management control: ii

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

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, and2. 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 costsare allocated to a cost object:

Actual Costing Standard CostingDirect costs Actual prices

× Actual inputs usedStandard prices × Standard inputs allowed for actual output

Indirect costs Actual indirect rate ×Actual inputs used

Standard indirect rate× Standard inputs 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, and4. 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. Usage of individual items included in variable overhead relative to the quantity of the

cost driver of the variable overhead cost pool.

8-6 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.

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, and4. 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:

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 fixed-manufacturing 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 production-volume 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

8-2

Flexible-budget variance

Spending varianceEfficiency variance (never a variance)

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 efficiencyvariances. 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 isnot 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.

Actual Costs Incurred

(1)

Actual Inputs × Budgeted Rate

(2)

Flexible Budget :Budgeted Input

Allowed for Actual Output

× Budgeted Rate(3)

Allocated:Budgeted Input

Allowed forActual Output

× Budgeted Rate(4)

(4,536 × $11.50)$52,164

(4,536 × $12)$54,432

(4 × 1,080 × $12)$51,840

(4 × 1,080 × $12)$51,840

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

$2,268 F

Spending variance

$2,592 U

Efficiency variance Never a variance

$324 U

Flexible-budget variance Never a variance

8-17 (20 min.) Fixed-manufacturing overhead, variance analysis(continuation of 8-16).

1 & 2. =4040,1

400,62$

×

=160,4

400,62$

= $15 per hour


(1)

Same Budgeted Lump Sum

(as in Static Budget)Regardless ofOutput Level

(2)

Flexible Budget:Same Budgeted

Lump Sum (as in Static Budget)

Regardless ofOutput Level

(3)



× Budgeted Rate(4)

$63,916 $62,400 $62,400(4 × 1,080 × $15)

$64,800

$1,516 U $2,400 FSpending variance Never a variance Production-volume variance

$1,516 U $2,400 FFlexible-budget variance Production-volume 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?

8-4

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

1. Denominator level= (3,200,000 × 0.02 hours) = 64,000 hours

2. ActualResults

Flexible Budget Amount

1. Output units (baguettes) 2,800,000 2,800,0002. Direct manufacturing labor-hours 50,400 56,000a

3. Labor-hours per output unit (2 ÷ 1) 0.018 0.0204. Variable MOH costs $680,400 $560,0005. Variable MOH per labor-hour (4 ÷ 2) $13.50 $106. Variable MOH per output unit (4 ÷ 1) $0.243 $0.200

a. 2,800,000 x 0.020= 56,000 hours


(1)

Actual Input × Budgeted Rate

(2)

Flexible Budget: Budgeted Input


× Budgeted Rate(3)



× Budgeted Rate(4)

(50,400 × $13.50)$680,400

(50,400 × $10)$504,000

(56,000 × $10)$560,000

(56,000 × $10)$560,000

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.

8-5

$176,400 U

Spending variance

$56,000 F


$120,400 U


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

1. Budgeted standard direct manufacturing labor used = 0.02 per baguetteBudgeted output = 3,200,000 baguettesBudgeted 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 baguettesAllocated fixed manufacturing overhead

= 2,800,000 × 0.02 × $4 = $224,000


(1)

Same BudgetedLump Sum


(2)




(3)


Allowed for Actual Output × Budgeted Rate

(4)

$272,000 $256,000 $256,000(2,800,000 × 0.02 × $4)

$224,000

2. The fixed manufacturing overhead is underallocated by $48,000.

3. The production-volume variance captures the difference between the budgeted 3,200,0000baguettes 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.

8-6

$16,000 U

Spending variance Never a variance

$32,000 U

Production-volumevariance

$16,000 U


32,000 UProduction-volume

variance

$48,000 U

Underallocated fixed overhead

(Total fixed overhead variance)

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

1. The summary analysis is:

SpendingVariance

EfficiencyVariance

Production-VolumeVariance

Variable Manufacturing Overhead

$40,700 F $59,200 U Never a variance

Fixed Manufacturing Overhead $23,420 U Never a variance $36,000 U



(1)


(2)



× Budgeted Rate(3)



× Budgeted Rate(4)

$610,500(16,280 × $40)

$651,200(7,400 × 2 × $40)

$592,000(7,400 × 2 × $40)

$592,000

Fixed-Manufacturing Overhead


(1)



(2)




(3)



× Budgeted Rate(4)

$503,420 $480,000 $480,000(7,400 × 2 × $30.00)

$444,000

8-7

$40,700 F

Spending variance

$59,200 U


$18,500 U


$23,420 U


$36,000 U

Production-volume variance

8-20 (Cont.d’)

Summary information is:

Actual Flexible BudgetOutput units 7,400 7,400

Allocation base (hours) 16,280 14,800a

Allocation base per output unit 2.20 2.00

Variable MOH $610,500 $592,000b

Variable MOH per hour $37.50c $40.00Fixed MOH $503,420 $480,000

Fixed MOH per hour $30.92d –a 7,400 × 2.00 = 14,800 c $610,500 ÷ 16,280 hours = $37.50 per hourb 7,400 × 2 × $40 = $592,000 d $503,420 ÷ 16,280 hours $30.92 per hour

The budgeted fixed manufacturing overhead rate is $30.00 for assembly by hour:

= $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.

8-8

$480,0008,000 × 2 hours

8-21 (10−15 min.) 4-variance analysis, fill in the blanks.

Variable Fixed1. Spending variance2. Efficiency variance3. Production-volume variance4. Flexible-budget variance5. Underallocated (overallocated) MOH

$1,900 U1,000 U

NEVER2,900 U2,900 U

$1,000 UNEVER

500 U1,000 U1,500 U

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


(1)

Actual Input× Budgeted Rate

(2)



× Budgeted Rate(3)



× Budgeted Rate(4)

VariableMOH

$11,900 $10,000 $9,000 $9,000

8-9

$1,900 U

Spending variance

$1,000 U


$2,900 U


$2,900 U

Underallocated variable overhead

(Total variable overhead variance)

8-21 (Cont.d’)


(1)

Same BudgtedLump Sum


(2)




(3)



× Budgeted Rate(4)

FixedMOH

$6,000 $5,000 $5,000 $4,500

An overview of the 4 overhead variances is:

4-VarianceAnalysis

SpendingVariance

EfficiencyVariance

Production-Volume

VarianceVariableOverhead $1,900 U $1,000 U Never a variance

FixedOverhead $1,000 U Never a variance $500 U

8-10

$1,000 U


$500 U


$1,000 U

Flexible-budget variance$500 U


$1,500 U



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-VarianceAnalysis

SpendingVariance

EfficiencyVariance

Production-Volume Variance

Variable ManufacturingOverhead

$17,800 U $16,000 U Never a Variance

Fixed ManufacturingOverhead $13,000 U 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 BudgetOutput units (auto parts) 4,400 4,400Allocation base (machine-hours) 28,400 26,400a

Allocation base per output unit 6.45b 6.00Variable MOH $245,000 $211,200c

Variable MOH per hour $8.63d $8.00Fixed MOH $373,000 $360,000e

Fixed MOH per hour $13.13f –a 4,400 units × 6.00 machine-hours/unit = 26,400 machine-hoursb 28,400 ÷ 4,400 = 6.45 machine-hours per unitc 4,400 units × 6.00 machine-hours per unit × $8.00 per machine-hour = $211,200d $245,000 ÷ 28,400 = $8.63e 4,000 units × 6.00 machine-hours per unit × $15 per machine-hour = $360,000f $373,000 ÷ 28,400 = $13.13

8-11

8-22 (Cont.d’)

2. Variable Manufacturing Overhead Control 245,000Accounts Payable Control and other accounts 245,000

Work-in-Process Control 211,200Variable Manufacturing Overhead Allocated 211,200

Variable Manufacturing Overhead Allocated 211,200Variable Manufacturing Overhead Spending Variance 17,800Variable Manufacturing Overhead Efficiency Variance 16,000

Variable Manufacturing Overhead Control 245,000

Fixed Manufacturing Overhead Control 373,000Wages Payable Control, Accumulated Depreciation

Control, etc. 373,000

Work-in-Process Control 396,000Fixed Manufacturing Overhead Allocated 396,000

Fixed Manufacturing Overhead Allocated 396,000Fixed Manufacturing Overhead Spending Variance 13,000

Fixed Manufacturing Overhead Production-Volume Variance 36,000Fixed Manufacturing Overhead Control 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 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).

8-12

SOLUTION EXHIBIT 8-22


(1)


(2)



× Budgeted Rate(3)



× Budgeted Rate(4)

VariableMOH $245,000

(28,400 × $8)$227,200

(4,400 × 6 × $8)$211,200

(4,400 × 6 × $8)$211,200


(1)



(2)




(3)



× Budgeted Rate(4)

FixedMOH $373,000

(4,000 × 6 × $15)$360,000

(4,000 × 6 × $15)$360,000

(4,400 × 6 × $15)$396,000

8-13

$17,800 U

Spending variance

$16,000 U


$13,000 U


$36,000 F


$33,800 U


$33,800 U



$13,000 U

Flexible-budget variance$36,000 F


$23,000 F

Overallocated fixed overhead


8-23 (30− 40 min.) Straightforward coverage of manufacturing overhead, standard-costing system.

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

Actual Flexible BudgetOutput units 41,000 41,000Allocation base (machine-hours) 13,300 12,300a


Variable MOH per hour $11.66d $12.00 Fixed MOH $401,000 $390,000Fixed MOH per hour $30.15e –a 41,000 × 0.30 = 12,300 d $155,100 ÷ 13,300 = $11.66b 13,300 ÷ 41,000 = 0.32 e $401,000 ÷ 13,300 = $30.15c 41,000 × 0.30 × $12 = $147,600

An overview of the 4-variance analysis is:

4-VarianceAnalysis

SpendingVariance

EfficiencyVariance

Production− Volume Variance


$4,500 F $12,000 U Never a variance

Fixed Manufacturing Overhead

$11,000 U Never a variance $21,000 U

8-14

8-23 (Cont.d’)

2. Variable Manuf. Overhead Control 155,100Accounts Payable Control and other accounts 155,100

Work-in-Process Control 147,600Variable Manufacturing Overhead Allocated 147,600

Variable Manuf. Overhead Allocated 147,600Variable Manuf. Overhead Efficiency Variance 12,000

Variable Manuf. Overhead Spending Variance 4,500Variable Manuf. Overhead Control 155,100

Fixed Manuf. Overhead Control 401,000Wages Payable Control, Accumulated Depreciation Control, etc. 401,000

Work-in-Process Control 369,000Fixed Manufacturing Overhead Allocated 369,000

Fixed Manufacturing Overhead Allocated 369,000Fixed Manufacturing Overhead Spending Variance 11,000Fixed Manuf. Overhead Production-Volume Variance 21,000

Fixed Manuf. Overhead Control 401,000


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).

8-15

8-23 (Cont.d’)



(1)


(2)



× Budgeted Rate(3)



× Budgeted Rate(4)

VariableManufacturingOverhead

$155,100(13,300 × $12)

$159,600(12,300 × $12)

$147,600(12,300 × $12)

$147,600


(1)



(2)




(3)



× Budgeted Rate(4)

FixedManufacturingOverhead

$401,000 $390,000 $390,000(12,300 × $30)

$369,000

8-16

$4,500 F

Spending variance

$12,000 U


$11,000 U


$21,000 U*


$7,500 U


$7,500 U



$11,000 U


$21,000 U*Production-volume variance

$32,000 U



8-23 (Cont.d’)

= hours-machine 13,000

$390,000

= $30 per machine-hour

*Alternative computation:13,000 denominator hours – 12,300 budgeted hours allowed = 700 hours700 × $30 = $21,000 U

8-24 (20-25 min.) Spending and efficiency overhead variances, service sector.

1. and 2. = $2 per hour of home delivery time

Budgeted fixed overhead rate = 80.0000,8

000,24$

× = hours ,4006

$24,000

= $3.75 per hour of home delivery time

A detailed comparison of actual and flexible budgeted amounts is:

Actual Flexible BudgetOutput units (deliveries) 7,460 7,460Allocation base (hours) 5,595 5,968a


Variable MOH per hour $2.53d $2.00Fixed MOH $27,600 $24,000Fixed MOH per hour $4.93e –a 7,460 × 0.80 = 5,968b 5,595 ÷ 7,460 = 0.75c 7,460 × 0.80 × $2.00 = $11,936d $14,174 ÷ 5,595 = $2.53e $27,600 ÷ 5,595 = $4.93

8-17

8-24 (Cont.d’)

The required variances are:

SpendingVariance

EfficiencyVariance

Variable overheadFixed overhead

$2,984 U$3,600 U

$ 746 F––

These variances are computed as follows:


(1)


(2)



× Budgeted Rate(3)



× Budgeted Rate(4)

VariableOverhead $14,174

(5,595 × $2)$11,190

(7,460 × 0.80 × $2)$11,936

(7,460 × 0.80 × $2)$11,936


(1)



(2)




(3)



× Budgeted Rate(4)

FixedOverhead $27,600 $24,000 $24,000

(7,460 × 0.80 × $3.75)$22,380

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 base––each delivery takes 0.75 hours versus a budgeted 0.80 hours.

8-18

$2,984 USpending variance

$746 FEfficiency variance Never a variance

$2,238 UFlexible-budget variance Never a variance

$3,600 USpending variance

Never a variance $1,620 UProduction-volume variance

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 ControlMeals on Wheels

Original DataActual Flexible-

Results Budget AmountsOutput 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 CalculationsActual Costs Incurred (1) $14,174

Actual Inputx Budgeted Rate (2) $11,190

Budgeted Input Allowedfor Actual Output

x Budgeted Rate (3) $11,936

Spending Variance (1)-(2) $2,984 UEfficiency Variance (2)-(3) $746 F

Fixed Overhead Spending Variance $3,600 U

8-19

8-24 (Cont.d’)

Flexible Budgets, Variances, and Management ControlMeals on Wheels

Flexible-Cost Item/Allocation Base Actual Results Budget

AmountVariable Overhead Costs $14,174 $12,800

Fixed Overhead Costs $27,600 $24,000 Time per Delivery (hours) 0.75 0.80

Number of Home Deliveries 7,460 8,000 Hours of Delivery time 5,595 6,400

Variable Overhead Cost per Delivery

$1.90 $1.60

Variable Overhead Cost per hour of Delivery Time

$2.53 $2.00

Problem 1 Budgeted Input AllowedActual Costs Actual Input for Actual OutputIncurred (1) x Budgeted

Rate (2)x Budgeted Rate (3)

$14,174 $11,190 $11,936

Spending Variance $2,984 U

Efficiency Variance $746 F

Problem 2Fixed Overhead Spending

Variance $3,600 U

8-20

8-25 (35−50 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:





× Budgeted Rate(12,050 hrs. × $16.80)

$202,440*(12,050 hrs. × $16.00*)

$192,800(11,750 hrs. × $16.00*)

$188,000

* GivenDirect Labor calculationsActual input × Budgeted rate = Actual costs – Price variance

= $202,440 – $9,640 = $192,800Actual input = $192,800 ÷ Budgeted rate = $192,800 ÷ $16 = 12,050 hoursBudgeted input × Budgeted rate = $192,800 – Efficiency variance

= $192,800 – $4,800 = $188,000Budgeted 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.

8-21

$9,640 U*

Price variance$4,800 U

Efficiency variance

$14,440 U*


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:


Actual Inputs × Budgeted Rate



× Budgeted Rate



× Budgeted Rate

$249,000*($117,600 + (12,050 × $8.00)

$214,000$117,600 + ($8 × 11,750)

$211,600(11,750 hrs. × $19.20)

$225,600

* Known figure

An overview of the 3-variance analysis using the block format in the text is:

3-VarianceAnalysis

SpendingVariance

EfficiencyVariance

Production− Volume Variance

Total Overhead

$35,000 U $2,400 U $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 day-to-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

$35,000 U

Spending variance

$2,400 U

Efficiency variance

$14,000 F*


$37,400 U


$14,000 F*Production-volume variance

Flexible Budget:Budgeted Input Allowed for

Actual Costs Actual Input Actual OutputIncurred × Budgeted Rate × Budgeted Rate

Spending variance Efficiency variance


Actual input × Budgeted rate (9,800 × $5) $49,000Spending variance 250 UActual costs incurred $49,250

Flexible budget (9,900 × $5) $49,500Actual input × Budgeted rate (9,800 × $5) 49,000Efficiency variance $ 500 F

Flexible budget variance (250 U + 500 F) $ 250 F

Variable overhead is overallocated in the amount of $250 (the same amount as favorable flexible-budget variance).

2. Flexible Budget Allocated:Same Lump Sum Budgeted Input

(as in Static Budget) Allowed forActual Costs Regardless of Actual Output Incurred Budgeted Output Level × Budgeted Rate

Spending variance Production-volume variance


8-23

8-26 (Cont.d’)

Actual total overhead costs incurred $80,000Actual variable overhead costs incurred 49,250Actual fixed overhead costs incurred $30,750Spending variance (fixed overhead) 750 UFlexible budget $30,000

Flexible budget $30,000Divide by denominator volume in machine-hours ÷10,000Budgeted rate per machine-hour $ 3

Allocated ($3 × 9,900 machine-hours) $29,700Flexible budget 30,000Production-volume variance 300 UFlexible-budget variance = spending variance $ 750 UUnderallocated amount ($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 Efficiency Variance

Production-Volume Variance

Total Operating Overhead $23,000 F $24,000 F $17,000 U

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 VarianceProduction-

Volume VarianceTotal Operating Overhead $47,000 F $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 VarianceTotal 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 U––actual 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 VariancesDirect materials $32,640 UDirect labor 2,112 UVariable indirect 64 FFixed indirect 7,000 U

Price-Spending Variances Efficiency VariancesDirect materials $17,280 UDirect labor 1,728 FVariable indirect 5,184 FFixed indirect 7,000 U

Direct materials $15,360 UDirect labor 3,840 UVariable indirect 5,120 UFixed 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:

ActualQuantityof Inputs

(1)

ActualUnit Cost

of Inputs

(2)

Actual Cost of Inputs

(3) = (1) × (2)

Budgeted Unit Cost of Inputs

(4)

ActualInputs × Budgeted Cost per Inputs

(5) = (1) × (4)Direct materials 17,280,000 pages $ 0.0130b $224,640 $ 0.0120d $207,360Direct labor costs 1,728 hoursa $29.00c $ 50,112 $30.00e $ 51,840

a $17,280,000 ÷ 10,000 = 1,728 hoursb $224,640 ÷ 17,280,000 = $0.0130 per pagec $50,112 ÷ 1,728 = $29.00 per hourd $180,000 ÷ 15,000,000 (300,000 copies × 50 pages) = $0.0120 per pagee $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)

Actual OutputAchieved

(2)

Budgeted Unit Cost of Inputs

(3)

Flexible Budget

(4) = (1) x (2) × (3)Direct materials 50 320,000 $ 0.0120 $192,000Direct labor costs .005f 320,000 $30.00 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 labor-hours.

The price and efficiency variances for direct materials and direct labor are:

Actual CostsIncurred(Actual Input ×

Actual Price)Price

Variance

Actual Inputs × Budgeted

PricesEfficiency Variance

Flexible Budget:

Budgeted Input Allowed for

Actual Output × Budgeted

PriceDirect materials $224,640 $ 17,280 U $207,360 $15,360 U $192,000Direct labor costs 50,112 1,728 F 51,840 3,840 U 48,000

Indirect Cost Variances

A summary of the information is:

Actual Flexible BudgetOutput units (papers) 320,000 320,000Allocation base (printed paper) 17,280,000 16,000,000a

Allocation base per output unit 54 50Variable MOH $63,936 $64,000b

Variable MOH per printed page $0.0037 $0.0040 d

Fixed MOH $97,000 $90,000Fixed MOH per printed page $0.0056c –a 320,000 × 50 = 16,000,000b $320,000 × 50 × $0.0040 = $64,000c $97,000 ÷ 17,280,000 = $0.0056 per printed paged $60,000 ÷ (50 × 300,000) pages = $0.004 per page

8-27

8-28 (Cont.d’)The spending and efficiency variances for variable indirect costs are:


(1)


(2)



× Budgeted Rate(3)



× Budgeted Rate(4)

(17,280,000 × $0.0037)$63,936

(17,280,000 × $0.004)$69,120

(16,000,000 × $0.004)$64,000

(16,000,000 × $0.004)$64,000

Fixed MOH allocated per page = $90,000 ÷ (50 × 300,000) pages = $0.006 per pageThe spending and production-volume variances for fixed indirect costs are:


(1)

Same Lump Sum(as in Static Budget)

Regardless of Budgeted Output

Level(2)

Flexible Budget:Same Lump Sum

(as in Static Budget)Regardless

of Budgeted Output Level

(3)



× Budgeted Rate(4)

$97,000 $90,000 $90,000(16,000,000 × $0.0060)

$96,000

2. The largest individual variance category is for direct materials––comprising 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

$5,184 F

Spending variance

$5,120 U

Efficiency variance

$64 F


Never a variance

$7,000 U


$6,000 F


8-28 (Cont’d.)

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:

ActualResults

Flexible BudgetAmount

Static-BudgetAmount

1. Output units (panels) 19,200 19,200 17,7602. Machine-hours 36,480 38,400 35,5203. Machine-hours per panel 1.90 2.00 2.00

4. Variable MOH costs $1,532,160 $1,536,000 $1,420,8005. Variable MOH costs per machine- hour (Row 4 ÷Row 2) $42.00 $40.00 $40.006. Variable MOH costs per unit (Row 4 ÷ Row 1)) $79.80 $80.00 $80.00

7. Fixed MOH costs $7,004,160 $6,961,920 $6,961,9208. Fixed MOH costs per machine- hour (Row 7 ÷ Row 2)) $192.00 $181.30 $196.009. Fixed MOH costs per unit (7 ÷ 1) $364.80 $362.60 $392.00

Solution Exhibit 8-30 shows the computation of the variances.

Journal entries for variable MOH, year ended December 31, 2003:

Variable MOH Control 1,532,160 Accounts Payable Control and Other Accounts 1,532,160

Work-in-Process Control 1,536,000 Variable MOH Allocated 1,536,000

Variable MOH Allocated 1,536,000 Variable MOH Spending Variance 72,960 Variable MOH Control 1,532,160 Variable MOH Efficiency Variance 76,800

8-30

8-30 (Cont.d’)

Journal entries for fixed MOH, year ended December 31, 2003:

Fixed MOH Control 7,004,160 Wages Payable, Accumulated Depreciation, etc. 7,004,160

Work-in-Process Control 7,526,400 Fixed MOH Allocated 7,526,400

Fixed MOH Allocated 7,526,400 Fixed MOH Spending Variance 42,240 Fixed MOH Control 7,004,160 Fixed MOH Production-Volume Variance 564,480

2. Adjustment of COGS

Variable MOH Efficiency Variance 76,800 Fixed MOH Production-Volume Variance 564,480 Variable MOH Spending Variance 72,960 Fixed MOH Spending Variance 42,240 Cost of Goods Sold 526,080

8-31




(1)

Actual Inputs× Budgeted Rate

(2)



× Budgeted Rate(3)



× Budgeted Rate(4)

(36,480 × $42)$1,532,160

(36,480 × $40)$1,459,200

(38,400 × $40)$1,536,000

(38,400 × $40)$1,536,000



(1)


(as in Static Budget)Regardless Of Output Level

(2)

Flexible Budget: Same Budgeted

Lump Sum(as in Static Budget)


(3)



× Budgeted Rate(4)

(38,400 × $196)$7,004,160 $6,961,920 $6,961,920 $7,526,400

8-32

$72,960 U

Spending variance

$76,800 F


$42,240 U

Spending variance Never a variance$564,480 F


Graph for planning and control purposes

Graph for inventorycosting purpose($18 per machine-hour)

8-31 (30−40 min.) Graphs and overhead variances.

1. Variable Manufacturing Overhead Costs

Fixed Manufacturing Overhead Costs

= = = $18 per machine-hour

8-33

Total Variable

Manuf.Overhead

Costs

$72,000,000

$36,000,000

Graph for planning and control and inventory

costingpurposes at $9

per machine-hour

4,000,000Machine-Hours

Total Fixed

Manuf.Overhead

Costs

$72,000,000

$36,000,000

4,000,000Machine-Hours

8-31 (Cont.d’)

2.


(1)


(2)

Flexible Budget:Budgeted Input


× Budgeted Rate(3)



× Budgeted Rate(4)

$36,100,000(3,800,000 × $9)

$34,200,000(3,500,000 × $9)

$31,500,000(3,500,000 × $9)

$31,500,000


(1)



(2)




(3)



× Budgeted Rate(4)

$72,200,000 $72,000,000 $72,000,000(3,500,000 × $18)

$63,000,000

*Alternative computation:4,000,000 denominator hours – 3,500,000 budgeted hours allowed = 500,000 hours500,000 × $18 = $9,000,000 U

8-34

$1,900,000 U

Spending variance

$2,700,000 U


$4,600,000 U


$4,600,000 U



$200,000 U


$9,000,000 U*


$200,000 U


$9,000,000 U*


$9,200,000 U


Total fixed overhead variance

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:

Actual Budget Allocated

$72,200,000 $72,000,0003,500,000 × $24 =

$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.

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

1. = hours-machine Budgeted 10,000

cost Budgeted $1,000,000 = $100 per machine-hour

Flexible budget:Budgeted Input

Allowed forActual Costs Actual Input Actual Output Incurred × Budgeted Rate × Budgeted Rate

(9,500 × $100) (9,800 × $100)$1,100,000 $950,000 $980,000

$150,000 U $30,000 FSpending variance Efficiency variance

2. = hours-machine Budgeted 10,000

cost Budgeted $600,000 = $60 per machine-hour

8-35

8-32 (Cont.d’)Flexible BudgetSame Budgeted Allocated: Lump Sum Budgeted Input

(as in Static Budget) Allowed forActual Costs Regardless of Actual OutputIncurred Output Level × Budgeted Rate

(9,800 × $60)$590,000 $600,000 $588,000

$10,000 F $12,000 USpending variance Production-volume variance

3. Panel A: Variable Manufacturing Overhead Costs

$1,000,000 ——

$ 800,000 —— Graph for

$ 600,000 — planning and control— purpose and inventory

$ 400,000 — costing purpose— ($100 per machine-hour)

$200,000 ——

2,000 4,000 6,000 8,000 10,000

Panel B: Fixed Manufacturing Overhead CostsGraph for planning and control purposes

600,000

— Production- volume variance

400,000 —

—

200,000 — Graph for inventorycosting purpose ($60 per machine-hour)

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 CostsIncurred

(Actual Inputs× Actual Rate)




× Budgeted Rate



Case A:Variable ManufacturingOverhead $7,000*

(530 × $15)$7,950

(500* × $15)$7,500*

(500* × $15)$7,500*

Fixed ManufacturingOverhead $10,600*

(Lump sum) $10,000*

(Lump sum)$10,000*

(500 × $20a)$10,000*

Total budgeted manufacturing overhead = $7,500 + $10,000 = $17,500Case B:Variable ManufacturingOverhead $5,525

(650 × $8.50*)$5,525

(650* × $8.50*)$5,525

(650* × $8.50*)$5,525

Fixed ManufacturingOverhead $6,700

(Lump sum)$7,000b

(Lump sum)$7,000b

(650* × $10)$6,500

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

8-37

Never a variance$450 U

Efficiency variance

$950* F

Spending variance

$0

Production volume varianceNever a variance$600 U

Spending variance

Never a variance$0

Efficiency variance

$0*

Spending variance

$500 U*

Production-volume varianceNever a variance$300 F*

Spending variance

8-33 (Cont.d’)

Case C:Variable ManufacturingOverhead $6,200

(1,170 × $5.00*)$5,850

(1,150 × $5.00*)$5,750c

(1,150 × $5.00*)$5,750c

Fixed ManufacturingOverhead $12,000* $11,000* $11,000* $11,500d

Total budgeted manufacturing overhead = $5,750 + $11,000 = $16,750aBudgeted FMOH rate = Budgeted FMOH costs ÷ Denominator level = $10,000 ÷ 500 = $20b = +

$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 (15−25 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

Never a variance$100 U*

Efficiency variance$350 U*

Spending variance

$500 F*

Production-volume varianceNever a variance$1,000 U

Spending variance

8-34 (Cont.d’)

2, 3, 4, 5. See Solution Exhibit 8-34 Variable overhead rate per DLH = $0.25 + $0.34 = $0.59Fixed overhead rate per DLH = $0.18 + $0.15 + $0.28 = $0.61Fixed overhead budget for May = ($648,000 + $540,000 + $1,008,000) ÷ 12

= $2,196,000 ÷ 12 = $183,000Using the format of Exhibit 8-3 for variable overhead and then fixed overhead:Actual variable overhead: $75,000 + $111,000 = $186,000Actual 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-VarianceAnalysis

SpendingVariance

EfficiencyVariance

Production- Volume

Variance

Variable ManufacturingOverhead

$150 U $8,850 F Never a variance

Fixed ManufacturingOverhead

$6,000 U Never a variance $18,300 F

8-39

8-34 (Cont.d’)

SOLUTION EXHIBIT 8-34Variable Manufacturing Overhead


(1)

Actual Inputs× Budgeted Rate

(2)



× Budgeted Rate(3)



× Budgeted Rate(4)

$186,000(315,000 × $0.59)

$185,850(330,000 × $0.59)

$194,700(330,000 × $0.59)

$194,700



(1)



(2)


Lump Sum(as in Static Budget)


(3)



× Budgeted Rate(4)

$189,000 $183,000 $183,000(330,000 × $0.61)

$201,300

Alternate computation of the production volume variance:

= × = × $ 0.61= (330,000 – 300,000) × $0.61 = $18,300 F

8-40

$150 U

Spending variance

$8,850 F


$6,000 U


$18,300 F


8-35 (30 min.) Overhead analysis.

1. Variable overhead analysis: Allocated:


Actual Costs Actual Input Actual Output Incurred × Budgeted Rate × Budgeted Rate

(30,000 × $300) (35,000 × $300)$9,600,000 $9,000,000 $10,500,000

$600,000 U $1,500,000 F

Spending variance Efficiency variance

2.

= hours-machine ofquantity totalBudgeted

poolcost overhead fixedin costs totalBudgted

= 33,000

$4,950,000

= $150 per machine-hour

Fixed overhead analysis:

Same Budgeted Allocated:Lump Sum Budgeted Input

(as in Static Budget) Allowed forActual Costs Regardless of Actual Output

Incurred Output Level × Budgeted Rate

$150 × 35,000

$4,500,000 $4,950,000 $5,250,000

$450,000 F $300,000 F


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

1. Budgeted selling price $100Budgeted variable cost per unit $40Budgeted fixed cost per unit ($5,000,000 ÷ 20,000) 25Budgeted cost per unit 65Budgeted profit per unit $ 35

Operating income based on budgeted profit per unit$35 per unit × 22,000 units $770,000

8-41

8-36 (Cont.d’)

Flexible-budget operating income isRevenues $100 × 22,000 $2,200,000Variable costs $40 × 22,000 880,000Fixed costs 500,000Operating income $ 820,000

Static-budget operating income isRevenues $100 × 20,000 $2,000,000Variable costs $40 × 20,000 800,000Fixed costs 500,000Operating income $ 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 = ×

= 20,000

$500,000 × 2,000 = $25 × 2,000 = $50,000 F

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

Static-budget operating income $700,000Sales-volume variance $120,000 FFlexible-budget operating income $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 $770,000Production-volume variance 50,000 FFlexible-budget operating income $820,000

8-43

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

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


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 $1,875 USpending variance 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.

8-44

8-37 (Cont.d’)

2. Computation of the fixed setup overhead cost variances follows:

Same Budgeted Allocated: Lump Sum Budgeted Input

(as in Static Budget) Allowed forActual Costs Regardless of Actual Output Incurred Output Level × Budgeted Rate

(90 × 5.0 × $30)$17,535 $18,000 $13,500

$465 F $4,500 U Spending variance 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 setup-hours than the budgeted setup-hour capacity available.

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

Static-Budget Actual1. Amounts Amounts

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

Actual Costs Actual Input Actual Output Incurred × Budgeted Rate × Budgeted Rate (40 × 5.4 × $42) (40 × 5.4 × $40) (44 × 5.5 × $40)

$9,072 $8,640 $9,680

$432 U $1,040 F

8-45

Spending variance Efficiency variance8-38 (Cont.d’)

The unfavorable spending variance is due to the actual variable overhead cost per testing-hour 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 $1,375 F


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 (30−40 min.) Comprehensive review of Chapters 7 and 8, working backward from given variances.

1. Solution Exhibit 8-39 outlines the Chapter 7 and 8 framework underlying this solution.(a) $176,000 ÷ $1.10 = 160,000 pounds(b) $69,000 ÷ $11.50 = 6,000 pounds(c) $10,350 – $18,000 = $7,650 F(d) Standard direct manufacturing labor rate = $800,000 ÷ 40,000 hours = $20 per hour

Actual direct manufacturing labor rate = $20 + $0.50 = $20.50Actual direct manufacturing labor-hours = $522,750 ÷ $20.50

= 25,500 hours(e) Standard variable manufacturing overhead rate = $480,000 ÷ 40,000

= $12 per direct manuf. labor-hourVariable manuf. overhead efficiency variance of $18,000 ÷ $12 = 1,500 excess hoursActual hours – Excess hours = Standard hours allowed

25,500 – 1,500 = 24,000 hours

8-46

(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’)


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).



(Actual Input× Actual Rate)




× Budgeted Rate

DirectMaterials

160,000 × $10.40$1,664,000

160,000 × $11.50$1,840,000

96,000 × $11.50$1,104,000

3 × 30,000 × $11.50$1,035,000

DirectManufacturingLabor

0.85 × 30,000 × $20.50$522,750

0.85 × 30,000 × $20$510,000

0.80 × 30,000 × $20$480,000

8-47

$176,000 FPrice variance

$69,000 UEfficiency variance

$12,750 UPrice variance

$30,000 UEfficiency variance

$42,750 UFlexible-budget variance

8-39 (Cont.d’)







× Budgeted Rate

VariableMOH

0.85 × 30,000 × $11.70$298,350

0.85 × 30,000 × $12$306,000

0.80 × 30,000 × $12$288,000

0.80 × 30,000 × $12$288,000


(1)

Same BudgetedLump Sum(as in Static

Budget)Regardless ofOutput Level

(2)


Lump Sum(as in Static

Budget)Regardless ofOutput Level

(3)



× Budgeted Rate(4)

FixedMOH

$597,460 $640,000 0.80 x 50,000 × $16$640,000

0.80 x 30,000 × $16$384,000

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$7,650 FSpending variance

$18,000 UEfficiency variance Never a variance

$10,350 UFlexible-budget variance Never a variance

$42,540 FSpending variance Never a variance

$256,000 UProduction volume variance$42,540 F

Flexible-budget variance$256,000 U

Production volume variance

8-40 (30−50 min.) 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 × $15.00(or 7,800 × 3 lbs. × $5.00 or 23,400 lbs. × $5.00) $ 117,000

Direct manufacturing labor, 7,800 × $75.00(or 7,800 × 5 hrs. × $15.00 or 39,000 hrs. × $15.00) 585,000

Manufacturing overhead:Variable, 7,800 × $30.00 (or 39,000 hrs. × $6.00) 234,000Fixed, 7,800 × $40.00 (or 39,000 hrs. × $8.00) 312,000

Total $1,248,000

The following is for later use:Fixed manufacturing overhead, a lump-sum budget $320,000*

*Fixed manufacturing overhead rate =$8.00 =

Budget = 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-VarianceAnalysis

SpendingVariance

EfficiencyVariance

ProductionVolume Variance

Total Manufacturing Overhead $39,400 U $6,600 U $8,000 U

8-49

8-40 (Cont.d’)


Actual CostsIncurred:

Actual Input (Actual Input x Budgeted Price)



× Actual Rate Purchases Usage × Budgeted PriceDirectMaterials

(25,000 × $5.20)$130,000

(25,000 × $5.00)$125,000

(23,100 × $5.00)$115,500

(23,400 × $5.00)$117,000

$5,000 Ua. Price variance

$1,500 Fb. Efficiency variance

DirectManuf.Labor

(40,100 × $14.60)$585,460

(40,100 × $15.00)$601,500

(39,000 × $15.00)$585,000

$16,040 F $16,500 Uc. Price variance d. Efficiency variance

Actual Costs

IncurredActual Input

× Budgeted Rate



× Budgeted Rate

Allocated:(Budgeted Input


× Budgeted Rate)VariableManufacturingOverhead (not given)

(40,100 × $6.00) $240,600

(39,000 × $6.00)$234,000

(39,000 × $6.00) $234,000

$6,600 U Efficiency variance Never a variance

FixedManufacturingOverhead (not given) $320,000 $320,000

(39,000 × $8.00)$312,000

$8,000 U*Never a variance Prodn. volume variance

TotalManufacturingOverhead

( given)$600,000

($240,600 + $320,000)$560,600

($234,000 + $320,000)$554,000

($234,000 + $312,000)$546,000

$39,400 U $6,600 U $8,000 Ue. Spending variance f. Efficiency variance g. Prodn. volume variance

8-50

8-40 (Cont.d’)

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

8.41 (45 min.) Overhead variances, ethics.

1. a. Total budgeted overhead $12,500,000Budgeted variable overhead($10 budgeted rate per machine-hour × 1,000,000budgeted machine-hours) 10,000,000Budgeted fixed overhead $ 2,500,000

b. Budgeted fixed OH rate = hours-machine Budgeted 1,000,000

amount Budgeted $2,500,000

= $2.50 per machine-hour

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 = $10

$20 = 2 machine-hours

8-51

8-41 (Cont.d’)

2. Variable overhead spending variance:

– ×

=hours-machine actual 960,000

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

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

Variable overhead efficiency variance:

Actual units of Budgeted units of Budgetedvariable overhead variable overhead variable cost-allocation – cost-allocation base × overhead base used for allowed for rate actual output actual output

= (960,000 – (2 × 498,000)) × $10= (960,000 – 996,000) × 10 = $360,000 F

3. By manipulating, Remich has created a sizable unfavorable fixed overhead spending variance or, at least, has increased its magnitude. Jerry Remich’s 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 Remich’s 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, Remich’s unethical actions will waste top management’s time and may lead to wrong decisions.

8-52

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 10%Purchased transportation 0%Rentals and landing fees 10%Depreciation and amortization 90%Maintenance and repairs 10%Fuel 0%Other 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. Indicate favorable and unfavorable variances.

8-53

http://www.prenhall.com/horngren

http://www.fedex.com/

Solution to Internet Exercise

1. Flexible Budget based on a 10% increase in sales.

Fixed Variable Budgeted TotalCost a Cost b Variable c Budgeted

Revenues (10% increase from 1999) $18,450,817

OPERATING EXPENSES Salaries and employee benefits 10.0% $ 708,773 $0.380 $

7,016,851 7,725,624

Purchased transportation 0.0% 0 0.092 1,691,564 1,691,564 Rentals and landing fees 10.0% 139,669 0.075 1,382,727 1,522,396 Depreciation and amortization 90.0% 931,606 0.006 113,863 1,045,469 Maintenance and repairs 10.0% 95,887 0.051 949,284 1,045,172 Fuel 0.0% 0 0.036 665,422 665,422 Other 90.0% 2,690,331 0.018 328,81

8 3,019,150

Total Operating Expenses $4,566,266 $12,148,529

16,714,796

Operating Income $ 1,736,021

a. Fixed percentage × 1999 costb. (1999 cost – fixed portion) / 1999 revenuesc. (variable cost % × 1999 revenues × 1.10)

2. Year 2000 operating budget compared to actual results.

Actual Budgeted VarianceRevenues $18,256,945 $18,450,81

7 $193,872 U

OPERATING EXPENSES Salaries and employee benefits

7,597,964 7,725,624 127,660 F

Purchased transportation 1,674,854 1,691,564 16,710 FRentals and landing fees 1,538,713 1,522,396 16,317 UDepreciation and amortization

1,154,863 1,045,469 109,394 U

Maintenance and repairs 1,101,424 1,045,172 56,252 UFuel 918,513 665,422 253,091 UOther 3,049,540 3,019,150 30,390 UTotal Operating Exp. 17,035,871 16,714,796 321,075 UOperating Income $ 1,221,074 $ 1,736,021 $514,947 U

8-54

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. Flexible Budget Budgeted Input

Allowed

Actual Costs Incurred Actual Input × Budgeted Rate For Actual Output × Budgeted Rate (67,500 × $28.89) (67,500 × $30.00) (0.40 × 150,000 × $30) $1,950,000 $2,025,000 $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 cost-pool 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.

8-55

management control: ii

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