ected level of efficiency.
+.1$
SOLUTION EXHIBIT 8-48
A%&#al C(-&-
I"%#rr+
213
A%&#al I"/#&
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#&
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#&
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
Variable
Manufacturing
Overhead
*1&&%100
(1'%'00 ) *12)
*1&#%(00
(12%'00 ) *12)
*1$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#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#&
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
2i5ed
Manufacturing
Overhead
*$01%000 *'#0%000 *'#0%000
(12%'00 ) *'0)
*'(#%000
8
hours . machine 1'%000
*'#0%000
8 *'0 ,er machine.hour.
KAlternative com,utationF 1'%000 denominator hours ; 12%'00 budgeted hours allo-ed 8 C00 hoursL
C00 hours 1 *'0 ,er machine.hour 8 *21%000 0
+.1&
*$%&00 2
3,ending variance
*12%000 0
Efficiency variance 4ever a variance
*11%000 0
3,ending variance 4ever a variance
*21%000 0K
9roduction.volume variance
*C%&00 0
2le5ible.budget variance 4ever a variance
*C%&00 0
0nderallocated variable overhead
(:otal variable overhead variance)
*11%000 0
2le5ible.budget variance
*21%000 0K
9roduction.volume variance
*'2%000 0
0nderallocated fi5ed overhead
(:otal fi5ed overhead variance)
8-49 (20;2& min.) O)r*a+ )aria"%-, -r)i% -%&(r.
1.
Mal- (" ?*l-
2Ma, 4<<;3
A%&#al
R-#l&-
Fl5ibl
B#+'&
S&a&i%
B#+'&
Out,ut units (number of deliveries) +%+00 +%+00 10%000
Bours ,er delivery 0.(&
a
0.C0 0.C0
Bours of delivery time &%C20 (%1(0
b
C%000
b
Variable overhead costs ,er delivery hour *1.+0
c
*1.&0 *1.&0
Variable overhead (VOB) costs *10%2#( *#%2$0
d
*10%&00
d
2i5ed overhead costs *'+%(00 *'&%000 *'&%000
2i5ed overhead cost ,er hour *&.00
e
a
&%C20 hours +%+00 deliveries 8 0.(& hours ,er delivery
b
hrs. ,er delivery number of deliveries 8 0.C0 10%000 8 C%000 hours
c
*10%2#( VOB costs &%C20 delivery hours 8 *1.+0 ,er delivery hour
d
@elivery hours VOB cost ,er delivery hour 8 C%000 *1.&0 8 *10%&00
e
3tatic budget delivery hours 8 10%000 units 0.C0 hoursIunit 8 C%000 hoursL
2i5ed overhead rate 8 2i5ed overhead costs 3tatic budget delivery hours 8 *'&%000 C%000 hours 8 *& ,er hour
VARIABLE OVERHEAD
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
B#+'&+ Ra&
&%C20 hrs *1.&0 ,er hr. (%1(0 hrs *1.&0 ,er hr.
*10%2#( *+%&+0 *#%2$0
*1%C1( 0 *((0 2
3,ending variance Efficiency variance
2.
FIXED OVERHEAD
A%&#al C(-&-
I"%#rr+
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($ O#&/#&
L)l
All(%a&+6
B#+'&+ I"/#& 0&,. All(7+ $(r
A%&#al O#&/#&
B#+'&+ Ra&
+%+00 units 0.C0 hrs.Iunit *&Ihr.
(%1(0 hrs. *&Ihr.
*'+%(00 *'&%000 *'0%+00
*'%(00 0 *$%200 0
3,ending variance 9roduction.volume variance
+.1(
'. :he s,ending variances for variable and fi5ed overhead are both unfavorable. :his means
that MO? had increases over budget in either or both the cost of individual items (such as
tele,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 variable
overhead costs results from more efficient use of the cost allocation base;;each delivery ta=es
0.(& hours versus a budgeted 0.C0 hours.
MO? can best manage its fi5ed overhead costs by long.term ,lanning of ca,acity rather
than day.to.day decisions. :his involves ,lanning to underta=e only value.added fi5ed.overhead
activities and then determining the a,,ro,riate level for those activities. Most fi5ed overhead
costs are committed -ell before they are incurred. /n contrast% for variable overhead% a mi5 of
long.run ,lanning and daily monitoring of the use of individual items is reuired to manage costs
efficiently. MO? should ,lan to underta=e only value.added variable.overhead activities (a
long.run focus) and then manage the cost drivers of those activities in the most efficient -ay (a
short.run focus).
:here is no ,roduction.volume variance for variable overhead costs. :he unfavorable
,roduction.volume variance for fi5ed overhead costs arises because MO? has unused fi5ed
overhead resources that it may see= to reduce in the long run.
+.1C
8-4@ ($0&0 min.) T(&al ()r*a+, 8-)aria"% a"al,-i-.
1. :his ,roblem has t-o maMor ,ur,osesF (a) to give e5,erience -ith data allocated on a total
overhead basis instead of on se,arate variable and fi5ed bases and (b) to reinforce distinctions
bet-een actual hours of in,ut% budgeted (standard) hours allo-ed for actual out,ut% and
denominator level.
An analysis of direct manufacturing labor -ill ,rovide the data for actual hours of in,ut
and 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 labor
efficiency variance can be com,uted by subtracting *'%+&( from *&%CC(. :he com,lete ,icture is
as follo-sF
A%&#al C(-&-
I"%#rr+
A%&#al I"/#&
1 B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#&
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
($%+20 hrs. ) *1(.+0)
*+0%#C(
K
($%+20hrs. ) *1(.00
K
)
*CC%120
($%C00 hrs. ) *1(.00
K
)
*C&%200
K
Given
Direct Labor calculations
Actual in,ut ) 7udgeted rate 8 Actual costs ; 9rice variance
8 *+0%#C( ; *'%+&( 8 *CC%120
Actual in,ut 8 *CC%120 1 7udgeted rate 8 *CC%120 1 *1( 8 $%+20 hours
7udgeted in,ut ) 7udgeted rate 8 *CC%120 ; Efficiency variance
8 *CC%120 ; *1%#20 8 *C&%200
7udgeted in,ut 8 *C&%200 1 7udgeted rate 8 *C&%200 1 1( 8 $%C00 hours
Production Overhead
Variable overhead rate 8 *2&%(00
K
1 '%200
K
hrs. 8 *+.00 ,er standard labor.hour
8 *C#%0$0
K
; $%000
K
) (*+.00) 8 *$C%0$0
/f total overhead is allocated at 120D of direct labor.cost% the single overhead rate must
be 120D of *1(.00% or *1#.20 ,er hour. :herefore% the fi5ed overhead com,onent of the rate
must be *1#.20 ; *+.00% or *11.20 ,er direct labor.hour.
+.1+
*'%+&( 0
K
9rice variance
*1%#20 0
Efficiency variance
*&%CC( 0
K
2le5ible.budget variance
Aet @ 8 denominator level in in,ut units
7udgeted fi5ed
overhead rate
,er in,ut unit
8
*11.20 8 *$C%0$0 1 @
@ 8 $%200 direct labor.hours
A summary '.variance analysis for October follo-sF
A%&#al C(-&-
I"%#rr+
A%&#al I"/#&-
1 B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#&
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
All(%a&+6
B#+'&+ I"/#&
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
*##%(00
K
(*$C%0$0 N ($%+20 ) *+.00)
*+&%(00
*$C%0$0 N (*+ ) $%C00)
*+$%($0
($%C00 hrs. ) *1#.20)
*#0%2$0
K
Ono-n figure
An overvie- of the '.variance analysis using the bloc= format in the te5t isF
8-Varia"%
A"al,-i-
S/"+i"'
Varia"%
E$$i%i"%,
Varia"%
Pr(+#%&i("
V(l#! Varia"%
:otal Overhead *1$%000 0 *#(00 *&%(00 2
2. :he control of variable manufacturing overhead reuires the identification of the cost
drivers for such items as energy% su,,lies% eui,ment% and maintenance. !ontrol often entails
monitoring nonfinancial measures that affect each cost item% one by one. E5am,les are =ilo-atts
used% uantities of lubricants used% and eui,ment ,arts and hours used. :he most convincing
-ay to discover -hy overhead ,erformance did not agree -ith a budget is to investigate ,ossible
causes% line item by line item.
/ndividual fi5ed manufacturing overhead items are not usually affected very much by day.
to.day control. /nstead% they are controlled ,eriodically through ,lanning decisions and
budgeting that may sometimes have hori<ons covering si5 months or a year (for e5am,le%
management salaries) and sometimes covering many years (for e5am,le% long.term leases and
de,reciation on ,lant and eui,ment).
+.1#
*1$%000 0
3,ending variance
*#(0 0
Efficiency variance
*&%(00 2K
9roduction.volume variance
*1$%#(0 0
2le5ible.budget variance
*&%(00 2K
9roduction.volume variance
8-46 ('0 min.) O)r*a+ )aria"%-, !i--i"' i"$(r!a&i(".
1. /n the columnar ,resentation of variable overhead variance analysis% all numbers sho-n in
bold are calculated from the given information% in the order (a) . (e).
VARIABLE MANUFACTURING OVERHEAD
Fl5ibl B#+'&6
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 *(.00
mach. hrs. ,er mach. hr. mach. hrs. ,er mach. hr.
A8;,64@ A;<,<<< A8;,1<<
*'C& 2 A;<< U 2+3
3,ending variance Efficiency variance
A@4@ U 23
2le5ible.budget variance
a. 15,000 machine-hours $6 per machine-hour = $90,000
b. Actual VMOH = $90,000 $375F (VOH spending variance) = $89,625
c. 14,850 machine-hours $6 per machine-hour = $89,100
d. VOH efficiency variance = $90,000 $89,100 = $900U
e. VOH flexible budget variance = $900U $375F = $525U
Allocated variable overhead -ill be the same as the fle5ible budget variable overhead of
*+#%100. :he actual variable overhead cost is *+#%(2&. :herefore% variable overhead is
underallocated by *&2&.
+.20
2. /n the columnar ,resentation of fi5ed overhead variance analysis% all numbers sho-n in
bold are calculated from the given information% in the order (a) ; (e).
FIXED MANUFACTURING OVERHEAD
Fl5ibl B#+'&6 All(%a&+6
A%&#al C(-&-
S&a&i% B#+'& L#!/ S#!
R'ar+l-- ($ O#&/#&
B#+'&+ I"/#& 0&,.
All(7+ $(r B#+'&+
I"%#rr+ L)l A%&#al O#&/#& Ra&
2a3 2b3
1$%+&0 A1.6<B 2%3
mach. hrs. ,er mach. hr.
A8<,8:@ A48,8<< A48,:6<
*1%&C& 0 A@,<9< U 2+3
3,ending variance Pr(+#%&i("-)(l#! )aria"%
A1,@:@ U 23
Fl5ibl-b#+'& )aria"%
a. Actual 2OB costs 8 *120%000 total overhead costs ; *+#%(2& VOB costs 8 *'0%'C&
b. 3tatic budget 2OB lum, sum 8 *'0%'C& ; *1%&C& s,ending variance 8 *2+%+00
c. K2OB allocation rate 8 *2+%+00 2OB static.budget lum, sum

1+%000 static.budget machine.hours

8 *1.(0 ,er machine.hour
Allocated 2OB 8 1$%+&0 machine.hours

*1.(0 ,er machine.hour 8 *2'%C(0

d. 9VV 8 *2+%+00 ; *2'%C(0 8 *&%0$00
e. 2OB fle5ible budget variance 8 2OB s,ending variance 8 *1%&C& 0
Allocated fi5ed overhead is *2'%C(0. :he actual fi5ed overhead cost is *'0%'C&. :herefore% fi5ed
overhead is underallocated by *(%(1&.
+.21
8-4: (1& min.) I+"&i$,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
Production output is
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
Production output is
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 versus
budgeted VOH
rates
Unfavorable: more
machine-hours
used relative to
flexible budget
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Cannot be
determined: no
information on
flexible-budget
machine-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
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#.
SOLUTION EXHIBIT 8-48
A%&#al C(-&-
I"%#rr+6
A%&#al I"/#& 0&,.
A%&#al I"/#& 0&,.
B#+'&+ Pri%
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 A%&#al Ra& P#r%*a-- U-a' 1 B#+'&+ Pri%
@irect
Materials
(&0%000 *22.0)
*1%100%000
(&0%000 *20.0)
*1%000%000
($&%000 *20.0)
*#00%000
($C%&00 *20.0)
*#&0%000
*100%000 0 *&0%000 2
a. 9rice variance b. Efficiency variance
@irect
Manufacturing
Aabor *(&0%000
(20%000 *'0.0)
*(00%000
(2'%C&0 *'0.0)
*C12%&00
*&0%000 0 *112%&00 2
c. 9rice variance d. Efficiency variance
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
B#+'&+ Ra&
All(%a&+6
2B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
B#+'&+ Ra&3
Variable
Manufacturing
Overhead *$00%000
($&%000 *10.0)
*$&0%000
($C%&00 *10.0)
*$C&%000
($C%&00 *10.0)
*$C&%000
*&0%000 2 *2&%000 2
e. 3,ending variance f. Efficiency variance 4ever a variance
2i5ed
Manufacturing
Overhead
*'&0%000 *2&0%000K *2&0%000
($C%&00 *&.0)
*2'C%&00
*100%000 0 *12%&00 0
h. 3,ending variance 4ever a variance g. 9roduction volume variance
K
@enominator level in hoursF 100%000 5 .& 8 &0%000 hours
7udgeted 2i5ed OverheadF &0%000 5 *&Ihr 8 *2&0%000
+.2'
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 they
used less brass than e5,ected (leading to a favorable material efficiency variance). /n turn% since
variable manufacturing overhead is assigned based on ,ounds of materials used% this directly led
to the favorable variable overhead efficiency variance. :he ,urchase of a better uality of brass
may also e5,lain -hy it too= less labor time to ,roduce the door=nobs than e5,ected (the
favorable direct labor efficiency variance). 2inally% the unfavorable direct labor ,rice variance
could im,ly that the -or=ers -ho -ere hired -ere more e5,erienced than e5,ected% -hich could
also be related to the ,ositive direct material and direct labor efficiency variances.
8-4; ('0 min.) C(!/r*"-i) )aria"% a"al,-i-.
1. 7udgeted number of machine.hours ,lanned can be calculated by multi,lying the number
of units ,lanned (budgeted) by the number of machine.hours allocated ,er unitF
+++ units 2 machine.hours ,er unit 8 1%CC( machine.hours.
2. 7udgeted fi5ed MOB costs ,er machine.hour can be com,uted by dividing the fle5ible
budget amount for fi5ed MOB (-hich is the same as the static budget) by the number of
machine.hours ,lanned (calculated in (a.))F
*'$+%0#( 1 1%CC( machine.hours 8 *1#(.00 ,er machine.hour
'. 7udgeted variable MOB costs ,er machine.hour are calculated as budgeted variable
MOB costs divided by the budgeted number of machine.hours ,lannedF
*C1%0$0 1 1%CC( machine.hours 8 *$0.00 ,er machine.hour.
$. 7udgeted number of machine.hours allo-ed for actual out,ut achieved can be calculated
by dividing the fle5ible.budget amount for variable MOB by budgeted variable MOB
costs ,er machine.hourF
*C(%+00 1 *$0.00 ,er machine.hour8 1%#20 machine.hours allo-ed
&. :he actual number of out,ut units is the budgeted number of machine.hours allo-ed for
actual out,ut achieved divided by the ,lanned allocation rate of machine hours ,er unitF
1%#20 machine.hours 1 2 machine.hours ,er unit 8 #(0 units.
(. :he actual number of machine.hours used ,er out,ut unit is the actual number of
machine hours used (given) divided by the actual number of units manufacturedF
1%+2$ machine.hours 1 #(0 units 8 1.# machine.hours used ,er out,ut unit.
+.2$
8-8< ((0 min.) =(#r"al "&ri- 2%("&i"#a&i(" ($ 8-4;3.
1. Oey information underlying the com,utation of variances isF
A%&#al
R-#l&-
Fl5ibl-B#+'&
A!(#"&
S&a&i%-B#+'&
A!(#"&
1. Out,ut units (food ,rocessors) #(0 #(0 +++
2. Machine.hours 1%+2$ 1%#20 1%CC(
'. Machine.hours ,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- $ 1 Ho- 2) *$2.00 *$0.00 *$0.00
(. Variable MOB costs ,er unit
(Ho- $ 1 Ho- 1) *C#.+0 *+0.00 *+0.00
C. 2i5ed MOB costs *'&0%20+ *'$+%0#( *'$+%0#(
+. 2i5ed MOB costs ,er machine.
hour (Ho- C 1 Ho- 2) *1#2.00 *1+1.'0 *1#(.00
#. 2i5ed MOB costs ,er unit (C 1 1) *'($.+0 *'(2.(0 *'#2.00
3olution E5hibit +.'0 sho-s the com,utation of the variances.
=(#r"al "&ri- $(r )ariabl MOH, ,ar "++ D%!br 81, 4<1<6
Variable MOB !ontrol C(%(0+
Accounts 9ayable !ontrol and Other Accounts C(%(0+
?or=.in.9rocess !ontrol C(%+00
Variable MOB Allocated C(%+00
Variable MOB Allocated C(%+00
Variable MOB 3,ending Variance '%($+
Variable MOB !ontrol C(%(0+
Variable MOB Efficiency Variance '%+$0
=(#r"al "&ri- $(r $i5+ MOH, ,ar "++ D%!br 81, 4<1<6
2i5ed MOB !ontrol '&0%20+
?ages 9ayable% Accumulated @e,reciation% etc. '&0%20+
?or=.in.9rocess !ontrol 'C(%'20
2i5ed MOB Allocated 'C(%'20
2i5ed MOB Allocated 'C(%'20
2i5ed MOB 3,ending Variance 2%112
2i5ed MOB !ontrol '&0%20+
2i5ed MOB 9roduction.Volume Variance 2+%22$
+.2&
2. A+C#-&!"& ($ COGS
Variable MOB Efficiency Variance '%+$0
2i5ed MOB 9roduction.Volume Variance 2+%22$
Variable MOB 3,ending Variance '%($+
2i5ed MOB 3,ending Variance 2%112
!ost of Goods 3old 2(%'0$
SOLUTION EXHIBIT 8-8<
Variabl Ma"#$a%&#ri"' O)r*a+
A%&#al C(-&-
I"%#rr+
213
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
(1%+2$ *$2)
*C(%(0+
(1%+2$ *$0)
*C2%#(0
(1%#20 *$0)
*C(%+00
(1%#20 *$0)
*C(%+00
Fi5+ Ma"#$a%&#ri"' O)r*a+
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- O$
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
(1%#20 ) *1#()
*'&0%20+ *'$+%0#( *'$+%0#( *'C(%'20
+.2(
*'%($+ 0
3,ending variance
*'%+$0 2
Efficiency variance 4ever a variance
*2%1120
3,ending variance 4ever a variance
*2+%22$ 2
9roduction.volume variance
Gra,h for ,lanning
and control ,ur,ose
Gra,h for inventory
costing ,ur,ose
(*1+ ,er machine.hour)
8-81 ('0$0 min.) Gra/*- a"+ ()r*a+ )aria"%-.
1. Variable Manufacturing Overhead !osts
2i5ed Manufacturing Overhead !osts
8
8 *1+%000%000I 1%000%000 machine hours
8 *1+ ,er machine.hour
+.2C
:otal
Variable
Manuf.
Overhead
!osts
*1+%000%000
*#%000%000
Gra,h for ,lanning
and control and inventory
costing
,ur,oses at *#
,er machine.hour
1%000%000
Machine.Bours
:otal
2i5ed
Manuf.
Overhead
!osts
*1+%000%000
*#%000%000
1%000%000
Machine.Bours
2. (a) Variable Manufacturing Overhead Variance Analysis for 2resh% /nc. for 200#
A%&#al C(-&-
I"%#rr+
213
A%&#al I"/#& Qty.
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
*#%02&%000
(#&0%000 *#)
*+%&&0%000
(+C&%000 *#)
*C%+C&%000
(+C&%000 *#)
*C%+C&%000
(b) 2i5ed Manufacturing Overhead Variance Analysis for 2resh% /nc. for 200#
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
*1+%0&0%000 *1+%000%000 *1+%000%000
(+C&%000 ) *1+)
*1&%C&0%000
K
Alternative com,utationF 1%000%000 denominator hrs. ; +C&%000 budgeted hrs. allo-ed 8 12&%000 hrs.
12&%000 *1+ 8 *2%2&0%000 0
+.2+
*$C&%000 0
3,ending variance
*(C&%000 0
Efficiency variance 4ever a variance
*1%1&0%000 0
2le5ible.budget variance 4ever a variance
*1%1&0,000 0
0nderallocated variable overhead
(:otal variable overhead variance)
*&0%000 0
3,ending variance 4ever a variance
*2%2&0%000 0
K
9roduction.volume variance
*&0%000 0
2le5ible.budget variance
*2%2&0%000 0
K
9roduction.volume variance
*2%'00%000 0
0nderallocated fi5ed overhead
(:otal fi5ed overhead variance)
'. :he underallocated manufacturing overhead -asF variable% *1%1&0%000 and fi5ed%
*2%'00%000. :he fle5ible.budget variance and underallocated overhead are al-ays the same
amount for variable manufacturing overhead% because the fle5ible.budget amount of variable
manufacturing overhead and the allocated amount of variable manufacturing overhead coincide.
/n contrast% the budgeted and allocated amounts for fi5ed manufacturing overhead only coincide
-hen the budgeted in,ut of the allocation base for the actual out,ut level achieved e5actly euals
the denominator level.
$. :he choice of the denominator level -ill affect inventory costs. :he ne- fi5ed
manufacturing overhead rate -ould be *1+%000%000 1 C&0%000 8 *2$ ,er machine.hour. /n turn%
the allocated amount of fi5ed manufacturing overhead and the ,roduction.volume variance
-ould change as seen belo-F
A%&#al B#+'& All(%a&+
*1+%0&0%000 *1+%000%000
+C&%000 ) *2$ 8
*21%000%000
* &0 %000 0 * ' %000%000 2
K

2le5ible.budget variance 9rodn. volume variance
* 2%#& 0%000 2
:otal fi5ed overhead variance
K
Alternate com,utationF (C&0%000 ; +C&%000) ) *2$ 8 *'%000%000 2
:he maMor ,oint of this reuirement is that inventory costs (and% hence% income determination)
can be heavily affected by the choice of the denominator level used for setting the fi5ed
manufacturing overhead rate.
+.2#
8-84 ('0 min.) 9-)aria"% a"al,-i-, $i"+ &* #">"(7"-.
Ono-n figures denoted by an K
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#&
0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
All(%a&+6
B#+'&+ I"/#&
0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
Ca- A6
Variable
Manufacturing
Overhead *1&%000K
(1%'2& ) *1&)
*1#%+C&
(1%2&0K ) *1&)
*1+%C&0K
(1%2&0K ) *1&)
*1+%C&0K
2i5ed
Manufacturing
Overhead *2(%&00K
(Aum, sum)
*2&%000K
(Aum, sum)
*2&%000K
(1%2&0 ) *20
a
)
*2&%000K
:otal budgeted manufacturing overhead 8 *1+%C&0 N *2&%000 8 *$'%C&0
Ca- B6
Variable
Manufacturing
Overhead *1'%+1'
(1%(2& *+.&0K)
*1'%+1'
(1%(2&K *+.&0K)
*1'%+1'
(1%(2&K *+.&0K)
*1'%+1'
2i5ed
Manufacturing
Overhead *1(%C&0
(Aum, sum)
*1C%&00
b
(Aum, sum)
*1C%&00
b
(1%(2&K *10)
*1(%2&0
@enominator level 8 7udgeted 2MOB costs 1 7udgeted 2MOB rate 8 *1C%&00 1 *10 8 1%C&0
hours
+.'0
4ever a variance
*1%12& 0
Efficiency variance
*$%+C&K 2
3,ending variance
*0
9roduction.volume
variance
4ever a variance
*1%&00 0
3,ending variance
4ever a variance
*0
Efficiency variance
*0K
3,ending variance
*1%2&0 0K
9roduction.volume
variance
4ever a variance
*C&0 2K
3,ending variance
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#&
0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
All(%a&+6
B#+'&+ I"/#&
0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
Ca- C6
Variable
Manufacturing
Overhead *1&%&00
(2%#2& *&.00K)
*1$%(2&
(2%+C& *&.00K)
*1$%'C&
c
(2%+C& *&.00K)
*1$%'C&
c
2i5ed
Manufacturing
Overhead *'0%000K *2C%&00K *2C%&00K *2+%C&0
d
:otal budgeted manufacturing overhead 8 *1$%'C& N *2C%&00 8 *$1%+C&
a
7udgeted 2MOB rate 8 7udgeted 2MOB costs 1 @enominator level 8 *2&%000 1 1%2&0 8 *20
b
8
7udgeted
fi5ed manuf. overhead
N
7udgeted
variable manuf. overhead
*'1%'1'K 8 72MOB N (1%(2& *+.&0)
72MOB 8 *1C%&00
c
7udgeted hours allo-ed for actual out,ut achieved must be derived from the out,ut level variance before this figure
can be derived% or% since the fi5ed manufacturing overhead rate is *2C%&00 1 2%C&0 8 *10% and the allocated amount
is *2+%C&0% the budgeted hours allo-ed for the actual out,ut achieved must be 2%+C& (*2+%C&0 *10).
d
2%+C& (*2C%&00K 1 2%C&0K) 8 *2+%C&0
+.'1
4ever a variance
*2&0 0K
Efficiency variance
*+C& 0K
3,ending variance
*1%2&0 2K
9roduction.volume
variance
4ever a variance
*2%&00 0
3,ending variance
8-88 (1&2& min.) Fl5ibl b#+'&-, 9-)aria"% a"al,-i-.
1. 8
8
'%(00%000
C20%000
8 & hours ,er unit
7udgeted @AB allo-ed for May out,ut 8 ((%000 units & hrs.Iunit 8 ''0%000 hrs.
Allocated total MOB 8 ''0%000 :otal MOB rate ,er hour
8 ''0%000 *1.20 8 *'#(%000
2% '% $% &. 3ee 3olution E5hibit +.''
Variable manuf. overhead rate ,er @AB 8 *0.2& N *0.'$ 8 *0.&#
2i5ed manuf. overhead rate ,er @AB 8 *0.1+ N *0.1& N *0.2+ 8 *0.(1
2i5ed manuf. overhead budget for May 8 (*($+%000 N *&$0%000 N *1%00+%000) 1 12
8 *2%1#(%000 1 12 8 *1+'%000
or%
2i5ed manuf. overhead budget for May 8 *&$%000 N *$&%000 N *+$%000 8 *1+'%000
0sing the format of E5hibit +.& for variable manufacturing overhead and then fi5ed
manufacturing overheadF
Actual variable manuf. overheadF *C&%000 N *111%000 8 *1+(%000
Actual fi5ed manuf. overheadF *&1%000 N *&$%000 N *+$%000 8 *1+#%000
An overvie- of the $.variance analysis using the bloc= format of the te5t isF
9-Varia"%
A"al,-i-
S/"+i"'
Varia"%
E$$i%i"%,
Varia"%
Pr(+#%&i("-
V(l#!
Varia"%
Variable
Manufacturing
Overhead
*1&0 0 *+%+&0 2 4ever a variance
2i5ed
Manufacturing
Overhead
*(%000 0 4ever a variance *1+%'00 2
+.'2
SOLUTION EXHIBIT 8-88
Variabl Ma"#$a%&#ri"' O)r*a+
A%&#al C(-&-
I"%#rr+
213
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
*1+(%000
('1&%000 *0.&#)
*1+&%+&0
(''0%000 *0.&#)
*1#$%C00
(''0%000 *0.&#)
*1#$%C00
Fi5+ Ma"#$a%&#ri"' O)r*a+
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#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#&
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
*1+#%000 *1+'%000 *1+'%000
(''0%000 *0.(1)
*201%'00
Alternate com,utation of the ,roduction volume varianceF
8
8 ( )
'% (00% 000
''0%000
12
1 _

1
, ]
) * 0.(1
8 (''0%000 ; '00%000) ) *0.(1 8 *1+%'00 2
+.''
*1&0 0
3,ending variance
*+%+&0 2
Efficiency variance 4ever a variance
*(%000 0
3,ending variance 4ever a variance
*1+%'00 2
9roduction.volume variance
8-89 (20 min.) Dir%& Ma"#$a%&#ri"' Lab(r a"+ Variabl Ma"#$a%&#ri"' O)r*a+
Varia"%-
1. @irect Manufacturing Aabor variance analysis for 3arah 7ethPs Art 3u,,ly !om,any
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,. All(7+
$(r A%&#al O#&/#&
B#+'&+ Pri%
1'%000 ) 0.C& ) 20.2 1'%000 ) 0.C& ) 20 1'%000 ) 0.& ) 20.0
*1#(%#&0 *1#&%000 *1'0%000

*1%#&0 0 *(&%000 0
9rice variance Efficiency variance
2. Variable Manufacturing Overhead variance analysis for 3arah 7ethPs Art 3u,,ly !om,any
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,. All(7+
$(r A%&#al O#&/#&
B#+'&+ Ra&
1'%000 ) 0.C& ) #.C& 1'%000 ) 0.C& ) 10.0 1'%000 ) 0.& ) 10.0
*#&%0(2.& *#C%&00 *(&%000

*2%$'C.& 2 *'2%&00 0
3,ending variance Efficiency variance
'. :he favorable s,ending variance for variable manufacturing overhead suggests that less costly
items -ere used% -hich could have a negative im,act on labor efficiency. 7ut note that the
-or=ers -ere ,aid a higher rate than budgeted% -hich% if it indicates the hiring of more ualified
em,loyees% should lead to favorable labor efficiency variances. Moreover% the ,rice variance and
the s,ending variance are both very small% a,,ro5imately 1D and 2.&D res,ectively% -hile the
efficiency variances are very large% each eualing &0D of e5,ected costs. /t is clear therefore
that the efficiency variances are related to factors other than the cost of the labor or overhead.
$. /f the variable overhead consisted only of costs that -ere related to direct manufacturing
labor% then 3arah is correct . both the labor efficiency variance and the variable overhead
efficiency variance -ould reflect real cost overruns due to the inefficient use of labor. Bo-ever%
a ,ortion of variable overhead may be a function of factors other than direct labor (e.g.% the costs
of energy or the usage of indirect materials). /n this case% allocating variable overhead using
direct labor as the only base -ill inflate the effect of inefficient labor usage on the variable
overhead efficiency variance. :he real effect on firm ,rofitability -ill be lo-er% and -ill li=ely
be ca,tured in a favorable s,ending variance for variable overhead.
+.'$
8-8@ ('0 min.) Ca#-- ($ I"+ir%& Varia"%-
1. Variable Overhead Variance Analysis for BeatherPs Borse 3,a for August 200#
A%&#al A%&#al i"/#& B#+'&+ i"/#& all(7+ $(r
Variabl O)r*a+ 5 B#+'&+ ra& A%&#al (#&/#& 5 B#+'&+ ra&
(#&0 ) '+ ) *0.2) (#00 ) '+ ) *0.2)
*C%&00 *C%220 *(%+$0
*2+0 0 *'+0 0
3,ending variance Efficiency variance
2. 2i5ed Overhead Variance Analysis for BeatherPs Borse 3,a for August 200#
A%&#al S&a&i% B#+'& B#+'&+ i"/#& all(7+ $(r
Fi5+ O)r*a+ Fi5+ O)r*a+ A%&#al (#&/#& 5 B#+'&+ Ra&
(#00 5 $0 5 *1.&) (#00 ) '+ ) *1.&)
*&0%000 *&$%000 &1%'00
*$%000 2 *2%C00 0
3,ending variance 9roduction.volume variance
'. :he variable overhead s,ending variance arises from the fact that the cost of horse feed%
sham,oo% ribbons and other su,,lies -as higher% ,er -eighted average horse.guest -ee=%
than e5,ected (*C%&00I(#&0)'+)lbs 8 *0.20+ ,er lb Q *0.2 ,er lb). 0nli=e the material
and labor ,rice variances% -hich only reflect the ,rices ,aid% the s,ending variance could
have both a cost and usage com,onent. BB3 -ould have a negative s,ending variance if
they ,aid more for feed than e5,ected or if the horses ate more feed than e5,ected.
$. :he *'+0 unfavorable variable overhead efficiency variance reflects the fact that the
average -eight of a horse -as higher than e5,ected. BB3 e5,ected horses to -eigh an
average of #00 lbs but during August% the horses -eighed an average of #&0 lbs. Aarger
horses are e5,ected to consume more variable overhead% such as horse feed and sham,oo%
hence the unfavorable nature of the variance.
&. 2i5ed overhead is fi5ed -ith res,ect to horse -eight. :his does not mean that it can be
forecasted -ith 100D accuracy. 2or e5am,le% salaries or actual costs for advertising may
have been higher than e5,ected% leading to the *$%000 unfavorable variance.
(. :he ,roduction.volume variance of *2%C00 e5ists because the fi5ed overhead rate -as
based on the forecasted number of horse guest.-ee=s% $0% -hile the fi5ed overhead -as
a,,lied using the actual number of horse guest.-ee=s% '+. :he overestimation of the
number of horse guests in August -ould lead to an under.absor,tion of fi5ed overhead%
resulting in the unfavorable ,roduction.volume variance. /f the estimate -as too far off
from the actual number of horses% BB3 might ,otentially not charge enough to cover
their costs.
+.'&
8-86 (20 min.) A%&i)i&,-ba-+ %(-&i"', ba&%*-l)l )aria"% a"al,-i-
1. 3tatic budget number of crates 8 7udgeted ,airs shi,,ed I 7udgeted ,airs ,er crate
8 2$0%000I12
8 20%000 crates
2. 2le5ible budget number of crates 8 Actual ,airs shi,,ed I 7udgeted ,airs ,er crate
8 1+0%000I12
8 1&%000 crates
'. Actual number of crates shi,,ed 8 Actual ,airs shi,,ed I Actual ,airs ,er bo5
8 1+0%000I10
8 1+%000 crates
$. 3tatic budget number of hours 8 3tatic budget number of crates ) budgeted hours ,er bo5
8 20%000 ) 1.2 8 2$%000 hours
2i5ed overhead rate 8 3tatic budget fi5ed overhead I static budget number of hours
8 (0%000I2$%000
8 *2.&0 ,er hour
&. Variable Overhead Variance Analysis for HicaPs 2leet 2eet /nc. for 200+
A%&#al A%&#al *(#r- B#+'&+ *(#r- all(7+ $(r
Variabl O)r*a+ 5 B#+'&+ ra& A%&#al (#&/#& 5 B#+'&+ ra&
(1+%000 ) 1.1 ) *21) (1+%000 ) 1.1 ) *20) (1&%000 ) 1.2 ) *20)
*$1&%+00 *'#(%000 *'(0%000
*1#%+00 0 *'(%000 0
3,ending variance Efficiency variance
(. 2i5ed Overhead Variance Analysis for HicaPs 2leet 2eet /nc. for 200+

A%&#al S&a&i% B#+'& B#+'&+ *(#r- all(7+ $(r
Fi5+ O)r*a+ Fi5+ O)r*a+ A%&#al (#&/#& 1 B#+'&+ Ra&
(1&%000 ) 1.2 )*2.&)
*&&%000 *(0%000 *$&%000
*&%000 2 *1&%000 0
3,ending variance 9roduction volume variance
+.'(
8-8: ('0 min.) A%&i)i&,-ba-+ %(-&i"', ba&%*-l)l )aria"% a"al,-i-
1. 3tatic budget number of setu,s 8 7udgeted boo=s ,roducedI 7udgeted boo=s ,er setu,
8 200%000 1 &00 8 $00 setu,s
2. 2le5ible budget number of setu,s 8 Actual boo=s ,roduced I 7udgeted boo=s ,er setu,
8 21(%000 1 &00 8 $'2 setu,s
'. Actual number of setu,s 8 Actual boo=s ,roduced I Actual boo=s ,er setu,
8 21(%000I$+0 8 $&0 setu,s
$. 3tatic budget number of hours 8 3tatic budget R of setu,s ) 7udgeted hours ,er setu,
8 $00 ) ( 8 2%$00 hours
2i5ed overhead rate 8 3tatic budget fi5ed overhead I 3tatic budget number of hours
8 C2%000I2%$00 8 *'0 ,er hour
&. 7udgeted variable overhead cost of a setu,
8 7udgeted variable cost ,er setu,.hour ) 7udgeted number of setu,.hours
8 *100 ) ( 8 *(00.

7udgeted total overhead cost of a setu,
8 7udgeted variable overhead cost N 2i5ed overhead rate ) 7udgeted number of setu,.hours
8 *(00 N *'0 ) ( 8 C+0.
3o% the charge of *C00 covers the budgeted incremental (i.e.% variable overhead) cost of a
setu,% but not the budgeted full cost.
(. Variable 3etu, Overhead Variance Analysis for "o 4athan 9ublishing !om,any for 200#
A%&#al A%&#al *(#r- S&a"+ar+ *(#r-
Variabl O)r*a+ 5 B#+'&+ ra& 5 S&a"+ar+ ra&
($&0 ) (.& ) *#0) ($&0 ) (.& ) *100) ($'2 ) (.0 ) *100)
*2('%2&0 *2#2%&00 *2&#%200
*2#%2&02 *''%'000
3,ending variance Efficiency variance
+.'C
C. 2i5ed 3etu, Overhead Variance Analysis for "o 4athan 9ublishing !om,any for 200#
A%&#al S&a&i% B#+'& S&a"+ar+ *(#r-
Fi5+ O)r*a+ Fi5+ O)r*a+ 5 B#+'&+ Ra&
($'2 ) (.0 ) *'0)
*C#%000 *C2%000 *CC%C(0
*C%000 0 *&%C(0 2
3,ending variance 9roduction.volume variance
+. HeMecting an order may have im,lications for future orders (i.e.% ,rofessors -ould be
reluctant to order boo=s from this ,ublisher again). "o 4athan should consider factors
such as ,rior history -ith the customer and ,otential future sales.
/f a boo= is relatively ne-% "o 4athan might consider running a full batch and holding the
e5tra boo=s in case of a second s,ecial order or Must hold the e5tra boo=s until ne5t
semester.
/f the s,ecial order comes at heavy volume times% "o should loo= at the o,,ortunity cost
of filling it% i.e.% acce,ting the order may interfere -ith or delay the ,rinting of other
boo=s.
+.'+
8-88 ('& min.) Pr(+#%&i("-V(l#! Varia"% A"al,-i- a"+ Sal- V(l#! Varia"%.
1. and 2. 2i5ed Overhead Variance Analysis for @a-n 2loral !reations% /nc. for 2ebruary
A%&#al Fi5+ S&a&i% B#+'& S&a"+ar+ H(#r-
O)r*a+ Fi5+ O)r*a+ 1 B#+'&+ Ra&
((00 ) 1.& ) *(K)
*#%200 *#%000 *&%$00
*200 0 *'%(00 0
3,ending variance 9roduction.volume variance
K fi5ed overhead rate 8 (budgeted fi5ed overhead)I(budgeted @A hours at ca,acity)
8 *#%000I(1000 5 1.& hours)
8 *#%000I1%&00 hours
8 *(Ihour
'. An unfavorable ,roduction.volume variance measures the cost of unused ca,acity. 9roduction
at ca,acity -ould result in a ,roduction.volume variance of 0 since the fi5ed overhead rate is
based u,on e5,ected hours at ca,acity ,roduction. Bo-ever% the e5istence of an unfavorable
volume variance does not necessarily im,ly that management is doing a ,oor Mob or incurring
unnecessary costs. 0sing the suggestions in the ,roblem% t-o reasons can be identified.
a. 2or most ,roducts% demand varies from month to month -hile commitment to the
factors that determine ca,acity% e.g. si<e of -or=sho, or su,ervisory staff% tends to remain
relatively constant. /f @a-n -ants to meet demand in high demand months% it -ill have
e5cess ca,acity in lo- demand months. /n addition% forecasts of future demand contain
uncertainty due to un=no-n future factors. Baving some e5cess ca,acity -ould allo-
@a-n to ,roduce enough to cover ,ea= demand as -ell as slac= to deal -ith une5,ected
demand surges in non.,ea= months.
b. 7asic economics ,rovides a demand curve that sho-s a tradeoff bet-een ,rice charged
and uantity demanded. 9otentially% @a-n could have a lo-er net revenue if they
,roduce at ca,acity and sell at a lo-er ,rice than if they sell at a higher ,rice at some
level belo- ca,acity.
/n addition% the unfavorable ,roduction.volume variance may not re,resent a
feasible cost savings associated -ith lo-er ca,acity. Even if @a-n could shift to
lo-er fi5ed costs by lo-ering ca,acity% the fi5ed cost may behave as a ste,
function. /f so% fi5ed costs -ould decrease in fi5ed amounts associated -ith a range
of ,roduction ca,acity% not a s,ecific ,roduction volume. :he ,roduction.
volume variance -ould only accurately identify ,otential cost savings if
the fi5ed cost function is continuous% not discrete.
+.'#
$. :he static.budget o,erating income for 2ebruary isF
Hevenues *&& ) 1%000 *&&%000
Variable costs *2& ) 1%000 2&%000
2i5ed overhead costs #%000
3tatic.budget o,erating income * 21%000
:he fle5ible.budget o,erating income for 2ebruary isF
Hevenues *&& ) (00 *''%000
Variable costs *2& ) (00 1&%000
2i5ed overhead costs #%000
2le5ible.budget o,erating income * #%000
:he sales.volume variance re,resents the difference bet-een the static.budget o,erating income
and the fle5ible.budget o,erating incomeF
3tatic.budget o,erating income *21%000
2le5ible.budget o,erating income #%000
3ales.volume variance *12%000 0
Euivalently% the sales.volume variance ca,tures the fact that -hen @a-n sells (00 units instead
of the budgeted 1%000% only the revenue and the variable costs are affected. 2i5ed costs remain
unchanged. :herefore% the shortfall in ,rofit is eual to the budgeted contribution margin ,er
unit times the shortfall in out,ut relative to budget.
8 ; )
D (*&& ; *2&) ) $00 8 *'0 ) $00 8 *12%000 0
/n contrast% -e com,uted in reuirement 2 that the ,roduction.volume variance -as *'%(000.
:his ca,tures only the ,ortion of the budgeted fi5ed overhead e5,ected to be unabsorbed because
of the $00.unit shortfall. :o com,are it to the sales.volume variance% consider the follo-ingF
7udgeted selling ,rice *&&
7udgeted variable cost ,er unit *2&
7udgeted fi5ed cost ,er unit (*#%000 1 1%000) #
7udgeted cost ,er unit '$
7udgeted ,rofit ,er unit * 21
O,erating income based on budgeted ,rofit ,er unit
*21 ,er unit ) (00 units *12%(00
+.$0
:he *'%(00 0 ,roduction.volume variance e5,lains the difference bet-een o,erating income
based on the budgeted ,rofit ,er unit and the fle5ible.budget o,erating incomeF
O,erating income based on budgeted ,rofit ,er unit *12%(00
9roduction.volume variance '%(00 0
2le5ible.budget o,erating income * #%000
3ince the sales.volume variance re,resents the difference bet-een the static. and fle5ible.budget
o,erating incomes% the difference bet-een the sales.volume and ,roduction.volume variances%
-hich is referred to as the o,erating.income volume variance isF
O,erating.income volume variance
8 3ales.volume variance ; 9roduction.volume variance
8 3tatic.budget o,erating income . O,erating income based on budgeted ,rofit ,er unit
8 *21%000 0 ; *12%(00 0 8 *+%$00 0.
:he o,erating.income volume variance e5,lains the difference bet-een the static.budget
o,erating income and the budgeted o,erating income for the units actually sold. :he static.
budget o,erating income is *21%000 and the budgeted o,erating income for (00 units -ould have
been *12%(00 (*21 o,erating income ,er unit

(00 units). :he difference% *+%$00 0% is the

o,erating.income volume variance% i.e.% the $00 unit dro, in actual volume relative to budgeted
volume -ould have caused an e5,ected dro, of *+%$00 in o,erating income% at the budgeted
o,erating income of *21 ,er unit. :he o,erating.income volume variance assumes that *&0%000
in fi5ed cost (*# ,er unit

$00 units) -ould be saved if ,roduction and sales volumes decreased

by $00 units.
+.$1
8-8; ('0$0 min.) C(!/r*"-i) r)i7 ($ C*a/&r- : a"+ 8, 7(r>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 *1.10 8 1(0%000 ,ounds
b. 9ounds of e5cess direct materials used 8 *(#%000 1 *11.&0 8 (%000 ,ounds
c. Variable manufacturing overhead s,ending variance 8 *10%'&0 ; *1+%000 8 *C%(&0 2
d. 3tandard direct manufacturing labor rate 8 *+00%000 1 $0%000 hours 8 *20 ,er hour
Actual direct manufacturing labor rate 8 *20 N *0.&0 8 *20.&0
Actual direct manufacturing labor.hours 8 *&22%C&0 1 *20.&0
8 2&%&00 hours
e. 3tandard variable manufacturing overhead rate 8 *$+0%000 1 $0%000
8 *12 ,er direct manuf. labor.hour
Variable manuf. overhead efficiency variance of *1+%000 1 *12 8 1%&00 e5cess hours
Actual hours ; E5cess hours 8 3tandard hours allo-ed for units ,roduced
2&%&00 ; 1%&00 8 2$%000 hours
f. 7udgeted fi5ed manufacturing overhead rate 8 *($0%000 1 $0%000 hours
8 *1( ,er direct manuf. labor.hour
2i5ed manufacturing overhead allocated 8 *1( 2$%000 hours 8 *'+$%000
9roduction.volume variance 8 *($0%000 ; *'+$%000 8 *2&(%000 0
2. :he control of variable manufacturing overhead reuires the identification of the cost drivers
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-atts used% uantities of
lubricants used% and re,air ,arts and hours used. :he most convincing -ay to discover -hy
overhead ,erformance did not agree -ith a budget is to investigate ,ossible causes% line item by
line item.
/ndividual fi5ed overhead items are not usually affected very much by day.to.day control.
/nstead% they are controlled ,eriodically through ,lanning decisions and budgeting ,rocedures
that may sometimes have ,lanning hori<ons covering si5 months or a year (for e5am,le%
management salaries) and sometimes covering many years (for e5am,le% long.term leases and
de,reciation on ,lant and eui,ment).
+.$2
SOLUTION EXHIBIT 8-8;
A%&#al C(-&-
I"%#rr+
2A%&#al I"/#& 0&,.
A%&#al Ra&3
A%&#al I"/#& 0&,.
B#+'&+ Ra&
P#r%*a-- U-a'
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
B#+'&+ Ra&
@irect
Materials
1(0%000 *10.$0
*1%(($%000
1(0%000 *11.&0
*1%+$0%000
#(%000 *11.&0
*1%10$%000
' '0%000 *11.&0
*1%0'&%000
@irect
Manuf.
Aabor
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#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
B#+'&+ Ra&
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
B#+'&+ Ra&
Variable
MOB
0.+& '0%000 *11.C0
*2#+%'&0
0.+& '0%000 *12
*'0(%000
0.+0 '0%000 *12
*2++%000
0.+0 '0%000 *12
*2++%000
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- ($
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
2i5ed
MOB *&#C%$(0 *($0%000
0.+0 ) &0%000 ) *1(
*($0%000
0.+0 5 '0%000 ) *1(
*'+$%000
+.$'
*1C(%000 2
9rice variance
*(#%000 0
Efficiency variance
*12%C&0 0
9rice variance
*'0%000 0
Efficiency variance
*$2%C&0 0
2le5ible.budget variance
*C%(&0 2
3,ending variance
*1+%000 0
Efficiency
variance
4ever a variance
*10%'&0 0
2le5ible.budget variance 4ever a variance
*2&(%000 0
*$2%&$0 2
2le5ible.budget variance
*2&(%000 0
9roduction volume variance
4ever a variance
*$2%&$0 2
3,ending variance
volume variance
8-9< ('0&0 min.) R)i7 ($ C*a/&r- : a"+ 8, 8-)aria"% a"al,-i-.
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'%$00 lbs. *&.00) * 11C%000
@irect manufacturing labor% C%+00 *C&.00
C%+00 & hrs. *1&.00 (or '#%000 hrs. *1&.00) &+&%000
Manufacturing overheadF
Variable% C%+00 *'0.00 (or '#%000 hrs. *(.00) 2'$%000
2i5ed% C%+00 *$0.00 (or '#%000 hrs. *+.00) '12%000
:otal *1%2$+%000
:he follo-ing is for later useF
2i5ed manufacturing overhead% a lum,.sum budget *'20%000
K
K
2i5ed manufacturing overhead rate 8
*+.00 8
7udget
$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- of
the '.variance analysis using the bloc= format of the te5t isF
8-Varia"%
A"al,-i-
S/"+i"'
Varia"%
E$$i%i"%,
Varia"%
Pr(+#%&i("
V(l#! Varia"%
:otal Manufacturing
Overhead
*'#%$00 0 *(%(00 0 *+%000 0
+.$$
SOLUTION EXHIBIT 8-9<
A%&#al C(-&-
I"%#rr+6
A%&#al I"/#& 0&,.
A%&#al I"/#& 0&,.

B#+'&+ Pri%
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
1 A%&#al Ra& P#r%*a-- U-a' 1 B#+'&+ Pri%
@irect
Materials
(2&%000 *&.20)
*1'0%000
(2&%000 *&.00)
*12&%000
(2'%100 *&.00)
*11&%&00
(2'%$00 *&.00)
*11C%000
*&%000 0 *1%&00 2
a. 9rice variance b. Efficiency variance
@irect
Manuf.
Aabor
($0%100 *1$.(0)
*&+&%$(0
($0%100 *1&.00)
*(01%&00
('#%000 *1&.00)
*&+&%000
*1(%0$0 2 *1(%&00 0
c. 9rice variance d. Efficiency variance
A%&#al
C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
B#+'&+ Ra&
All(%a&+6
2B#+'&+ I"/#& 0&,.
All(7+ $(r
A%&#al O#&/#&
B#+'&+ Ra&3
Variable
Manuf.
Overhead (not given)
($0%100 *(.00)
*2$0%(00
('#%000 *(.00)
*2'$%000
('#%000 *(.00)
*2'$%000
*(%(00 0
Efficiency variance 4ever a variance
2i5ed
Manuf.
Overhead (not given) *'20%000 *'20%000
('#%000 *+.00)
*'12%000
*+%000 0
K
4ever a variance 9rodn. volume variance
:otal
Manuf.
Overhead
(given)
*(00%000
(*2$0%(00 N *'20%000)
*&(0%(00
(*2'$%000 N *'20%000)
*&&$%000
(*2'$%000 N *'12%000)
*&$(%000
*'#%$00 0 *(%(00 0 *+%000 0
e. 3,ending variance f. Efficiency variance g. 9rodn. volume variance
K
@enominator level in hours $0%000
9roduction volume in standard hours allo-ed '#%000
9roduction.volume variance 1%000 hours 5 *+.00 8 *+%000 0
+.$&
8-91 (20 minutes) N("-$i"a"%ial )aria"%-
1. Variance Analysis of /ns,ection Bours for @aisy !anine 9roducts for May
A%&#al P(#"+- S&a"+ar+ P(#"+- I"-/%&+
A%&#al H(#r- I"-/%&+EB#+'&+ $(r A%&#al O#&/#& EB#+'&+
F(r I"-/%&i("- P(#"+- /r *(#r P(#"+- /r *(#r
200%000lbsI1%000 lbs ,er hour (2%2&0%000 5 .1)I1%000 lbs ,er hour
210 hours 200 hours 22& hours
10 hours 0 2& hours 2
E$$i%i"%, Varia"% 0#a"&i&, Varia"%
2. Variance Analysis of 9ounds 2ailing /ns,ection for @aisy !anine 9roducts for May
A%&#al /(#"+- S&a"+ar+ P(#"+- I"-/%&+
A%&#al P(#"+- I"-/%&+ 5 B#+'&+ $(r A%&#al O#&/#& 5 B#+'&+
Faili"' I"-/%&i("- I"-/%&i(" Fail#r Ra& I"-/%&i(" Fail#r Ra&
(200%000lbs 5 .02) (2%2&0%000 5 .1 5 .02)
'%&00 lbs $%000 lbs $%&00 lbs
500 lbs F 500 lbs F
E$$i%i"%, Varia"% 0#a"&i&, Varia"%
+.$(
8-94 (20 minutes) N("-$i"a"%ial /r$(r!a"% !a-#r-
1. :he cost of the ball bearings -ould be indirect materials if it is either not ,ossible to trace
the costs to individual ,roducts% or if the cost is so small relative to other costs that it is
im,ractical to do so. 3ince @e,artment 7 ma=es a fairly constant number of finished ,roducts
($00 units) each day% it -ould be easy to trace the cost of bearings to the -heels com,leted daily.
Bo-ever% the fact that Hollie measures ball bearings by -eight and discards leftover bearings at
the end of each day suggests that they are a relatively ine5,ensive item and not -orth the effort
to restoc= or trac= in inventory. As such% it could be argued that ball bearings should be classified
as overhead (e.g.% indirect materials).
2. 4on.financial ,erformance measures for @e,artment 7 might includeF
4umber or ,ro,ortion of -heels sent bac= for re-or= andIor amount or ,ro,ortion of
time s,ent on re-or=L
4umber of -heels thro-n a-ay% ratio of -heels thro-n a-ay to -heels re-or=ed% andIor
ratio of bad to good -heelsL
Amount of do-n time for bro=en machines during the dayL
?eight of ball bearings discarded% or ratio of -eights used and discarded.
'. /f the number of -heels thro-n a-ay is significant relative to the number of re-or=ed
-heels% then it is not efficient to re-or= them and so Hollie should re.e5amine the re-or= ,rocess
or even Must thro- a-ay all the bad -heels -ithout re-or=.
/f the amount of re-or= is significant then the original ,rocess is not turning out uality
goods in a timely manner. Hollie might slo- do-n the ,rocess in @e,artment 7 so it ta=es a
little longer to ma=e each good -heel% but the number of good -heels -ill be higher and may
even save time overall if re-or= time dro,s considerably. :hey might also need to service the
machines more often than Must after the total daily ,roduction run% in -hich case they -ill trade
off intentional do-n time for more efficient ,rocessing.
/f the amount of unintentional do-n time is significant they might bring in the mechanics
during the day to fi5 a machine that goes do-n during a ,roduction run.
2inally% Hollie might consider determining a better measure of ball bearings to reuisition
each day so that fe-er are discarded% and might also =ee, any leftover ball bearings for use the
ne5t day.
+.$C
C(llab(ra&i) Lar"i"' Pr(bl!
8-98 ($& min.) O)r*a+ )aria"%-, &*i%-.
1. a. :otal budgeted overhead *'1%2&0%000
7udgeted variable overhead
(*10 budgeted rate ,er machine.hour ) 2%&00%000
budgeted machine.hours) 2&%000%000
7udgeted fi5ed overhead * (%2&0%000
7udgeted fi5ed OB rate
*(%2&0%000 budgeted amount
8 *2.&0 ,er machine.hour
2%&00%000 budgeted machine.hours

b. 2i5ed overhead s,ending variance 8 Actual costs incurred ; 7udgeted amount.

7ecause fi5ed overhead s,ending variance is unfavorable% the amount of actual costs is
higher than the budgeted amount.
Actual cost 8 *(%2&0%000 N *1%&00%000
8 *C%C&0%000
c. 9roduction.volume variance 8
7udgeted fi5ed overhead ;
8 *(%2&0%000 ; (*2.&0 ,er machine.hour ) 2 machine.hours ,er unit
K
) 1%2$&%000
units)
8 *(%2&0%000 ; *(%22&%000
8 *2&%000 0
K
7udgeted variable overhead ,er unit 8 *20
7udgeted variable overhead rate 8 *10 ,er machine.hour
:herefore% budgeted machine hours allo-ed ,er unit 8 *20I*10 8 2 machine.hours
2. Variable overhead s,ending varianceF

Actual variable
overhead cost
,er unit of cost
allocation base
;
7udgeted variable
overhead cost
,er unit of
cost.allocation base
)
Actual uantity
of variable overhead
cost.allocation base
used for actual out,ut
*2&%200%000 budget amount
*10 ,er machine.hour 2% $00% 000 machine.hours
2%$00%000 actual machine.hours
1

1
]

8 (*10.&0 ; *10) ) 2%$00%000
8 *1%200%000 0
+.$+
Variable overhead efficiency varianceF
Actual units of 7udgeted units of 7udgeted
variable overhead variable overhead variable
cost.allocation ; cost.allocation base ) overhead
base used for allo-ed for rate
actual out,ut actual out,ut
8 (2%$00%000 ; (2 ) 1%2$&%000)) ) *10
8 (2%$00%000 ; 2%$#0%000) ) *10
8 *#00%000 2
'. 7y mani,ulating% Hemich has created a si<able unfavorable fi5ed overhead s,ending
variance or% at least% has increased its magnitude. "ac= HemichPs action is clearly unethical.
Variances dra- attention to the areas that need management attention. /f the to, management
relies on Hemich% due to his e5,ertise% to inter,ret and e5,lain the reasons for the unfavorable
variance% it is li=ely that his re,ort -ill be biased and misleading to the to, management. :he to,
management may erroneously conclude that Monroe is not able to manage his fi5ed overhead
costs effectively. Another ,robable adverse outcome of HemichPs actions -ill be that Monroe
-ill have even less confidence in the usefulness of accounting re,orts. :his% of course% defeats
the ,ur,ose of ,re,aring the re,orts. /n summary% HemichPs unethical actions -ill -aste to,
managementPs time and may lead to -rong decisions.
+.$#