CHAPTER 8

FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND

MANAGEMENT CONTROL
8-1

Effective planning of variable overhead costs involves:

1. Planning to undertake only those variable overhead activities that add value for
customers using the product or service, and
2. Planning to use the drivers of costs in those activities in the most efficient way.

8-2
At the start of an accounting period, a larger percentage of fixed overhead costs are
locked-in than is the case with variable overhead costs. When planning fixed overhead costs, a
company must choose the appropriate level of capacity or investment that will benefit the
company over a long time. This is a strategic decision.
8-3
The key differences are how direct costs are traced to a cost object and how indirect costs
are allocated to a cost object:

Direct costs
Indirect costs

Actual Costing
Actual prices
Actual inputs used
Actual indirect rate
Actual inputs used

Standard Costing
Standard prices
Standard inputs allowed for actual output
Standard indirect cost-allocation rate
Standard quantity of cost-allocation base
allowed for actual output

8-4

Steps in developing a budgeted variable-overhead cost rate are:

1. Choose the period to be used for the budget,
2. Select the cost-allocation bases to use in allocating variable overhead costs to the
output produced,
3. Identify the variable overhead costs associated with each cost-allocation base, and
4. Compute the rate per unit of each cost-allocation base used to allocate variable
overhead costs to output produced.

8-5

Two factors affecting the spending variance for variable manufacturing overhead are:
a. Price changes of individual inputs (such as energy and indirect materials) included in
variable overhead relative to budgeted prices.
b. Percentage change in the actual quantity used of individual items included in variable
overhead cost pool, relative to the percentage change in the quantity of the cost driver
of the variable overhead cost pool.

8-6

Possible reasons for a favorable variable-overhead efficiency variance are:

Workers more skillful in using machines than budgeted,
Production scheduler was able to schedule jobs better than budgeted, resulting in
lower-than-budgeted machine-hours,
Machines operated with fewer slowdowns than budgeted, and
Machine time standards were overly lenient.

8-1

8-7
A direct materials efficiency variance indicates whether more or less direct materials
were used than was budgeted for the actual output achieved. A variable manufacturing overhead
efficiency variance indicates whether more or less of the chosen allocation base was used than
was budgeted for the actual output achieved.
8-8

Steps in developing a budgeted fixed-overhead rate are

1. Choose the period to use for the budget,
2. Select the cost-allocation base to use in allocating fixed overhead costs to output
produced,
3. Identify the fixed-overhead costs associated with each cost-allocation base, and
4. Compute the rate per unit of each cost-allocation base used to allocate fixed overhead
costs to output produced.

8-9

The relationship for fixed-manufacturing overhead variances is:

Flexible-budget variance

Efficiency variance
(never a variance)

Spending variance

There is never an efficiency variance for fixed overhead because managers cannot be
more or less efficient in dealing with an amount that is fixed regardless of the output level. The
result is that the flexible-budget variance amount is the same as the spending variance for fixedmanufacturing overhead.
8-10 For planning and control purposes, fixed overhead costs are a lump sum amount that is
not controlled on a per-unit basis. In contrast, for inventory costing purposes, fixed overhead
costs are allocated to products on a per-unit basis.
8-11 An important caveat is what change in selling price might have been necessary to attain
the level of sales assumed in the denominator of the fixed manufacturing overhead rate. For
example, the entry of a new low-price competitor may have reduced demand below the
denominator level if the budgeted selling price was maintained. An unfavorable productionvolume variance may be small relative to the selling-price variance had prices been dropped to
attain the denominator level of unit sales.

8-2

8-12 A strong case can be made for writing off an unfavorable production-volume variance to
cost of goods sold. The alternative is prorating it among inventories and cost of goods sold, but
this would penalize the units produced (and in inventory) for the cost of unused capacity, i.e.,
for the units not produced. But, if we take the view that the denominator level is a soft
numberi.e., it is only an estimate, and it is never expected to be reached exactly, then it makes
more sense to prorate the production volume variancewhether favorable or notamong the
inventory stock and cost of goods sold. Prorating a favorable variance is also more conservative:
it results in a lower operating income than if the favorable variance had all been written off to
cost of goods sold. Finally, prorating also dampens the efficacy of any steps taken by company
management to manage operating income through manipulation of the production volume
variance. In sum, a production-volume variance need not always be written off to cost of goods
sold.
8-13

The four variances are:

Variable manufacturing overhead costs
spending variance
efficiency variance
Fixed manufacturing overhead costs
spending variance
production-volume variance

8-14 Interdependencies among the variances could arise for the spending and efficiency
variances. For example, if the chosen allocation base for the variable overhead efficiency
variance is only one of several cost drivers, the variable overhead spending variance will include
the effect of the other cost drivers. As a second example, interdependencies can be induced when
there are misclassifications of costs as fixed when they are variable, and vice versa.
8-15 Flexible-budget variance analysis can be used in the control of costs in an activity area by
isolating spending and efficiency variances at different levels in the cost hierarchy. For example,
an analysis of batch costs can show the price and efficiency variances from being able to use
longer production runs in each batch relative to the batch size assumed in the flexible budget.

8-3

EXERCISES
8-30
Solution
Variable manufacturing overhead variance analysis.
1. Denominator level= (32,00,000 0.02 hours) = 64,000 hours
2.
1. Output units (baguettes)
2. Direct manufacturing labor-hours
3. Labor-hours per output unit (2 1)
4. Variable MOH costs
5. Variable MOH per labor-hour (4 2)
6. Variable MOH per output unit (4 1)

Actual Results
28,00,000
50,400
0.018
Rs 68,04,000
Rs 135
Rs 2.43

Flexible Budget Amount

28,00,000
56,000a
0.020
Rs 56,00,000
Rs 100
Rs 2.00

2,800,000 0.020 = 56,000 hours

Actual
Costs
Incurred
(1)
(50,400 Rs 135)
Rs 68,04,000

Flexible Budget:
Budgeted Input
Allowed for
Actual Output
Budgeted Rate
(3)
(56,000 Rs 100)
Rs 56,00,000

Actual Input
Budgeted Rate
(2)
(50,400 Rs 100)
Rs 50,40,000

Rs 17,64,000 U
Spending variance

Rs 5,60,000 F
Efficiency variance

Rs 12,04,000 U
Flexible-budget variance

Allocated:
Budgeted Input
Allowed for
Actual Output
Budgeted Rate
(4)
(56,000 Rs 100)
Rs 56,00,000

Never a variance
Never a variance

3. Spending variance of Rs 17,64,000 U. It is unfavorable because variable manufacturing overhead was 35% higher than planned. A possible explanation could be an increase in energy rates relative to the rate per standard labor-hour assumed in the flexible budget.
Efficiency variance of Rs 5,60,000 F is favorable because the actual number of direct manufacturing labor-hours required was lower
than the number of hours in the flexible budget. Labor was more efficient in producing the baguettes than management had anticipated in
the budget. This could occur because of improved morale in the company, which could result from an increase in wages or an improvement in the compensation scheme.
Flexible-budget variance. It is unfavorable because the favorable efficiency variance was not large enough to compensate for the large
unfavorable spending variance.

8-31
Solution
4-variance analysis, fill in the blanks.
Variable
1. Spending variance
Rs 19,000 U
2. Efficiency variance
10,000 U
3. Production-volume variance
NEVER
4. Flexible-budget variance
29,000 U
5. Underallocated (overallocated) MOH
29,000 U
These relationships could be presented in the same way as in Exhibit 8-31 (variable overhead shown first):
Solution Exhibit 8-31
Same Budgeted
Flexible Budget:
Lump Sum
Same Budgeted
Actual
(as in Static Budget)
Lump Sum (as in Static
Costs
Regardless of
Budget) Regardless
Incurred
Output Level
of Output Level
(1)
(2)
(3)
Variable MOH
Rs 1,19,000
Rs 1,00,000
Rs 90,000
Rs 19,000 U
Spending variance

Rs 10,000 U
Efficiency variance

Fixed
Rs 10,000 U
NEVER
5,000 U
10,000 U
15,000 U

Allocated:
Budgeted Input
Allowed for
Actual Output
Budgeted Rate
(4)
Rs 90,000

Never a variance

Rs 29,000 U
Flexible-budget variance

Never a variance

Rs 29,000 U
Underallocated variable overhead (Total variable overhead variance)

Fixed MOH

Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)
Rs 50,000

Actual
Costs
Incurred
(1)
Rs 60,000

Rs 10,000 U
Spending variance

Flexible Budget:
Same Budgeted
Lump Sum (as in Static
Budget) Regardless
of Output Level
(3)
Rs 50,000

Never a variance

Rs 10,000 U
Flexible-budget variance

Allocated:
Budgeted Input
Allowed for
Actual Output
Budgeted Rate
(4)
Rs 45,000

Rs 5,000 U
Production-volume variance
Rs 5,000 U
Production-volume variance

Rs 15,000 U
Underallocated fixed overhead (Total fixed overhead variance)
An overview of the 4 overhead variances is:
4-Variance Analysis
Spending Variance
Variable Overhead
Rs 19,000 U
Fixed Overhead
Rs 10,000 U

Efficiency Variance
Rs 10,000 U
Never a variance

Production-VolumeVariance
Never a variance
Rs 5,000 U

8-32
Solution
Straightforward coverage of manufacturing overhead, standard-costing system.
1. Solution Exhibit 8-23 shows the computations. Summary details are:
Actual
41,000
13,300
0.32b
Rs 15,51,000
Rs 116.6d
Rs 40,10,000
Rs 301.50e

Output units
Allocation base (machine-hours)
Allocation base per output unit
Variable MOH
Variable MOH per hour
Fixed MOH
Fixed MOH per hour

Flexible Budget
41,000
12,300a
0.30
Rs 14,76,000c
Rs 120
Rs 39,00,000

d
41,000 0.30 = 12,300
Rs 15,51,000 13,300 = Rs 116.60
e
13,300 41,000 = 0.32
Rs 40,10,000 13,300 = Rs 301.50
c
41,000 0.30 Rs 120 = Rs 14,76,000
a
b

An overview of the 4-variance analysis is:

4-Variance Analysis
Variable Manufacturing Overhead
Fixed Manufacturing Overhead

Spending Variance
Rs 45,000 F
Rs 1,10,000 U

2. Variable Manufacturing Overhead Control

Accounts Payable Control and other accounts

Efficiency Variance
Rs 1,20,000 U
Never a variance

Production-VolumeVariance
Never a variance
Rs 2,10,000 U

Rs 15,51,000
Rs 15,51,000

Work-in-Process Control
Variable Manufacturing Overhead Allocated

14,76,000

Variable Manufacturing Overhead Allocated

Variable Manufacturing Overhead Efficiency Variance
Variable Manufacturing Overhead Spending Variance
Variable Manufacturing Overhead Control

14,76,000
1,20,000

14,76,000

45,000
15,51,000

Fixed Manufacturing Overhead Control

Wages Payable Control, Accumulated
Depreciation Control, etc.

40,10,000

Work-in-Process Control
Fixed Manufacturing Overhead Allocated

36,90,000

40,10,000
36,90,000

Fixed Manufacturing Overhead Allocated

36,90,000
Fixed Manufacturing Overhead Spending Variance
1,10,000
Fixed Manuf. Overhead Production-Volume Variance
2,10,000
Fixed Manufacturing Overhead Control
40,10,000
3. The control of variable manufacturing overhead requires the identification of the cost drivers for such items as energy, supplies, and repairs. Control often entails monitoring nonfinancial measures that affect each cost item, one by one. Examples are kilowatts used, quantities of lubricants used, and repair parts and hours used. The most convincing way to discover why overhead performance did not agree
with a budget is to investigate possible causes, line item by line item.
Individual fixed manufacturing overhead items are not usually affected very much by day-to-day control. Instead, they are controlled periodically through planning decisions and budgeting procedures that may sometimes have horizons covering six months or a year (for example, management salaries) and sometimes covering many years (for example, long-term leases and depreciation on plant and
equipment).
Solution Exhibit 8-32

Actual
Costs
Incurred
(1)
Variable
Manufacturing
Overhead

Rs 15,51,000

Actual Input
Budgeted Rate
(2)
(13,300 Rs 120)
Rs 15,96,000

Rs 45,000 F
Spending variance

Flexible Budget:
Budgeted Input
Allowed for
Actual Output
Budgeted Rate
(3)
(12,300 Rs 120)
Rs 14,76,000

Rs 1,20,000 U
Efficiency variance

Allocated:
Budgeted Input
Allowed for
Actual Output
Budgeted Rate
(4)
(12,300 Rs 120)
Rs 14,76,000

Never a variance

Rs 75,000 U
Flexible-budget variance

Never a variance

Rs 75,000 U
Underallocated variable overhead (Total variable overhead variance)

Fixed
Manufacturing
Overhead

Actual
Costs
Incurred
(1)

Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)

Flexible Budget:
Same Budgeted
Lump Sum (as in Static
Budget) Regardless
of Output Level
(3)

Rs 40,10,000

Rs 39,00,000

Rs 39,00,000

Rs 1,10,000 U
Spending variance

Never a variance

Rs 1,10,000 U
Flexible-budget variance
Rs 3,20,000 U
Underallocated fixed overhead (Total fixed overhead variance)

Allocated:
Budgeted Input
Allowed for
Actual Output
Budgeted Rate
(4)
(12,300 Rs 300)
Rs 36,90,000

Rs 2,10,000 U*
Production-volume variance
Rs 2,10,000 U*
Production-volume variance

Fixed manufacturing overheadbudgeted rate =

Rs 39,00,000
13,000 machine - hours

= Rs 300 per machine-hour

*Alternative computation:
13,000 denominator hours 12,300 budgeted hours allowed = 700 hours
700 Rs 300 = Rs 2,10,000 U

8-33
Solution
Overhead variances, missing information.
1.
Actual
Costs
Incurred

Actual Input
Budgeted
Rate

Flexible Budget:Budgeted
InputAllowed forActual
Output Budgeted Rate

Spending variance

Efficiency variance

Flexible-budget variance
Actual input Budgeted rate (9,800 Rs 50)
Spending variance

Rs 4,90,000
2,500 U

Actual costs incurred

Rs 4,92,500

Flexible budget (9,900 Rs 50)

Actual input Budgeted rate (9,800 Rs 50)

Rs 4,95,000
4,90,000

Efficiency variance

Rs 5,000 F

Flexible budget variance (2,500 U + 5,000 F)

Rs 2,500 F

Variable overhead is overallocated in the amount of Rs 2,500 (the same amount as favorable flexible-budget variance).
2.
Actual
Costs
Incurred

Flexible Budget Same

Lump Sum (as in Static
Budget) Regardless of
Budgeted Output Level

Spending variance

Allocated: Budgeted Input

Input Allowed forActual
Allowed for Actual
Output Budgeted Rate

Production-volume variance

Flexible-budget variance
Actual total overhead costs incurred
Actual variable overhead costs incurred
Actual fixed overhead costs incurred
Spending variance (fixed overhead)
Flexible budget

Rs 8,00,000
4,92,500
Rs 3,07,500
7,500 U
Rs 3,00,000

Flexible budget
Divide by denominator volume in machine-hours
Budgeted rate per machine-hour

Rs 3,00,000
10,000
Rs 30

Allocated (Rs 30 9,900 machine-hours)

Flexible budget
Production-volume variance

Rs 2,97,000
3,00,000
3,000 U

Flexible-budget variance = spending variance

Underallocated amount (Rs 3,000 U + Rs 7,500 U)

Rs 7,500 U
Rs 10,500

8-34
Solution
Flexible-budget variances, review of Chapters 7 and 8.
1. A summary of the variances for the four categories of cost is:
Flexible-Budget Variances
Direct materials
Direct labor
Variable indirect
Fixed indirect
Price-Spending Variances
Direct materials
51,840 U
Direct labor
5,184 F
Variable indirect
15,552 F
Fixed indirect
21,000 U

97,920 U
6,336 U
192 F
21,000 U
Efficiency Variances
Direct materials
Direct labor
Variable indirect
Fixed indirect

46,080 U
11,520 U
15,360 U

In addition, there is a production-volume variance of Rs 18,000 F for fixed indirect costs.

Direct Cost Variances
The key items for computing the flexible-budget, price, and efficiency for direct cost items are:
Actual Quantity
Actual Unit
Actual Cost
Budgeted Unit
of Inputs
Cost of Inputs
of Inputs
Cost of Inputs
(1)
(2)
(3) = (1) (2)
(4)
Direct materials
1,72,80,000 pages
Rs 0.039b
Rs 6,73,920
Rs 0.036d
Direct labor costs
1,728 hoursa
Rs 87.00c
Rs 1,50,336
Rs 90.00e

Actual Inputs
Budgeted Cost per Inputs
(5) = (1) (4)
Rs 6,22,080
Rs 1,55,520

1,72,80,000 10,000 = 1,728 hours

Rs 6,73,920 17,280,000 = Rs 0.039 per page
c
Rs 1,50,336 1,728 = Rs 87.00 per hour
d
Rs 5,40,000 1,50,00,000 (3,00,000 copies 50 pages) = Rs 0.036 per page
e
Rs 1,35,000 1,500(1,50,00,000 10,000) = Rs 90.00 per hour
a
b

Direct materials
Direct labor costs

Budgeted Inputs Allowed

per Output Unit
(1)
50
.005f

Actual Output
Achieved
(2)
320,000
320,000

Budgeted Unit
Cost of Inputs
(3)
Rs 0.036
Rs 90.00

Flexible
Budget
(4) = (1) (2) (3)
Rs 5,76,000
1,44,000

Budgeted 10,000 pages produced per labor-hour yields budgeted output of 200 Magazine (50 pages each) per hour. Thus, each output unit is budgeted to require 0.005 (1 200) direct labor-hours.

The price and efficiency variances for direct materials and direct labor are:
Actual Costs Incurred
Price
Actual Inputs
(Actual Input
Variance
Budgeted
Actual Price)
Prices
Direct materials
Direct labor costs

Rs 6,73,920
1,50,336

51,840 U
5,184

Rs 6,22,080
1,55,520

Efficiency
Variance

Rs 46,080 U
11,520

Flexible Budget:
Budgeted Input Allowed
for Actual Output
Budgeted Price
Rs 5,76,000
1,44,000

Indirect Cost Variances

A summary of the information is:
Output units (magazines)
Allocation base (printed paper)
Allocation base per output unit
Variable MOH
Variable MOH per printed page
Fixed MOH
Fixed MOH per printed page

Actual
320,000
17,280,000
54
Rs 1,91,808
Rs 0.0111
Rs 2,91,000
Rs 0.0168c

Flexible Budget
320,000
16,000,000a
50
Rs 1,92,000b
Rs 0.0120 d
Rs 2,70,000

3,20,000 50 = 16,000,000
3,20,000 50 Rs 0.0120 = Rs 1,92,000
c
Rs 2,91,000 17,280,000 = Rs 0.0168 per printed page
d
Rs 1,80,000 (50 300,000) pages = Rs 0.012 per page
b

The spending and efficiency variances for variable indirect costs are:
Actual
Actual Inputs
Costs
Budgeted
Incurred
Rate
(1)
(2)
(1,72,80,000 Rs 0.0111)
(17,280,000 Rs 0.012)
Rs 1,91,808
Rs 2,07,360
Rs 15,552 F
Spending variance

Flexible Budget: Budgeted

Input Allowed for Actual
Output Budgeted Rate
(3)
(1,60,00,000 Rs 0.012)
Rs 1,92,000

Rs 15,360 U
Efficiency variance

Never a variance

Rs 192 F
Flexible-budget variance

Never a variance

Fixed MOH allocated per page = Rs 2,70,000 (50 300,000) pages = Rs 0.018 per page
The spending and production-volume variances for fixed indirect costs are:
Same Budgeted
Flexible Budget:
Lump Sum
Same Budgeted Lump Sum
Actual
(as in Static Budget)
(as in Static Budget)
Costs
Regardless of
Regardless of
Incurred
Output Level
Output Level
(1)
(2)
(3)
Rs 2,91,000

Rs 2,70,000
Rs 21,000 U
Spending variance

Allocated: Budgeted
Input Allowed for Actual
Output Budgeted Rate
(4)
(1,60,00,000 Rs 0.012)
Rs 1,92,000

Rs 2,70,000

Never a variance

Allocated:
Budgeted Input
Allowed for Actual
Output
Budgeted Rate
(4)
(1,60,00,000 Rs 0.0180)
Rs 2,88,000

Rs 18,000 F
Production-volume variance

2. The largest individual variance category is for direct materialscomprising a Rs 51,840 U price variance (the actual cost per page of Rs
0.039 exceeds the budgeted Rs 0.036 per page) and a Rs 46,080 U efficiency variance (the 1,280,000 unusable pages Rs 0.036 budgeted cost).
The direct labor price variance (Rs 5,184 F) is due to the actual labor rate being Rs 87.00 per hour compared to the budgeted Rs 90.00 per
hour.
The spending variance for variable indirect costs of Rs 15,552 F is due to the actual variable overhead costs being less than budgeted.
The unfavorable variable indirect costs efficiency variance of Rs 15,360 U is due to 1,280,000 extra pages being used (the cost allocation
base) over that budgeted.
The labor efficiency variance is Rs 11,520 U due to the use of more labor hours than budgeted.
The spending variance for fixed indirect costs is due to actual costs being Rs 21,000 above the budgeted Rs 2,70,000. An analysis of the
line items in this budget would help assist in determining the causes of this variance.
The production-volume variance of Rs 18,000 F arises because the denominator used to allocate the Rs 2,70,000 of fixed indirect costs is
16,000,000 printed pages rather than the 15,000,000 budgeted. This increase arises due to an increase in the production run (320,000
newspapers vs. 300,000 budgeted).

8-35
Solution
Variance analysis, graphs.
1. Variable MOHbudgeted rate =
Actual
Costs
Incurred

Rs 100
, ,00,000 Budgeted cos t
= Rs 1,000 per machine-hour
10,000 Budgeted machine - hours

Actual Input
Budgeted
Rate

Flexible Budget: Budgeted

Input Allowed for Actual
Output Budgeted Rate

(9,500 Rs 1,000)
Rs 95,00,000

Rs 1,10,00,000
Rs 15,00,000 U
Spending variance
2. Fixed MOH budgeted rate =

(9,800 Rs 1,000)
Rs 98,00,000
Rs 3,00,000 F
Efficiency variance

Rs 60,00,000 Budgeted cos t

= Rs 600 per machine-hour
10,000 Budgeted machine - hours

Actual
Costs
Incurred

Flexible Budget Same Budgeted

Lump Sum (as in Static Budget)
Regardless of Output Level
(9,800 Rs 60)
Rs 60,00,000

Rs 59,00,000

Rs 1,00,000 F
Spending variance

Allocated: Budgeted Input

Allowed for Actual Output
Budgeted Rate
Rs 58,80,000

Rs 1,20,000 U
Production-volume variance

3. Panel A: Variable Manufacturing Overhead Costs

Rs 1,00,00,000
Rs 80,00,000

Graph for
planning and control
purpose and inventory
costing purpose
(Rs 1,000 per machine-hour)

Rs 60,00,000
Rs 40,00,000
Rs 20,00,000
2,000

4,000

6,000

8,000

10,000

Panel B: Fixed Manufacturing Overhead Costs

Graph for planning and control purpose
Rs 60,00,000
Productionvolume variance
Rs 40,00,000
Graph for
inventory costing purpose
(Rs 600 per machine-hour)

Rs 20,00,000

2,000

4,000

6,000

8,000

10,000

8-36
Solution
4-variance analysis, find the unknowns.
Known figures denoted by an *
Actual Costs Incurred
(Actual Inputs
Actual Rate)
Case A:
Variable
Manufacturing Overhead
Rs 70,000*

Actual Input
Budgeted
Rate

Flexible Budget: Budgeted

Input Allowed for Actual
Output Budgeted Rate

Allocated: Budgeted Input

Allowed for Actual Output
Budgeted Rate

(530 Rs 150)
Rs 79,500

(500* Rs 150)
Rs 75,000*

(500* Rs 150)
Rs 75,000*

Rs 4,500 U
Spending variance
Fixed
Manufacturing Overhead

Rs 1,06,000*

Rs 9,500* F
Efficiency variance

(Lump sum)
Rs 1,00,000*

Rs 6,000 U
Spending variance

Never a variance
(500 Rs 200a)
Rs 1,00,000*

(Lump sum)
Rs 1,00,000*

Never a variance

Production-variance

Total budgeted manufacturing overhead = Rs 75,000 + Rs 1,00,000 = Rs 1,75,000

Case B:
Variable
(650 Rs 85*)
(650* Rs 85*)
Manufacturing Overhead
Rs 55,250
Rs 55,250
Rs 55,250
Rs 0*
Spending variance
Fixed
Manufacturing Overhead

Rs 67,000

Rs 0
Efficiency variance

(Lump sum)
Rs 70,000b

Rs 3,000 F*
Spending variance

(650* Rs 85*)
Rs 55,250

Never a variance
(650* Rs 100)
Rs 65,000

(Lump sum)
Rs 70,000b

Never a variance

Rs 5,000 U*
Production-volume variance

Denominator level = Budgeted FMOH costs Budgeted FMOH rate = Rs 70,000 Rs 100 = 700 hours
Case C:
Variable
(1,170 Rs 50*)
(1,150 Rs 50*)
Manufacturing Overhead
Rs 62,000
Rs 58,500
Rs 57,500c
Rs 3,500 U*
Spending variance
Fixed
Manufacturing Overhead

Rs 1,20,000*

Rs 1,000 U*
Efficiency variance

Rs 1,10,000*

Rs 10,000 U
Spending variance

Never a variance

Rs 1,10,000*

Never a variance

(1,150 Rs 50*)
Rs 57,500c

Rs 1,15,000d

Rs 5,000 F*
Production-volume variance

Total budgeted manufacturing overhead = Rs 57,500 + Rs 1,10,000 = Rs 1,67,500

Budgeted FMOH rate = Budgeted FMOH costs Denominator level = Rs 1,00,000 500 = Rs 200
Budgeted total overhead = Budgeted fixed overhead + Budgeted variable overhead
Rs 1,25,250* = BFOVH + (650 Rs 85)
BFOVH = Rs 70,000
c
Budgeted hours allowed for actual output achieved must be derived from the output level variance before this figure can be derived, or, since the fixed manufacturing overhead rate is Rs 1,10,000 1,100 = Rs 100, and the allocated amount is Rs 1,15,000, the budgeted hours allowed for the actual output achieved must
be 1,150.
d
1,150 (Rs 1,10,000* 1,100*) = Rs 1,15,000
a
b

8-37
Solution
Overhead analysis.
1. Variable overhead analysis:
Actual
Costs
Incurred

Actual Input
Budgeted
Rate
(30,000 Rs 300)
Rs 90,00,000

Rs 96,00,000
Rs 6,00,000 U
Spending variance
2. Budgeted fixed overhead cost rate =

Allocated: Budgeted Input

Allowed for Actual Output
Budgeted Rate
(35,000 Rs 300)
Rs 1,05,00,000

Rs 15,00,000 F
Production-volume variance

Budgeted total cos ts in fixed overhead cos t pool

Budgeted total quantity of machine - hours

Rs 49,50,000
33,000

= Rs 150 per machine-hour

Fixed overhead analysis:
Actual
Costs
Incurred

Same Budgeted Lump Sum

(as in Static Budget)
Regardless of Output Level

Rs 45,00,000

Rs 49,50,000
Rs 4,50,000 F
Spending variance

Allocated: Budgeted Input

Allowed for Actual Output
Budgeted Rate
Rs 150 35,000
Rs 52,50,000

Rs 3,00,000 F
Production-volume variance

8-38
Solution
Activity-based costing, variance analysis.
1.
a. Units of SFA produced and sold
b. Batch size
c. Number of batches (a b)
d. Testing-hours per batch
e. Total testing-hours (c d)
f. Variable overhead cost per testing-hour
g. Variable testing overhead costs (e f)
h. Total fixed testing overhead costs
i. Fixed overhead cost per testing-hour (h e)

Static-Budget Amounts
21,000
500
42
5.5
231
Rs 400
Rs 92,400
Rs 2,88,750
Rs 1,250

Actual Amounts
22,000
550
40
5.4
216
Rs 420
Rs 90,720
Rs 2,72,160
Rs 1,260

The flexible budget is based on the budgeted number of testing-hours for the actual output achieved, 22,000 units 500 units per batch = 44
batches
Computation of variable testing overhead cost variances follows:
Actual
Costs
Incurred
(40 5.4 Rs 420)
Rs 90,720

Actual Input
Budgeted
Rate
(40 5.4 Rs 400)
Rs 86,400

Flexible Budget: Budgeted

Input Allowed for Actual
Output Budgeted Rate
(44 5.5 Rs 400)
Rs 96,800

Rs 4,320 U
Price variance

Rs 10,400 F
Efficiency variance

The unfavorable spending variance is due to the actual variable overhead cost per testing-hour increasing from the budgeted Rs 400 per hour to
the actual rate of Rs 420 per hour. The favorable efficiency variance is due to the actual output of 22,000 units (1) requiring fewer batches, 40,
than the budgeted amount of 42 and (2) each batch taking less time, 5.4 hours, than the budgeted time of 5.5 hours.
3.

Computation of the fixed testing overhead cost variances follows:

Actual
Same Budgeted Lump Sum
Costs
(as in Static Budget)
Incurred
Regardless of Output Level
Rs 2,72,160

Rs 2,88,750
Rs 16,590 F
Spending variance

Allocated: Budgeted Input

Allowed for Actual Output
Budgeted Rate
(44 5.5 Rs 1,250)
Rs 3,02,500

Rs 13,750 F
Production-volume variance

The fixed testing overhead cost spending variance is Rs 16,590 F because the amount of actual costs was lower than the budgeted amount of
Rs 2,88,750. The production-volume variance is Rs 13,750 F because the actual number of SFA produced and sold required more budgeted
testing-hours than the budgeted testing-hour capacity available.

8-39
Solution
Comprehensive review of Chapters 7 and 8, working backward from given variances.
1. Solution Exhibit 8-39 outlines the framework underlying this solution.
(a) Rs 8,80,000 Rs 5.5 = 1,60,000 kgs
(b) Rs 3,45,000 Rs 57.5 = 6,000 kgs
(c) Rs 51,750 Rs 90,000 = Rs 38,250 F
(d) Standard direct manufacturing labor rate = Rs 40,00,000 40,000 hours = Rs 100 per hour
Actual direct manufacturing labor rate = Rs 100 + Rs 2.5 = Rs 102.5
Actual direct manufacturing labor-hours = Rs 26,13,750 Rs 102.5 = 25,500 hours
(e) Standard variable manufacturing overhead rate = Rs 24,00,000 40,000
= Rs 60 per direct manufacturing labor-hour
Variable manufacturing overhead efficiency variance of Rs 90,000 Rs 60 = 1,500 excess hours
Actual hours - Excess hours = Standard hours allowed
25,500 1,500 = 24,000 hours
(f) Budgeted fixed manufacturing overhead rate = Rs 32,00,000 40,000 hours
= Rs 80 per direct manufacturing labor-hour
Fixed manufacturing overhead allocated
= Rs 80 24,000 hours = Rs 19,20,000
Production-volume variance
= Rs 32,00,000 Rs 19,20,000 = Rs 12,80,000 U
2. The control of variable manufacturing overhead requires the identification of the cost drivers for such items as energy, supplies, and repairs. Control often entails monitoring nonfinancial measures that affect each cost item, one by one. Examples are kilowatts used, quantities of lubricants used, and repair parts and hours used. The most convincing way to discover why overhead performance did not agree
with a budget is to investigate possible causes, line item by line item.
Individual fixed overhead items are not usually affected very much by day-to-day control. Instead, they are controlled periodically through
planning decisions and budgeting procedures that may sometimes have planning horizons covering six months or a year (for example,
management salaries) and sometimes covering many years (for example, long-term leases and depreciation on plant and equipment).

Solution Exhibit 8-39

Direct
Materials

Direct
Manufacturing Labor

Actual Costs Incurred

(Actual input
Actual Rate)
1,60,000 Rs 52
Rs 83,20,000

Actual Input
Budgeted
Rate
160,000 Rs 57.5
96,000 Rs 57.5
Rs 92,00,000
Rs 55,20,000

Rs 8,80,000 F
Price variance
0.85 30,000 Rs 102.5
Rs 26,13,750

0.85 30,000 Rs 100

Rs 25,50,000

Rs 63,750 U
Price variance

Variable MOH

Actual
Costs
Incurred
0.85 30,000 Rs 58.5
Rs 14,91,750

Flexible Budget: Budgeted Allocated:Budgeted Input

Input Allowed for Actual Allowed forActual Output
Output Budgeted Rate
Budgeted Rate
0.80 30,000 Rs 60
0.80 30,000 Rs 60
Rs 14,40,000
Rs 14,40,000

Rs 90,000 U
Efficiency Variance

Rs 51,750 U
Flexible-budget variance

Fixed
MOH

Actual
Costs
Incurred
(1)

Same Budgeted Lump Sum

(as in Static Budget)
Regardless of
Output Level
(2)

Rs 29,87,300

Rs 32,00,000

Rs 2,12,700 F
Spending variance

Rs 3,45,000 U
Efficiency Variance
0.80 30,000 Rs 100
Rs 24,00,000
Rs 1,50,000 U
Efficiency Variance

Actual Input
Budgeted
Rate
0.85 30,000 Rs 60
Rs 15,30,000

Rs 38,250 F
Spending variance

Flexible Budget: Budgeted

Input Allowed for Actual
Output Budgeted Rate
3 30,000 Rs 57.5
Rs 51,75,000

Never a variance

Never a variance
Flexible Budget: Same
Allocated:Budgeted
Budgeted Lump Sum
Input Allowed for
(as in Static Budget)
Actual Output
Regardless of Output Level
Budgeted Rate
(3)
(4)
0.8 50,000 Rs 80
0.80 32,000 Rs 80
32,00,000
19,20,000

Efficiency Variance

Rs 2,12,700 F
Flexible-budget variance

Rs 12,80,000 U
Production volume variance
Rs 12,80,000 U
Production volume variance

8-40
Solution
Review of Chapters 7 and 8, 3-variance analysis.
1. Total standard production costs are based on 7,800 units of output.
Direct materials, 7,800 Rs 15.00 (or 7,800 3 kgs. Rs 5.00 or 23,400 kgs. Rs 5.00)
Direct manufacturing labor, 7,800 Rs 75.00 (or 7,800 5 hrs. Rs 15.00 or 39,000 hrs. Rs 15.00)
Manufacturing overhead:
Variable, 7,800 Rs 30.00 (or 39,000 hrs. Rs 6.00)
Fixed, 7,800 Rs 40.00 (or 39,000 hrs. Rs 8.00)
Total
The following is for later use:
Fixed manufacturing overhead, a lump-sum budget
*Fixed manufacturing overhead rate =

Budgeted fixed manufacturing overhead

Deno min ator level

Rs 1,17,000
5,85,000
2,34,000
3,12,000
Rs 12,48,000
Rs 3,20,000*

Rs 8.00 = Budget 40,000 hrs.

Budget = 40,000 hours Rs 8.00 = Rs 3,20,000
2. Solution Exhibit 8-40 presents a columnar presentation of the variances. An overview of the 3-variance analysis using the block format of
the text is:
3-Variance Analysis
Total Manufacturing Overhead

Spending Variance
Rs 39,400 U

SOLUTION EXHIBIT 8-40

Actual CostsIncurred:
Actual Input
Actual Rate
DirectMaterials
(25,000 Rs 5.20)
Rs 1,30,000

Efficiency Variance
Rs 6,600 U

(Actual Input x Budgeted Price)

Purchases
Usage
(25,000 Rs 5.00)
(23,100 Rs 5.00)
Rs 1,25,000
Rs 1,15,500

Rs 5,000 U
a. Price variance
Direct Manuf. Labor

(40,100 Rs 15.00)
Rs 6,01,500
Rs 16,040 F
c. Price variance

Variable
Manufacturing Overhead

(not given)

(39,000 Rs 15.00)
Rs 5,85,000
Rs 16,500 U
d. Efficiency Variance

Actual Input
Budgeted
Rate
(40,100 Rs 6.00)
Rs 2,40,600

Flexible Budget:
Budgeted Input Allowed
for Actual Output
Regardless of Output Level
(39,000 Rs 6.00)
Rs 2,34,000

Rs 6,600 U
a. Efficiency variance
Fixed
Manufacturing Overhead

Total
Manufacturing Overhead

(not given)

( given)
Rs 600,000

Rs 3,20,000

Allocated:Budgeted
Input Allowed for
Actual Output
Budgeted Rate
(39,000 Rs 6.00)
Rs 2,34,000

b. Never a variance

Rs 3,20,000

(39,000 Rs 8.00)
Rs 312,000

Rs 8,000 U*
c. Never a variance
d. Prodn. volume variance
(Rs 240,600 + Rs 320,000) (Rs 234,000 + Rs 320,000) (Rs 234,000 + Rs 312,000)
Rs 560,600
Rs 554,000
Rs 546,000

Rs 39,400 U
e. Spending variance
*Denominator level in hours
Production volume in standard hours allowed
Production-volume variance

Flexible Budget:Budgeted
InputAllowed for
Budgeted Price
(23,400 Rs 5.00)
Rs 1,17,000

Rs 1,500 F
b. Efficiency Variance

(40,100 Rs 14.60)
Rs 5,85,460

Actual
Costs
Incurred

Production-VolumeVariance
Rs 8,000 U

Rs 6,600 U
f. Efficiency variance

40,000
39,000
1,000 hours Rs 8.00 = Rs 8,000 U

Rs 8,000 U
g. Prodn. volume variance