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CHAPTER 8 FLEXIBLE BUDGETS, VARIANCES, AND MANAGEMENT CONTROL: II 8-1

2. 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 Planning to use the drivers of costs in those activities in the most efficient way. 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.

8.2

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 rate Standard inputs allowed for actual output

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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. 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. Usage of individual items included in variable overhead relative to the quantity of the cost driver of the variable overhead cost pool. Reasons for a $25,000 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 set with padding built in by machine workers.

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8-6

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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. 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. The relationship for fixed-manufacturing overhead variances is:
Flexible-budget variance

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Spending variance

Efficiency variance (never a 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 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.

8.11 The four variances are:


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

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8.12

Fixed manufacturing costs represent resources sacrificed in acquiring capacity that cannot be decreased if the resources needed are less than the resources acquired. A lump-sum amount of fixed costs will be unaffected by the degree of operating efficiency in a given budget period.

8.13 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.

8.14 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.

8-15 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.

8-16 (20 min.) Variable manufacturing overhead, variance analysis.


1. Flexible Budget : Budgeted Input Allowed for Actual Output Budgeted Rate (3) (4 1,080 $12) $51,840 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (4 1,080 $12) $51,840

Actual Costs Incurred (1) (4,536 $11.50) $52,164

Actual Inputs Budgeted Rate (2) (4,536 $12) $54,432

$2,268 F Spending variance

$2,592 U Efficiency variance

Never a variance

$324 U Flexible-budget variance

Never a variance

2. Esquire had a favorable spending variance of $2,268 because the actual variable overhead rate was $11.50 per direct manufacturing labor-hour versus $12 budgeted. It had an unfavorable efficiency variance of $2,592 U because each suit averaged 4.2 labor-hours (4,536 hours 1,080 suits) versus 4.0 budgeted.

8-3

8-17 (20 min.) Fixed-manufacturing overhead, variance analysis


(continuation of 8-16). 1 & 2. = =
$6 ,4 0 2 0 1,0 0 4 4 $6 , 4 0 2 0 4,1 0 6

= $15 per hour Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $62,400

Actual Costs Incurred (1) $63,916

Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $62,400

Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (4 1,080 $15) $64,800

$1,516 U Spending variance

Never a variance

$2,400 F Production-volume variance $2,400 F Production-volume variance

$1,516 U Flexible-budget variance

The fixed manufacturing overhead spending variance and the fixed manufacturing flexible budget variance are the same$1,516 U. Esquire spent $1,516 above the $62,400 budgeted amount for June 2004. The production-volume variance is $2,400 F. This arises because Esquire utilized its capacity more intensively than budgeted (the actual production of 1,080 suits exceeds the budgeted 1,040 suits). This results in overallocated fixed manufacturing overhead of $2,400 (4 40 $15). Esquire would want to understand the reasons for a favorable production-volume variance. Is the market growing? Is Esquire gaining market share? Will Esquire need to add capacity?

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8.18 (30 min.) Variable manufacturing overhead variance analysis.


1. 2. 1. 2. 3. 4. 5. 6. Output units (baguettes) Direct manufacturing labor-hours Labor-hours per output unit (2 1) Variable MOH costs Variable MOH per labor-hour (4 2) Variable MOH per output unit (4 1) Denominator level= (3,200,000 0.02 hours) = 64,000 hours Actual Results 2,800,000 50,400 0.018 $680,400 $13.50 $0.243 Flexible Budget Amount 2,800,000 56,000a 0.020 $560,000 $10 $0.200

a. 2,800,000 x 0.020= 56,000 hours Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (3) (56,000 $10) $560,000 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (56,000 $10) $560,000

Actual Costs Incurred (1) (50,400 $13.50) $680,400

Actual Input Budgeted Rate (2) (50,400 $10) $504,000

$176,400 U Spending variance

$56,000 F Efficiency variance

Never a variance

$120,400 U Flexible-budget variance

Never a variance

3. Spending variance of $176,400 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 $56,000 F. It 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.

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8-19 (30 min.) Fixed manufacturing overhead variance analysis.


1. Budgeted standard direct manufacturing labor used = 0.02 per baguette Budgeted output = 3,200,000 baguettes Budgeted standard direct manufacturing labor-hours = 3,200,000 0.02 = 64,000 hours Budgeted fixed manufacturing overhead costs = 64,000 $4.00 per hour = $256,000 Actual output = 2,800,000 baguettes Allocated fixed manufacturing overhead = 2,800,000 0.02 $4 = $224,000 Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $256,000 Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $256,000 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (2,800,000 0.02 $4) $224,000

Actual Costs Incurred (1) $272,000

$16,000 U Spending variance

Never a variance

$32,000 U Production-volume variance 32,000 U Production-volume variance

$16,000 U Flexible-budget variance

$48,000 U Underallocated fixed overhead (Total fixed overhead variance)

2. The fixed manufacturing overhead is underallocated by $48,000. 3. The production-volume variance captures the difference between the budgeted 3,200,0000 baguettes and the actual 2,800,000 baguettes. The spending variance of $16,000 unfavorable means that the actual aggregate of fixed costs ($272,000) exceeds the budget amount ($256,000). For example, monthly leasing rates for baguette-making machines may have increased above those in the budget for 2004.

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8-20 (30-40 min.) Manufacturing overhead, variance analysis.


1. The summary analysis is: Spending Variance Variable Manufacturing Overhead Fixed Manufacturing Overhead $40,700 F $23,420 U Efficiency Variance $59,200 U Never a variance Production-Volume Variance Never a variance $36,000 U

Variable Manufacturing Overhead Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (3) (7,400 2 $40) $592,000 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (7,400 2 $40) $592,000

Actual Costs Incurred (1) $610,500

Actual Input Budgeted Rate (2) (16,280 $40) $651,200

$40,700 F Spending variance

$59,200 U Efficiency variance

Never a variance

$18,500 U Flexible-budget variance

Never a variance

Fixed-Manufacturing Overhead Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $480,000
$23,420 U Spending variance

Actual Costs Incurred (1) $503,420

Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $480,000

Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (7,400 2 $30.00) $444,000

$36,000 U Never a variance

Production-volume variance

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8-20 (Cont.d) Summary information is: Output units Allocation base (hours) Allocation base per output unit Variable MOH Variable MOH per hour Fixed MOH Fixed MOH per hour a 7,400 2.00 = 14,800 b 7,400 2 $40 = $592,000 Actual Flexible Budget 7,400 7,400 16,280 14,800a 2.20 2.00 $610,500 $592,000b $37.50c $40.00 $503,420 $480,000 d $30.92 c $610,500 16,280 hours = $37.50 per hour d $503,420 16,280 hours $30.92 per hour

The budgeted fixed manufacturing overhead rate is $30.00 for assembly by hour: $480,000 8,000 2 hours = $30.00 per assembly-hour

2. Zyton produced 600 less CardioX units than were budgeted. The variable manufacturing overhead cost efficiency variance of $59,200 U arises because more assembly-time-hours per output unit (16,280 7,400 = 2.2 hours) were used than the budgeted 2.0 hours per unit. The variable manufacturing overhead cost spending variance of $40,700 F indicates one or more of the following probably occurred(i) actual prices of individual items included in variable overhead differ from their budgeted prices, or (ii) actual usage of individual items included in variable overhead differs from their budgeted usage. The fixed manufacturing overhead cost spending variance of $23,420 U means fixed overhead was above that budgeted. For example, it could be due to an unexpected increase in plant leasing costs. The unfavorable production-volume variance of $36,000 arises because actual output of 7,400 units is below the 8,000 units used in determining the $30.00 per assembly-hour budgeted rate. 3. Planning and control of variable manufacturing overhead costs has both a long-run and a short-run focus. It involves Zyton planning to undertake only value-added overhead activities (a long-run view) and then managing the cost drivers of those activities in the most efficient way (a short-run view). Planning and control of fixed manufacturing overhead costs at Zyton have primarily a long-run focus. It involves undertaking only value-added fixed-overhead activities for a budgeted level of output. Zyton makes most of the key decisions that determine the level of fixed-overhead costs at the start of the accounting period.

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8-21 (1015 min.) 4-variance analysis, fill in the blanks.


1. 2. 3. 4. 5. Spending variance Efficiency variance Production-volume variance Flexible-budget variance Underallocated (overallocated) MOH Variable $1,900 U 1,000 U NEVER 2,900 U 2,900 U Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (3) $9,000 Fixed $1,000 U NEVER 500 U 1,000 U 1,500 U Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) $9,000

These relationships could be presented in the same way as in Exhibit 8-3 (variable overhead shown first):

Variable MOH

Actual Costs Incurred (1) $11,900

Actual Input Budgeted Rate (2) $10,000

$1,900 U Spending variance

$1,000 U Efficiency variance

Never a variance

$2,900 U Flexible-budget variance $2,900 U Underallocated variable overhead (Total variable overhead variance)

Never a variance

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8-21 (Cont.d) Same Budgted Lump Sum (as in Static Budget) Regardless of Output Level (2) $5,000 Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $5,000 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) $4,500

Fixed MOH

Actual Costs Incurred (1) $6,000

$1,000 U Spending variance

Never a variance

$500 U Production-volume variance $500 U Production-volume variance

$1,000 U Flexible-budget variance

$1,500 U Underallocated fixed overhead (Total fixed overhead variance)

An overview of the 4 overhead variances is: 4-Variance Analysis Variable Overhead Fixed Overhead Spending Variance $1,900 U $1,000 U Efficiency Variance $1,000 U Never a variance ProductionVolume Variance Never a variance $500 U

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8-22 (20-30 min.) Straightforward 4-variance overhead analysis.


1. The budget for fixed manufacturing overhead is 4,000 6 $15 = $360,000.

An overview of the 4-variance analysis is: 4-Variance Analysis Variable Manufacturing Overhead Fixed Manufacturing Overhead Spending Variance $17,800 U $13,000 U Efficiency Variance $16,000 U Never a Variance ProductionVolume Variance Never a Variance $36,000 F

Solution Exhibit 8-22 has details of these variances. A detailed comparison of actual and flexible budgeted amounts is: Actual Flexible Budget Output units (auto parts) 4,400 4,400 Allocation base (machine-hours) 28,400 26,400a Allocation base per output unit 6.45b 6.00 Variable MOH $245,000 $211,200c Variable MOH per hour $8.63d $8.00 Fixed MOH $373,000 $360,000e Fixed MOH per hour $13.13f a 4,400 units 6.00 machine-hours/unit = 26,400 machine-hours b 28,400 4,400 = 6.45 machine-hours per unit c 4,400 units 6.00 machine-hours per unit $8.00 per machine-hour = $211,200 d $245,000 28,400 = $8.63 e 4,000 units 6.00 machine-hours per unit $15 per machine-hour = $360,000 f $373,000 28,400 = $13.13

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8-22 (Cont.d) 2. Variable Manufacturing Overhead Control Accounts Payable Control and other accounts Work-in-Process Control Variable Manufacturing Overhead Allocated Variable Manufacturing Overhead Allocated Variable Manufacturing Overhead Spending Variance Variable Manufacturing Overhead Efficiency Variance Variable Manufacturing Overhead Control Fixed Manufacturing Overhead Control Wages Payable Control, Accumulated Depreciation Control, etc. Work-in-Process Control Fixed Manufacturing Overhead Allocated 245,000 245,000 211,200 211,200 211,200 17,800 16,000 245,000 373,000 373,000 396,000 396,000

Fixed Manufacturing Overhead Allocated 396,000 Fixed Manufacturing Overhead Spending Variance 13,000 Fixed Manufacturing Overhead Production-Volume Variance Fixed Manufacturing Overhead Control

36,000 373,000

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 dayto-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).

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SOLUTION EXHIBIT 8-22 Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (3) (4,400 6 $8) $211,200 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (4,400 6 $8) $211,200

Actual Costs Incurred (1) Variable MOH $245,000

Actual Input Budgeted Rate (2) (28,400 $8) $227,200

$17,800 U Spending variance

$16,000 U Efficiency variance

Never a variance

$33,800 U Flexible-budget variance

Never a variance

$33,800 U Underallocated variable overhead (Total variable overhead variance)

Actual Costs Incurred (1) Fixed MOH $373,000

Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) (4,000 6 $15) $360,000

Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) (4,000 6 $15) $360,000

Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (4,400 6 $15) $396,000

$13,000 U Spending variance

Never a variance

$36,000 F Production-volume variance $36,000 F Production-volume variance

$13,000 U Flexible-budget variance $23,000 F Overallocated fixed overhead (Total fixed overhead variance)

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8-23 (3040 min.) Straightforward coverage of manufacturing overhead, standard-costing system.


1. Solution Exhibit 8-23 shows the computations. Summary details are:

Actual Flexible Budget Output units 41,000 41,000 Allocation base (machine-hours) 13,300 12,300a b Allocation base per output unit 0.32 0.30 Variable MOH $155,100 $147,600c d Variable MOH per hour $11.66 $12.00 Fixed MOH $401,000 $390,000 Fixed MOH per hour $30.15e a d 41,000 0.30 = 12,300 $155,100 13,300 = $11.66 b e 13,300 41,000 = 0.32 $401,000 13,300 = $30.15 c 41,000 0.30 $12 = $147,600 An overview of the 4-variance analysis is: 4-Variance Analysis Variable Manufacturing Overhead Fixed Manufacturing Overhead Spending Variance $4,500 F Efficiency Variance $12,000 U Production Volume Variance Never a variance

$11,000 U

Never a variance

$21,000 U

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8-23 (Cont.d) 2. Variable Manuf. Overhead Control Accounts Payable Control and other accounts Work-in-Process Control Variable Manufacturing Overhead Allocated Variable Manuf. Overhead Allocated Variable Manuf. Overhead Efficiency Variance Variable Manuf. Overhead Spending Variance Variable Manuf. Overhead Control Fixed Manuf. Overhead Control Wages Payable Control, Accumulated Depreciation Control, etc. Work-in-Process Control Fixed Manufacturing Overhead Allocated Fixed Manufacturing Overhead Allocated Fixed Manufacturing Overhead Spending Variance Fixed Manuf. Overhead Production-Volume Variance Fixed Manuf. Overhead Control 155,100 155,100 147,600 147,600 147,600 12,000 4,500 155,100 401,000 401,000 369,000 369,000 369,000 11,000 21,000 401,000

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 dayto-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).

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8-23 (Cont.d) SOLUTION EXHIBIT 8-23 Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (3) (12,300 $12) $147,600 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (12,300 $12) $147,600

Actual Costs Incurred (1) Variable Manufacturing Overhead $155,100

Actual Input Budgeted Rate (2) (13,300 $12) $159,600

$4,500 F Spending variance

$12,000 U Efficiency variance

Never a variance

$7,500 U Flexible-budget variance

Never a variance

$7,500 U Underallocated variable overhead (Total variable overhead variance)

Actual Costs Incurred (1) Fixed Manufacturing Overhead $401,000

Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $390,000

Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $390,000

Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (12,300 $30) $369,000

$11,000 U Spending variance

Never a variance

$21,000 U* Production-volume variance $21,000 U* Production-volume variance

$11,000 U Flexible-budget variance

$32,000 U Underallocated fixed overhead (Total fixed overhead variance)

8-16

8-23 (Cont.d) = 13,000 machine - hours = $30 per machine-hour *Alternative computation: 13,000 denominator hours 12,300 budgeted hours allowed = 700 hours 700 $30 = $21,000 U
$390,000

8-24 (20-25 min.) Spending and efficiency overhead variances, service sector.
1. and 2. = $2 per hour of home delivery time
$ 2 ,0 0 4 0

Budgeted fixed overhead rate = 8,000 0.80 = 6,400 hours = $3.75 per hour of home delivery time A detailed comparison of actual and flexible budgeted amounts is: Output units (deliveries) Allocation base (hours) Allocation base per output unit Variable MOH Variable MOH per hour Fixed MOH Fixed MOH per hour a 7,460 0.80 = 5,968 b 5,595 7,460 = 0.75 c 7,460 0.80 $2.00 = $11,936 d $14,174 5,595 = $2.53 e $27,600 5,595 = $4.93 Actual 7,460 5,595 0.75b $14,174 $2.53d $27,600 $4.93e Flexible Budget 7,460 5,968a 0.80 $11,936c $2.00 $24,000

$24,000

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8-24 (Cont.d) The required variances are: Spending Variance $2,984 U $3,600 U Efficiency Variance $ 746 F Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (3) (7,460 0.80 $2) $11,936 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (7,460 0.80 $2) $11,936

Variable overhead Fixed overhead These variances are computed as follows:

Actual Costs Incurred (1) Variable Overhead $14,174

Actual Input Budgeted Rate (2) (5,595 $2) $11,190

$2,984 U Spending variance

$746 F Efficiency variance

Never a variance Never a variance

$2,238 U Flexible-budget variance

Actual Costs Incurred (1) Fixed Overhead $27,600

Flexible Budget: Same Budgeted Same Budgeted Lump Sum Lump Sum (as in Static Budget) (as in Static Budget) Regardless of Regardless of Output Level Output Level (2) (3) $24,000 $24,000

Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (7,460 0.80 $3.75) $22,380

$3,600 U Spending variance

$1,620 U Never a variance Production-volume variance

The spending variances for variable and fixed overhead are both unfavorable. This means that MOW had increases over budget in either or both the cost of individual items (such as telephone calls and gasoline) in the overhead cost pools, or the usage of these individual items per unit of the allocation base (delivery time). The favorable efficiency variance for variable overhead costs results from more efficient use of the cost allocation baseeach delivery takes 0.75 hours versus a budgeted 0.80 hours.

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8-24 (Cont.d) 3. MOW best manages its fixed overhead costs by long-term planning of capacity rather than day-to-day decisions. This involves planning to undertake only value-added fixed-overhead activities and then determining the appropriate level for those activities. Most fixed overhead costs are committed well before they are incurred. In contrast, for variable overhead, a mix of long-run planning and daily monitoring of the use of individual items is required to manage costs efficiently. MOW plans to undertake only value-added variable-overhead activities (a long-run focus) and then manage the cost drivers of those activities in the most efficient way (a short-run focus).

8-24 Excel Application


Flexible Budgets, Variances, and Management Control Meals on Wheels Original Data Actual FlexibleResults Budget Amounts Output Units (# Deliveries) 7,460 8,000 Hours of Delivery Time 5,595 6,400 Hours per Delivery 0.75 0.80 Variable Overhead Costs $14,174 $12,800 Variable Overhead Costs per Hour of Delivery Time $2.53 $2.00 Fixed Overhead Costs $27,600 $24,000 Variance Calculations Actual Costs Incurred (1) Actual Input x Budgeted Rate (2) Budgeted Input Allowed for Actual Output x Budgeted Rate (3) Spending Variance (1)-(2) Efficiency Variance (2)-(3) Fixed Overhead Spending Variance

$14,174 $11,190 $11,936 $2,984 U $746 F $3,600 U

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8-24 (Cont.d)
Flexible Budgets, Variances, and Management Control Meals on Wheels Cost Item/Allocation Base Actual Results Variable Overhead Costs Fixed Overhead Costs Time per Delivery (hours) Number of Home Deliveries Hours of Delivery time Variable Overhead Cost per Delivery Variable Overhead Cost per hour of Delivery Time $14,174 $27,600 0.75 7,460 5,595 $1.90 $2.53 FlexibleBudget Amount $12,800 $24,000 0.80 8,000 6,400 $1.60 $2.00

Problem 1 Actual Costs Incurred (1) $14,174 Actual Input x Budgeted Rate (2) $11,190 Spending Variance $2,984 U Problem 2 Fixed Overhead Spending Variance $3,600 U

Budgeted Input Allowed for Actual Output x Budgeted Rate (3) $11,936 Efficiency Variance $746 F

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8-25 (3550 min.) Total overhead, 3-variance analysis.


1. This problem has two major purposes: (a) to give experience with data allocated on a total overhead basis instead of on separate variable and fixed bases and (b) to reinforce distinctions between actual hours of input, budgeted (standard) hours allowed for actual output, and denominator level. An analysis of direct manufacturing labor will provide the data for actual hours of input and standard hours allowed. One approach is to plug the known figures (designated by asterisks) into the analytical framework and solve for the unknowns. The direct manufacturing labor efficiency variance can be computed by subtracting $9,640 from $14,440. The complete picture is:

Actual Costs Incurred (12,050 hrs. $16.80) $202,440*

Actual Input Budgeted Rate (12,050 hrs. $16.00*) $192,800

Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (11,750 hrs. $16.00*) $188,000

$9,640 U* Price variance

$4,800 U Efficiency variance

$14,440 U* Flexible-budget variance

* Given Direct Labor calculations Actual input Budgeted rate = Actual costs Price variance = $202,440 $9,640 = $192,800 Actual input = $192,800 Budgeted rate = $192,800 $16 = 12,050 hours Budgeted input Budgeted rate = $192,800 Efficiency variance = $192,800 $4,800 = $188,000 Budgeted input = $188,000 Budgeted rate = $188,000 16 = 11,750 hours Repair Overhead Variable overhead rate = $64,000* 8,000* hrs. = $8.00 per standard labor-hour = $197,600* 10,000*($8.00) = $117,600

If total overhead is allocated at 120% of direct labor-cost, the single overhead rate must be 120% of $16.00, or $19.20 per hour. Therefore, the fixed overhead component of the rate must be $19.20 $8.00, or $11.20 per direct labor-hour.

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8-25 (Cont.d) Let D = denominator level in input units = $11.20 D = = 10,500 direct labor-hours

A summary 3-variance analysis for October follows: Flexible Budget: Allocated: Budgeted Input Budgeted Input Allowed for Allowed for Actual Costs Actual Inputs Actual Output Actual Output Incurred Budgeted Rate Budgeted Rate Budgeted Rate ($117,600 + (12,050 $8.00) $117,600 + ($8 11,750) (11,750 hrs. $19.20) $249,000* $214,000 $211,600 $225,600
$35,000 U Spending variance $2,400 U Efficiency variance $14,000 F* Production-volume variance $14,000 F* Production-volume variance

$37,400 U Flexible-budget variance

* Known figure An overview of the 3-variance analysis using the block format in the text is: 3-Variance Analysis Total Overhead Spending Variance $35,000 U Efficiency Variance $2,400 U Production Volume Variance $14,000 F

2. The control of variable manufacturing overhead requires the identification of the cost drivers for such items as energy, supplies, equipment, and maintenance. Control often entails monitoring nonfinancial measures that affect each cost item, one by one. Examples are kilowatts used, quantities of lubricants used, and equipment 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 dayto-day control. Instead, they are controlled periodically through planning decisions and budgeting 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).

8-26 (30 min.) Overhead variances, missing information.


1.

8-22

Flexible Budget: Budgeted Input Actual Costs Incurred Actual Input Budgeted Rate Spending variance Allowed for Actual Output Budgeted Rate

Efficiency variance

Flexible-budget variance Actual input Budgeted rate (9,800 $5) Spending variance Actual costs incurred Flexible budget (9,900 $5) Actual input Budgeted rate (9,800 $5) Efficiency variance Flexible budget variance (250 U + 500 F) $49,000 250 U $49,250 $49,500 49,000 $ 500 F $ 250 F

Variable overhead is overallocated in the amount of $250 (the same amount as favorable flexible-budget variance). 2. Actual Costs Incurred Flexible Budget Allocated: Same Lump Sum Budgeted Input (as in Static Budget) Allowed for Regardless of Actual Output Budgeted Output Level Budgeted Rate Production-volume variance

Spending variance

Flexible-budget variance

8-23

8-26 (Cont.d) Actual total overhead costs incurred Actual variable overhead costs incurred Actual fixed overhead costs incurred Spending variance (fixed overhead) Flexible budget Flexible budget Divide by denominator volume in machine-hours Budgeted rate per machine-hour Allocated ($3 9,900 machine-hours) Flexible budget Production-volume variance Flexible-budget variance = spending variance Underallocated amount ($300 U + $750 U) $80,000 49,250 $30,750 750 U $30,000 $30,000 10,000 $ 3 $29,700 30,000 300 U $ 750 U $ 1,050

8-27 (30 min.) 4-variance analysis, working backwards.


1. To arrive at the 3-variance analysis amounts, simply sum the numbers in each column of the table provided in the question: Spending Variance Total Operating Overhead 2-Variance Analysis The 2-variance analysis includes numbers for the flexible-budget and production-volume (PVV) variances. The PVV is as above. The flexible-budget variance is the sum of the spending and efficiency variances: Flexible-Budget Variance Total Operating Overhead $47,000 F ProductionVolume Variance $17,000 U $23,000 F Efficiency Variance $24,000 F ProductionVolume Variance $17,000 U

8-24

8-27 (Cont.d) 1-Variance Analysis The total overhead variance is simply the sum of the flexible-budget and the production-volume variances: Total Overhead Variance Total Operating Overhead $30,000 F

2. The total overhead variance is $30,000 F. The total overhead variance is equal to the difference between the total actual operating overhead incurred and the operating overhead allocated to the actual output units. Therefore, if the actual operating overhead was $420,000, this must be $30,000 less than budgeted for, i.e., the operating overhead allocated to actual output units provided is $450,000. 3. Flexible-budget variance for fixed overhead is equal to the spending variance since the flexible-budget variance is equal to the sum of the spending and efficiency variances, and there is never an efficiency variance for fixed overhead. Therefore fixed operating overhead flexible budget variance is $14,000 U. The production volume variance is $17,000 U. The under - or overallocation of fixed operating overhead is determined as the sum of the flexible-budget variance and the production volume variance. So, summing $14,000 U and $17,000 U, the total fixed overhead variance is $31,000 Uactual fixed operating overhead was higher than budgeted for, i.e., fixed operating overhead was underallocated. 4. Variances in the 4-variance analysis are not necessarily independent. The cause of one variance may affect another. For example, consider the case where Lookmeup.com acquires less expensive Internet access for its servers. This may give rise to a favorable spending variance. However, cheaper Internet access may be of lower quality and require longer connection times and congestion, resulting in an unfavorable efficiency variance.

8-25

8-28 (40 min.) 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 $32,640 U Direct labor 2,112 U Variable indirect 64 F Fixed indirect 7,000 U Price-Spending Variances Direct materials $17,280 U Direct labor 1,728 F Variable indirect 5,184 F Fixed indirect 7,000 U Efficiency Variances Direct materials $15,360 U Direct labor 3,840 U Variable indirect 5,120 U Fixed indirect

In addition, there is a production-volume variance of $6,000 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 Unit Cost Actual Cost of of Inputs Inputs (3) = (1) (2) (2) b $ 0.0130 $224,640 $29.00c $ 50,112 Actual Inputs Budgeted Cost per Inputs
(5) = (1) (4)

Direct materials Direct labor costs


a b

Actual Quantity of Inputs (1) 17,280,000 pages 1,728 hoursa

Budgeted Unit Cost of Inputs (4) $ 0.0120d $30.00e

$207,360 $ 51,840

$17,280,000 10,000 = 1,728 hours $224,640 17,280,000 = $0.0130 per page c $50,112 1,728 = $29.00 per hour d $180,000 15,000,000 (300,000 copies 50 pages) = $0.0120 per page e $45,000 1,500(15,000,000 10,000) = $30.00 per hour

8-26

8-28 (Cont.d) Budgeted Inputs Allowed per Output Unit (1) 50 .005f Actual Output Achieved (2) 320,000 320,000 Budgeted Unit Cost of Inputs (3) $ 0.0120 $30.00 Flexible Budget
(4) = (1) x (2) (3)

Direct materials Direct labor costs

$192,000 48,000

f Budgeted 10,000 pages produced per labor-hour yields budgeted output of 200 newspapers (50 pages each) per hour. Thus, each output unit is budgeted to require 0.005 (1 200) direct laborhours.
The price and efficiency variances for direct materials and direct labor are:

Direct materials Direct labor costs

Actual Costs Incurred (Actual Input Price Actual Price) Variance $224,640 $ 17,280 U 50,112 1,728 F

Actual Inputs Budgeted Prices $207,360 51,840

Efficiency Variance $15,360 U 3,840 U

Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Price $192,000 48,000

Indirect Cost Variances A summary of the information is: Actual Output units (papers) 320,000 Allocation base (printed paper) 17,280,000 Allocation base per output unit 54 Variable MOH $63,936 Variable MOH per printed page $0.0037 Fixed MOH $97,000 Fixed MOH per printed page $0.0056c a 320,000 50 = 16,000,000 b $320,000 50 $0.0040 = $64,000 c $97,000 17,280,000 = $0.0056 per printed page d $60,000 (50 300,000) pages = $0.004 per page Flexible Budget 320,000 16,000,000a 50 $64,000b $0.0040 d $90,000

8-27

8-28 (Cont.d) The spending and efficiency variances for variable indirect costs are: Flexible Budget: Budgeted Input Allowed for Actual Costs Actual Input Actual Output Incurred Budgeted Rate Budgeted Rate (1) (2) (3)
(17,280,000 $0.0037) (17,280,000 $0.004) $63,936 $69,120
$5,184 F Spending variance

Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4)
(16,000,000 $0.004) $64,000

(16,000,000 $0.004) $64,000

$5,120 U Efficiency variance

Never a variance

$64 F Flexible-budget variance

Never a variance

Fixed MOH allocated per page = $90,000 (50 300,000) pages = $0.006 per page The spending and production-volume variances for fixed indirect costs are: Flexible Budget: Allocated: Same Lump Sum Same Lump Sum Budgeted Input (as in Static Budget) (as in Static Budget) Allowed for Regardless Regardless Actual Output Actual Costs of Budgeted Output of Budgeted Output Incurred Level Level Budgeted Rate (1) (2) (3) (4) (16,000,000 $0.0060) $97,000 $90,000 $90,000 $96,000
$7,000 U Spending variance $6,000 F Production-volume variance

Never a variance

2. The largest individual variance category is for direct materialscomprising a $17,280 U price variance (the actual cost per page of $0.013 exceeds the budgeted $0.012 per page) and a $15,360 U efficiency variance (the 1,280,000 unusable pages $0.012 budgeted cost). The direct labor price variance ($1,728 F) is due to the actual labor rate being $29.00 per hour compared to the budgeted $30.00 per hour. The spending variance for variable indirect costs of $5,184 F is due to the actual variable overhead costs being less than budgeted. The unfavorable variable indirect costs efficiency variance of $5,120 U is due to 1,280,000 extra pages being used (the cost allocation base) over that budgeted. The labor efficiency variance is $3,840 U due to the use of more labor hours than budgeted. The spending variance for fixed indirect costs is due to actual costs being $7,000 above the budgeted $90,000. An analysis of the line items in this budget would help assist in determining the causes of this variance. 8-28

8-28 (Contd.) The production-volume variance of $6,000 F arises because the denominator used to allocate the $90,000 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).

8-29 (30 min.) Comprehensive variance analysis.


a) Budgeted number of machine-hours planned can be calculated by multiplying the number of units planned (budgeted) by the number of machine-hours allocated per unit: 17,760 units 2 machine-hours per unit = 35,520 machine-hours. b) Budgeted fixed MOH costs per machine-hour can be computed by dividing the flexible budget amount for fixed MOH (which is the same as the static budget) by the number of machine-hours planned (calculated in (a)): $6,961,920 35,520 machine-hours = $196.00 per machine-hour c) Budgeted variable MOH costs per machine-hour are calculated as budgeted variable MOH costs divided by the budgeted number of machine-hours planned: $1,420,800 35,520 machine-hours = $40.00 per machine-hour. d) Budgeted number of machine-hours allowed for actual output achieved can be calculated by dividing the flexible-budget amount for variable MOH by budgeted variable MOH costs per machine-hour: $1,536,000 $40.00 per machine-hour= 38,400 machine-hours allowed e) The actual number of output units is the budgeted number of machine-hours allowed for actual output achieved divided by the planned allocation rate of machine hours per unit: 38,400 machine-hours 2 machine-hours per unit = 19,200 units. f) The actual number of machine-hours used per panel is the actual number of machine hours used (given) divided by the actual number of units manufactured: 36,480 machine-hours 19,200 units = 1.9 machine-hours used per panel.

8-29

8-30 (60 min.) Journal entries (continuation of 8-29).


1. Key information underlying the computation of variances is: Actual Results 19,200 36,480 1.90 $1,532,160 $42.00 $79.80 $7,004,160 $192.00 $364.80 Flexible Budget Amount 19,200 38,400 2.00 $1,536,000 $40.00 $80.00 $6,961,920 $181.30 $362.60 Static-Budget Amount 17,760 35,520 2.00 $1,420,800 $40.00 $80.00 $6,961,920 $196.00 $392.00

1. Output units (panels) 2. Machine-hours 3. Machine-hours per panel 4. Variable MOH costs 5. Variable MOH costs per machinehour (Row 4 Row 2) 6. Variable MOH costs per unit (Row 4 Row 1)) 7. Fixed MOH costs 8. Fixed MOH costs per machinehour (Row 7 Row 2)) 9. Fixed MOH costs per unit (7 1)

Solution Exhibit 8-30 shows the computation of the variances. Journal entries for variable MOH, year ended December 31, 2003: Variable MOH Control Accounts Payable Control and Other Accounts Work-in-Process Control Variable MOH Allocated Variable MOH Allocated Variable MOH Spending Variance Variable MOH Control Variable MOH Efficiency Variance 1,532,160 1,532,160 1,536,000 1,536,000 1,536,000 72,960 1,532,160 76,800

8-30

8-30 (Cont.d) Journal entries for fixed MOH, year ended December 31, 2003: Fixed MOH Control Wages Payable, Accumulated Depreciation, etc. Work-in-Process Control Fixed MOH Allocated Fixed MOH Allocated Fixed MOH Spending Variance Fixed MOH Control Fixed MOH Production-Volume Variance 2. Adjustment of COGS Variable MOH Efficiency Variance Fixed MOH Production-Volume Variance Variable MOH Spending Variance Fixed MOH Spending Variance Cost of Goods Sold 76,800 564,480 72,960 42,240 526,080 7,004,160 7,004,160 7,526,400 7,526,400 7,526,400 42,240 7,004,160 564,480

8-31

SOLUTION EXHIBIT 8-30 Variable Manufacturing Overhead Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (3) (38,400 $40) $1,536,000 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (38,400 $40) $1,536,000

Actual Costs Incurred (1) (36,480 $42) $1,532,160

Actual Inputs Budgeted Rate (2) (36,480 $40) $1,459,200

$72,960 U Spending variance

$76,800 F Efficiency variance

Never a variance

Fixed Manufacturing Overhead Same Budgeted Lump Sum (as in Static Budget) Regardless Of Output Level (2) $6,961,920
$42,240 U Spending variance

Actual Costs Incurred (1) $7,004,160

Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $6,961,920

Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (38,400 $196) $7,526,400
$564,480 F

Never a variance

Production-volume variance

8-32

8-31 (3040 min.) Graphs and overhead variances.


1. Variable Manufacturing Overhead Costs

Total Variable Manuf. Overhead Costs $72,000,000

Graph for planning and control and inventory costing purposes at $9 per machine-hour

$36,000,000

4,000,000 Machine-Hours

Fixed Manufacturing Overhead Costs


Total Fixed Manuf. Overhead Costs $72,000,000

Graph for planning and control purposes Graph for inventory costing purpose ($18 per machine-hour)

$36,000,000

4,000,000 Machine-Hours

= = = $18 per machine-hour

8-33

8-31 (Cont.d) 2. Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (3) (3,500,000 $9) $31,500,000 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (3,500,000 $9) $31,500,000

Actual Costs Incurred (1) $36,100,000

Actual Input Budgeted Rate (2) (3,800,000 $9) $34,200,000

$1,900,000 U Spending variance

$2,700,000 U Efficiency variance

Never a variance

$4,600,000 U Flexible-budget variance $4,600,000 U Underallocated variable overhead (Total variable overhead variance)

Never a variance

Actual Costs Incurred (1) $72,200,000

Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $72,000,000

Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $72,000,000

Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (3,500,000 $18) $63,000,000

$200,000 U Spending variance

$9,000,000 U* Never a variance

Production-volume variance
$9,000,000 U*

$200,000 U Flexible-budget variance

Production-volume variance

$9,200,000 U Underallocated fixed overhead Total fixed overhead variance

*Alternative computation: 4,000,000 denominator hours 3,500,000 budgeted hours allowed = 500,000 hours 500,000 $18 = $9,000,000 U

8-34

8-31 (Cont.d) 3. The underallocated overhead was: variable, $4,600,000 and fixed, $9,200,000. The flexible-budget variance and underallocated overhead are always the same amount for variable overhead, because the flexible-budget amount of variable overhead and the allocated amount of variable overhead coincide. In contrast, the only time the budget and allocated amounts coincide for fixed overhead is when the budgeted input of the allocation base for the actual output level achieved exactly equals the denominator level. 4. The choice of the denominator level will affect inventory costs. The new fixed overhead rate would be $72,000,000 3,000,000 = $24.00. In turn, the allocated amount of fixed overhead and the production-volume variance would change as seen below: Allocated 3,500,000 $24 = $72,200,000 $72,000,000 $84,000,000 $200,000 U $12,000,000 F* Flexible-budget variance Prodn. volume variance $11,800,000 F Total fixed overhead variance *Alternate computation: (3,000,000 3,500,000) $24 = $12,000,000 F The major point of this requirement is that inventory costs (and, hence, income determination) can be heavily affected by the choice of the denominator level used for setting the fixed manufacturing overhead rate. Actual Budget

8.32 (30-40 min.) Variance analysis, graphs.


1. = 10,000 Budgeted machine - hours = $100 per machine-hour Flexible budget: Budgeted Input Actual Costs Incurred $1,100,000 Actual Input Budgeted Rate (9,500 $100) $950,000 Allowed for Actual Output Budgeted Rate (9,800 $100) $980,000
$1,000,000 Budgeted cost

$150,000 U Spending variance 2.


$600,000 Budgeted cost

$30,000 F Efficiency variance

= 10,000 Budgeted machine - hours = $60 per machine-hour

8-35

8-32 (Cont.d) Flexible Budget Same Budgeted Allocated: Lump Sum Budgeted Input (as in Static Budget) Allowed for Regardless of Actual Output Output Level Budgeted Rate (9,800 $60) $600,000 $588,000

Actual Costs Incurred $590,000

$10,000 F $12,000 U Spending variance Production-volume variance 3. Panel A: Variable Manufacturing Overhead Costs $1,000,000 $ 800,000 $ 600,000 $ 400,000 $200,000 2,000 4,000 6,000

Graph for planning and control purpose and inventory costing purpose ($100 per machine-hour)

8,000

10,000

Panel B: Fixed Manufacturing Overhead Costs Graph for planning and control purposes 600,000 400,000 200,000 Graph for inventory costing purpose ($60 per machine-hour) Productionvolume variance

2,000

4,000

6,000

8,000

10,000

8-36

8-33 (30 min.) 4-variance analysis, find the unknowns.


Known figures denoted by an * Actual Costs Incurred (Actual Inputs Actual Rate) Case A: Variable Manufacturing Overhead Flexible Budget: Allocated: Budgeted Input Budgeted Input Allowed for Allowed for Actual Output Actual Output Budgeted Rate Budgeted Rate (500* $15) $7,500* (500* $15) $7,500*

Actual Input Budgeted Rate (530 $15) $7,950

$7,000*
$950* F

Spending variance

$450 U Efficiency variance

Never a variance

Fixed Manufacturing Overhead

$10,600*
$600 U

(Lump sum) $10,000*

(Lump sum) $10,000*


$0

(500 $20a) $10,000*

Spending variance

Never a variance

Production volumevariance

Total budgeted manufacturing overhead = $7,500 + $10,000 = $17,500 Case B: Variable Manufacturing (650 $8.50*) (650* $8.50*) Overhead $5,525 $5,525 $5,525
$0* Spending variance $0 Efficiency variance

(650* $8.50*) $5,525

Never a variance

Fixed Manufacturing Overhead

$6,700
$300 F*

(Lump sum) $7,000b

(Lump sum) $7,000b

(650* $10) $6,500


$500 U*

Spending variance

Never a variance

Production-volume variance

Denominator level = Budgeted FMOH costs Budgeted FMOH rate = $7,000 $10 = 700 hours

8-37

8-33 (Cont.d) Case C: Variable Manufacturing Overhead

$6,200

(1,170 $5.00*) $5,850


$350 U*

(1,150 $5.00*) $5,750c

(1,150 $5.00*) $5,750c

$100 U*

Spending variance Efficiency variance

Never a variance

Fixed Manufacturing Overhead

$12,000*
$1,000 U

$11,000*

$11,000*

$11,500d
$500 F*

Spending variance

Never a variance

Production-volume variance

Total budgeted manufacturing overhead = $5,750 + $11,000 = $16,750 aBudgeted FMOH rate = Budgeted FMOH costs Denominator level = $10,000 500 = $20 b = + $12,525* = BFOVH + (650 $8.50) BFOVH = $7,000 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 $11,000 1,100 = $10, and the allocated amount is $11,500, the budgeted hours allowed for the actual output achieved must be 1,150.
d

1,150 ($11,000* 1,100*) = $11,500

8-34 (1525 min.) Flexible budgets, 4-variance analysis.


1. = = = 5 hours per unit Budgeted DLH allowed for May output = 66,000 units 5 hrs./unit = 330,000 hrs. Allocated total MOH = 330,000 Total MOH rate per hour = 330,000 $1.20 = $396,000

8-38

8-34 (Cont.d) 2, 3, 4, 5. See Solution Exhibit 8-34 Variable overhead rate per DLH = $0.25 + $0.34 = $0.59 Fixed overhead rate per DLH = $0.18 + $0.15 + $0.28 = $0.61 Fixed overhead budget for May = ($648,000 + $540,000 + $1,008,000) 12 = $2,196,000 12 = $183,000 Using the format of Exhibit 8-3 for variable overhead and then fixed overhead: Actual variable overhead: $75,000 + $111,000 = $186,000 Actual fixed overhead: $51,000 + $54,000 + $84,000 = $189,000 An overview of the 4-variance analysis using the block format of the text is: 4-Variance Analysis Variable Manufacturing Overhead Fixed Manufacturing Overhead Spending Variance $150 U Efficiency Variance $8,850 F ProductionVolume Variance Never a variance

$6,000 U

Never a variance

$18,300 F

8-39

8-34 (Cont.d) SOLUTION EXHIBIT 8-34 Variable Manufacturing Overhead Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (3) (330,000 $0.59) $194,700 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (330,000 $0.59) $194,700

Actual Costs Incurred (1) $186,000

Actual Inputs Budgeted Rate (2) (315,000 $0.59) $185,850

$150 U Spending variance

$8,850 F Efficiency variance

Never a variance

Fixed Manufacturing Overhead Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $183,000 Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $183,000 Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) (330,000 $0.61) $201,300

Actual Costs Incurred (1) $189,000

$6,000 U Spending variance

$18,300 F Never a variance

Production-volume variance

Alternate computation of the production volume variance: = = $ 0.61 = (330,000 300,000) $0.61 = $18,300 F

8-40

8-35 (30 min.) Overhead analysis.


1. Variable overhead analysis: Allocated: Budgeted Input Actual Costs Incurred $9,600,000 Actual Input Budgeted Rate (30,000 $300) $9,000,000 Allowed for Actual Output Budgeted Rate (35,000 $300) $10,500,000

$600,000 U Spending variance 2. =

$1,500,000 F Efficiency variance

Budgted total costs in fixed overhead cost pool Budgeted total quantity of machine - hours

$4,950,000 33,000

= $150 per machine-hour Fixed overhead analysis: Same Budgeted Lump Sum (as in Static Budget) Allowed for Actual Costs Regardless of Actual Output Incurred Output Level $4,500,000 $4,950,000 Allocated: Budgeted Input Budgeted Rate $150 35,000 $5,250,000

$450,000 F Spending variance

$300,000 F Production-volume variance

8-36 (25 min.)Sales-volume variance, production-volume variance.


1. Budgeted selling price Budgeted variable cost per unit Budgeted fixed cost per unit ($5,000,000 20,000) Budgeted cost per unit Budgeted profit per unit Operating income based on budgeted profit per unit $35 per unit 22,000 units $100 $40 25 65 $ 35 $770,000

8-41

8-36 (Cont.d) Flexible-budget operating income is Revenues $100 22,000 Variable costs $40 22,000 Fixed costs Operating income Static-budget operating income is Revenues $100 20,000 Variable costs $40 20,000 Fixed costs Operating income $2,200,000 880,000 500,000 $ 820,000 $2,000,000 800,000 500,000 $ 700,000

2. The sales-volume variance recognizes that when Morano sells 22,000 units instead of the budgeted 20,000, only the revenue and the variable costs are affected. Fixed costs remain unchanged. = = ($100 $40) 2,000 = $60 2,000 = $120,000 F Production-volume variance = =
$500,000 20,000

2,000 = $25 2,000 = $50,000 F

Compare the sales-volume variance and the production-volume variance. The $120,000 F salesvolume variance explains the difference between the static-budget operating income and the flexible-budget operating income: Static-budget operating income Sales-volume variance Flexible-budget operating income $700,000 $120,000 F $820,000

The $50,000 F production-volume variance explains the difference between operating income based on the budgeted profit per unit and the flexible-budget operating income: Operating income based on budgeted profit per unit Production-volume variance Flexible-budget operating income $770,000 50,000 F $820,000

8-42

8-37 (40 min.) Activity-based costing, variance analysis.


1. a. b. c. d. e. f. g. h. i. Static-Budget Amounts Units of TGC produced and sold 30,000 Batch size 250 Number of batches (a b) 120 Setup-hours per batch 5 Total setup-hours (c d) 600 Variable overhead cost per setup-hour $25 Variable setup overhead costs (e f) $15,000 Total fixed setup overhead costs $18,000 Fixed overhead cost per setup-hour (h e) $30 Actual Amounts 22,500 225 100 5.25 525 $24 $12,600 $17,535 $33.40

The flexible-budget is based on the budgeted number of setups for the actual output achieved: 22,500 units 250 units per batch= 90 batches Computation of variable setup overhead cost variances follows: Allocated: Budgeted Input Allowed for Actual Costs Actual Input Actual Output Incurred Budgeted Rate Budgeted Rate (100 5.25 $24) (100 5.25 $25) (90 5.0 $25) $12,600 $13,125 $11,250 $525 F Spending variance $1,875 U Efficiency variance

The favorable spending variance is due to the actual variable overhead cost per setup-hour declining from the budgeted $25 per hour to the actual rate of $24 per hour. The unfavorable efficiency variance is due to the actual output of 22,500 units (1) requiring more setups (100) than the budgeted amount (90), and (2) each setup taking longer time (5.25 hours) than the budgeted time (5.0 hours). The flexible-budget variance of $1,350 U reflects the larger unfavorable efficiency variance not being offset by the favorable spending variance.

8-43

8-37 (Cont.d) 2. Computation of the fixed setup overhead cost variances follows: Lump Sum Actual Costs Incurred $17,535 $465 F Spending variance Same Budgeted Budgeted Input (as in Static Budget) Regardless of Output Level $18,000 Allocated: Allowed for Actual Output Budgeted Rate (90 5.0 $30) $13,500

$4,500 U Production-volume variance

The fixed setup overhead cost spending variance is $465 F because the amount of actual costs was lower than the budgeted amount of $18,000. The production-volume variance is $4,500 U because the actual units of TGC produced and sold require fewer budgeted setuphours than the budgeted setup-hour capacity available.

8.38 (40 min.) Activity-based costing, variance analysis.


1. a. b. c. d. e. f. g. h. i. Static-Budget Amounts Units of SFA produced and sold 21,000 Batch size 500 Number of batches (a b) 42 Testing-hours per batch 5.5 Total testing-hours (c d) 231 Variable overhead cost per testing-hour $40 Variable testing overhead costs (e f) $9,240 Total fixed testing overhead costs $28,875 Fixed overhead cost per testing-hour (h e) $125 Actual Amounts 22,000 550 40 5.4 216 $42 $9,072 $27,216 $126

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: Allocated: Budgeted Input Actual Costs Incurred (40 5.4 $42) $9,072 Actual Input Budgeted Rate (40 5.4 $40) $8,640 Allowed for Actual Output Budgeted Rate (44 5.5 $40) $9,680 $1,040 F

$432 U

8-44

Spending variance 8-38 (Cont.d)

Efficiency variance

The unfavorable spending variance is due to the actual variable overhead cost per testinghour increasing from the budgeted $40 per hour to the actual rate of $42 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. 2. Computation of the fixed testing overhead cost variances follows: Same Budgeted Allocated: Lump Sum Budgeted Input (as in Static Budget) Allowed for Actual Costs Regardless of Actual Output Incurred Output Level Budgeted Rate (44 5.5 $125) $27,216 $28,875 $30,250 $1,659 F Spending variance $1,375 F Production-volume variance

The fixed testing overhead cost spending variance is $1,659 F because the amount of actual costs was lower than the budgeted amount of $28,875. The production-volume variance is $1,375 F because the actual number of SFA produced and sold required more budgeted testing-hours than the budgeted testing-hour capacity available.

8-39 (3040 min.) Comprehensive review of Chapters 7 and 8, working backward from given variances.
1. (a) (b) (c) (d) Solution Exhibit 8-39 outlines the Chapter 7 and 8 framework underlying this solution. $176,000 $1.10 = 160,000 pounds $69,000 $11.50 = 6,000 pounds $10,350 $18,000 = $7,650 F Standard direct manufacturing labor rate = $800,000 40,000 hours = $20 per hour Actual direct manufacturing labor rate = $20 + $0.50 = $20.50 Actual direct manufacturing labor-hours = $522,750 $20.50 = 25,500 hours Standard variable manufacturing overhead rate = $480,000 40,000 = $12 per direct manuf. labor-hour Variable manuf. overhead efficiency variance of $18,000 $12 = 1,500 excess hours Actual hours Excess hours = Standard hours allowed 25,500 1,500 = 24,000 hours

(e)

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(f)

Budgeted fixed manufacturing overhead rate

= $640,000 40,000 hours = $16 per direct manuf. labor-hour Fixed manufacturing overhead allocated = $16 24,000 hours = $384,000 Production-volume variance = $640,000 $384,000 = $256,000 U

8-39 (Cont.d) 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 Actual Costs Incurred (Actual Input Actual Rate) Direct Materials 160,000 $10.40 $1,664,000 Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate 3 30,000 $11.50 $69,000 U $1,035,000

Actual Input Budgeted Rate 96,000 $11.50 $1,104,000

160,000 $11.50 $176,000 F $1,840,000

Price variance

Efficiency variance

Direct 0.85 30,000 $20.50 Manufacturing $522,750 Labor


$12,750 U Price variance

0.85 30,000 $20 $510,000

0.80 30,000 $20 $480,000

$30,000 U Efficiency variance $42,750 U Flexible-budget variance

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8-39 (Cont.d) Flexible Budget: Budgeted Input Allowed for Actual Input Actual Output Budgeted Rate Budgeted Rate
0.85 30,000 $12 $306,000 0.80 30,000 $12 $288,000

Actual Costs Incurred


Variable MOH 0.85 30,000 $11.70 $298,350

Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate


0.80 30,000 $12 $288,000

$7,650 F Spending variance

$18,000 U Efficiency variance

Never a variance

$10,350 U Flexible-budget variance

Never a variance

Actual Costs Incurred (1) $597,460 Fixed MOH

Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) $640,000

Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) 0.80 x 50,000 $16 $640,000

Allocated: Budgeted Input Allowed for Actual Output Budgeted Rate (4) 0.80 x 30,000 $16 $384,000

$42,540 F Spending variance $42,540 F Flexible-budget variance

$256,000 U Never a variance Production volume variance $256,000 U Production volume variance

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8-40 (3050 min.)Review of Chapters 7 and 8, 3variance analysis.


1. Total standard production costs are based on 7,800 units of output. Direct materials, 7,800 $15.00 (or 7,800 3 lbs. $5.00 or 23,400 lbs. $5.00) Direct manufacturing labor, 7,800 $75.00 (or 7,800 5 hrs. $15.00 or 39,000 hrs. $15.00) Manufacturing overhead: Variable, 7,800 $30.00 (or 39,000 hrs. $6.00) Fixed, 7,800 $40.00 (or 39,000 hrs. $8.00) Total The following is for later use: Fixed manufacturing overhead, a lump-sum budget *Fixed manufacturing overhead rate $8.00 Budget

$ 117,000 585,000 234,000 312,000 $1,248,000 $320,000*

= = = 40,000 hours $8.00 = $320,000

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 $39,400 U Efficiency Variance $6,600 U Production Volume Variance $8,000 U

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8-40 (Cont.d) SOLUTION EXHIBIT 8-40 Actual Costs Incurred: Actual Input (Actual Input x Budgeted Price) Actual Rate Purchases Usage Direct (25,000 $5.20) (25,000 (23,100 Materials $130,000 $5.00) $5.00) $125,000 $115,500 $5,000 U a. Price variance Direct Manuf. Labor (40,100 $14.60) $585,460 Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Price (23,400 $5.00) $117,000

$1,500 F b. Efficiency variance (40,100 $15.00) $601,500 (39,000 $15.00) $585,000

$16,040 F c. Price variance

$16,500 U d. Efficiency variance Flexible Budget: Budgeted Input Allowed for Actual Output Budgeted Rate (39,000 $6.00) $234,000 Allocated: (Budgeted Input Allowed for Actual Output Budgeted Rate) (39,000 $6.00) $234,000

Actual Costs Incurred Variable Manufacturing Overhead (not given)

Actual Input Budgeted Rate (40,100 $6.00) $240,600

$6,600 U Efficiency variance Fixed Manufacturing Overhead

Never a variance

(not given)

$320,000 Never a variance

(39,000 $8.00) $320,000 $312,000 $8,000 U* Prodn. volume variance

Total Manufacturing ( given) ($240,600 + $320,000) ($234,000 + $320,000) ($234,000 + $312,000) Overhead $600,000 $560,600 $554,000 $546,000 $39,400 U $6,600 U $8,000 U e. Spending variance f. Efficiency variance g. Prodn. volume variance

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8-40 (Cont.d) *Denominator level in hours Production volume in standard hours allowed Production-volume variance 40,000 39,000 1,000 hours x $8.00 = $8,000 U

8.41 (45 min.) Overhead variances, ethics.


1. a. Total budgeted overhead Budgeted variable overhead ($10 budgeted rate per machine-hour 1,000,000 budgeted machine-hours) Budgeted fixed overhead $12,500,000

10,000,000 $ 2,500,000

b.

Budgeted fixed OH rate = 1,000,000 Budgeted machine - hours = $2.50 per machine-hour

$2,500,000 Budgeted amount

c.

Fixed overhead spending variance = Actual costs incurred Budgeted amount. Because fixed overhead spending variance is unfavorable, the amount of actual costs is higher than the budgeted amount. Actual cost = $2,500,000 + $600,000 = $3,100,000

d.

Production-volume variance = Budgeted fixed overhead

= $2,500,000 ($2.50 per machine-hour 2 machine-hours per unit* 498,000 units) = $2,500,000 $2,490,000 = $10,000 U *Budgeted variable overhead per unit = $20 Budgeted variable overhead rate = $10 per machine-hour Therefore, budgeted machine hours allowed per unit =
$20 $10

= 2 machine-hours

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8-41 (Cont.d) 2. Variable overhead spending variance:


10,080,000 Budgeted amount $10 per machine-hour 960,000 actual machine - hours

= =

960,000 machine-hours

($10.50 $10) 960,000 = $480,000 U

Variable overhead efficiency variance: Actual units of variable overhead cost-allocation base used for actual output Budgeted units of variable overhead cost-allocation base allowed for actual output Budgeted variable overhead rate

= (960,000 (2 498,000)) $10 =(960,000996,000)10=$360,000F 3. By manipulating, Remich has created a sizable unfavorable fixed overhead spending variance or, at least, has increased its magnitude. Jerry Remichs action is clearly unethical. Variances draw attention to the areas which need management attention. If the top management relies on Remich, due to his expertise, to interpret and explain the reasons for the unfavorable variance, it is likely that his report will be biased and misleading to the top management. The top management may erroneously conclude that Monroe is not able to manage his fixed overhead costs effectively. Another probable adverse outcome of Remichs actions will be that Monroe will have even less confidence in the usefulness of accounting reports. This, of course, defeats the purpose of preparing the reports. In summary, Remichs unethical actions will waste top managements time and may lead to wrong decisions.

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Chapter 8 Internet Exercise


The Internet exercise is available to students only on the Prentice Hall Companion Website www.prenhall.com/horngren. Students can click on Cost Accounting, 11th ed., and access the Internet Exercise for the chapter, which links to the Web site of a company or organization. The Internet Exercise on the Web will be updated periodically so that it is current with the latest information available on the subject organization's Web site. A printout copy of the Internet exercise for this chapter as of early 2002 appears below. The solution to the Internet exercise, which will also be updated periodically, is available to instructors from the Companion Website's faculty view. To access the solution, click on Cost Accounting, 11th ed., Faculty link, and then register once to obtain your password through the online form. After the initial registration, you will have a personal login ID and password to use to log in. A printout of the solution to the Internet exercise for this chapter as of early 2002 follows. The exercise and solution provide instructors with an idea of the content of the Internet exercise for this chapter. Internet Exercise FedEx Corporation is a global provider of transportation, e-commerce, and supply-chain management services. It is best known for its worldwide express delivery business. This exercise requires you to access FedEx's annual report and calculate operating variances. Go to the FedEx home page, http://www.fedex.com/, and click on the "investor relations" link and then the "annual report" link. Scroll down the page to access the 2000 income statement as either a PDF file or an Excel workbook. 1. Use FedEx's 1999 income statement to prepare a flexible-operating budget for 2000. Assume that FedEx expects operating revenues to increase by 10%, variable costs per dollar of revenue will remain constant, and that the fixed component for each category of operating expense was as follows: Salaries and employee benefits Purchased transportation Rentals and landing fees Depreciation and amortization Maintenance and repairs Fuel Other 10% 0% 10% 90% 10% 0% 90%

Hint: First calculate 1999 fixed costs, then calculate variable cost as a percentage of sales, use these amounts to prepare a flexible budget for 2000. 2. Use FedEx's actual operating results to prepare a variance report for 2000. favorable and unfavorable variances. Indicate

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Solution to Internet Exercise 1. Flexible Budget based on a 10% increase in sales. Fixed Cost a Revenues (10% increase from 1999) OPERATING EXPENSES Salaries and employee benefits Purchased transportation Rentals and landing fees Depreciation and amortization Maintenance and repairs Fuel Other Total Operating Expenses Operating Income a. Fixed percentage 1999 cost b. (1999 cost fixed portion) / 1999 revenues c. (variable cost % 1999 revenues 1.10) 2. Year 2000 operating budget compared to actual results. Actual Budgeted Variance $18,256,945 $18,450,81 $193,872 U 7 127,660 F 16,710 F 16,317 U 109,394 U 56,252 253,091 30,390 321,075 $514,947 U U U U U 10.0% $ 708,773 $0.380 0.0% 0 10.0% 139,669 90.0% 931,606 10.0% 95,887 0.0% 0 90.0% 2,690,331 $4,566,266 0.092 0.075 0.006 0.051 0.036 0.018 Variable Budgeted Cost b Variable c Total Budgeted $18,450,817

$ 7,725,624 7,016,851 1,691,564 1,691,564 1,382,727 1,522,396 113,863 1,045,469 949,284 1,045,172 665,422 665,422 328,81 3,019,150 8 $12,148,52 16,714,796 9 $ 1,736,021

Revenues

OPERATING EXPENSES Salaries and employee 7,597,964 7,725,624 benefits Purchased transportation 1,674,854 1,691,564 Rentals and landing fees 1,538,713 1,522,396 Depreciation and 1,154,863 1,045,469 amortization Maintenance and repairs 1,101,424 1,045,172 Fuel 918,513 665,422 Other 3,049,540 3,019,150 Total Operating Exp. 17,035,871 16,714,796 Operating Income $ 1,221,074 $ 1,736,021

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Chapter 8 Video Case The video case can be discussed using only the case writeup in the chapter. Alternatively, instructors can have students view the videotape of the company that is the subject of the case. The videotape can be obtained by contacting your Prentice Hall representative. The case questions challenge students to apply the concepts learned in the chapter to a specific business situation.
TEVA SPORT SANDALS: VARIABLE OVERHEAD VARIANCES

1. Allowed Actual Costs Incurred


(67,500

Flexible Budget Budgeted Input Actual Input Budgeted Rate

For Actual Output Budgeted Rate

$28.89) $1,950,000

(67,500 $30.00) $2,025,000

(0.40 150,000 $30) $1,800,000

Spending variance: $1,950,000 $2,025,000 = $75,000 F (favorable effect on operating income) Efficiency variance: $2,025,000 $1,800,000 = $225,000 U (unfavorable effect on oper. income) 2. The favorable variable overhead spending variance of $75,000 means that the plant spent less on variable overhead items versus the budgeted amount. Possible reasons are that actual prices of individual variable overhead items such as energy, indirect materials, or indirect manufacturing labor were lower than budgeted prices, or relative to the flexible budget, the percentage increase in the actual quantity usage of individual items in the variable overhead costpool is less than the percentage increase in machine-hours. The unfavorable variable overhead efficiency variance of $225,000 means that more machine-hours were used to create the 150,000 pairs of sandals than were budgeted. Possible causes are less skillful workers in the use of manufacturing machines than anticipated, production was inefficiently scheduled, machines were not properly maintained for peak operating performance, or budgeted machine time standards were set without careful analysis of operating conditions. 3. The plant manager should explain that the key reason for the unfavorable flexible-budget variance is the higher-than-budgeted number of machine-hours used this month. In performing an investigation, the manager could indicate whether this was due to poorly trained labor, poor maintenance, bad production scheduling, or inaccurate budgeted machine time standards.

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