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CHAPTER 8
FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND
MANAGEMENT CONTROL
8-16 (20 min.) Variabl !a"#$a%ri"' ()r*a+, )aria"% a"ali.
1. Variable Manufacturing Overhead Variance Analysis for Esuire !lothing for "une 200#
A%al C(&
I"%#rr+
A%al I"/#& 0&.
A%al Ra&
213
A%al I"/#& 0&.
B#+'&+ Ra&
243
Fl5ibl B#+'&
B#+'&+ I"/#& 0&.
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
23
All(%a&+
B#+'&+ I"/#& 0&.
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
293
($%&' *11.&0)*&2%1$
($%&' *12)*&$%$'2
($ 1%0+0 *12)*&1%+$0
($ 1%0+0 *12)*&1%+$0
2. Esuire had a favorable s,ending variance of *2%2+ because the actual variable overheadrate -as *11.&0 ,er direct manufacturing laborhour versus *12 budgeted. /t had an unfavorableefficiency variance of *2% because each suit averaged $.2 laborhours ($%&' hours 1%0+0suits) versus $.0 budgeted laborhours.
+1
*2%2+
3,ending variance
*2%
Efficiency variance
4ever a variance
*'2$
le5iblebudget variance
4ever a variance
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8-1: (20 min.) Fi5+-!a"#$a%ri"' ()r*a+, )aria"% a"ali 2%("&i"#a&i(" ($ 8-163.
1 6 2.7udgeted fi5ed overhead
rate ,er unit ofallocation base
8$0$0%1
$00%(2*
81(0%$
$00%(2*
8 *1& ,er hour
i5ed Manufacturing Overhead Variance Analysis for Esuire !lothing for "une 200#
A%al C(&
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a i" S&a&i% B#+'&3
R'ar+l ($
O#&/#& L)l
243
Fl5ibl B#+'&
Sa! B#+'&+
L#!/ S#!
2a i" S&a&i% B#+'&3
R'ar+l ($
O#&/#& L)l
23
All(%a&+
B#+'&+ I"/#& 0&.
All(7+ $(r A%al
O#&/#&
B#+'&+ Ra&
293
*'%#1 *2%$00 *2%$00($ 1%0+0 *1&)
*$%+00
*1%&1 *2%$00
3,ending variance 4ever a variance 9roductionvolume variance
*1%&1 *2%$00 le5iblebudget variance 9roductionvolume variance
:he fi5ed manufacturing overhead s,ending variance and the fi5ed manufacturingfle5ible budget variance are the same;;*1%&1 . Esuire s,ent *1%&1 above the *2%$00
budgeted amount for "une 200#.:he ,roductionvolume variance is *2%$00 . :his arises because Esuire utili /s Esuire gaining mar=et share> ?ill Esuire need to addca,acity>
+2
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8-18 ('0 min.) Variabl !a"#$a%ri"' ()r*a+ )aria"% a"ali.
1. @enominator level 8('%200%000 0.02 hours) 8 $%000 hours
2. A%alR#l&
Fl5ibl
B#+'& A!(#"&
1. Out,ut units (baguettes) 2%+00%000 2%+00%0002. @irect manufacturing laborhours &0%$00 &%000a
'. aborhours ,er out,ut unit (2 1) 0.01+ 0.020$. Variable manuf. overhead (MOB) costs *+0%$00 *&0%000
&. Variable MOB ,er laborhour ($ 2) *1'.&0 *10. Variable MOB ,er out,ut unit ($ 1) *0.2$' *0.200
a2%+00%000 0.0208 &%000 hours
Variable Manufacturing Overhead Variance Analysis for rench 7read !om,any for 200#
A%al C(&I"%#rr+
A%al I"/#& 0&.
A%al Ra&
213
A%al I"/#& 0&.
B#+'&+ Ra&
243
Fl5ibl B#+'&
B#+'&+ I"/#& 0&.All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
23
All(%a&+
B#+'&+ I"/#& 0&.All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
293
(&0%$00 *1'.&0)*+0%$00
(&0%$00 *10)*&0$%000
(&%000 *10)*&0%000
(&%000 *10)*&0%000
'. 3,ending variance of *1C%$00. /t is unfavorable because variable manufacturing overhead-as '&D higher than ,lanned. A ,ossible e5,lanation could be an increase in energy ratesrelative to the rate ,er standard laborhour assumed in the fle5ible budget.
Efficiency variance of *&%000. /t is favorable because the actual number of directmanufacturing laborhours reuired -as lo-er than the number of hours in the fle5ible budget.abor -as more efficient in ,roducing the baguettes than management had antici,ated in thebudget. :his could occur because of im,roved morale in the com,any% -hich could result froman increase in -ages or an im,rovement in the com,ensation scheme.
le5iblebudget variance of *120%$00. /t is unfavorable because the favorable efficiencyvariance -as not large enough to com,ensate for the large unfavorable s,ending variance.
+'
*1C%$00
3,ending variance
*&%000
Efficiency variance 4ever a variance
*120%$00 le5iblebudget variance 4ever a variance
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8-1; ('0 min.) Fi5+ !a"#$a%ri"' ()r*a+ )aria"% a"ali 2%("&i"#a&i(" ($ 8-183.
1. 7udgeted standard direct manufacturing labor used 8 0.02 ,er baguette7udgeted out,ut 8 '%200%000 baguettes7udgeted standard direct manufacturing laborhours
8 '%200%000 0.02 8 $%000 hours
7udgeted fi5ed manufacturing overhead costs 8 $%000 *$.00 ,er hour 8 *2&%000
Actual out,ut 8 2%+00%000 baguettesAllocated fi5ed manufacturing overhead
8 2%+00%000 0.02 *$ 8 *22$%000
i5ed Manufacturing Overhead Variance Analysis for rench 7read !om,any for 200#
A%al C(&
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a i" S&a&i% B#+'&3
R'ar+l ($
O#&/#& L)l
243
Fl5ibl B#+'&
Sa! B#+'&+
L#!/ S#!
2a i" S&a&i% B#+'&3
R'ar+l ($
O#&/#& L)l
23
All(%a&+
B#+'&+ I"/#& 0&.
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
293
*2C2%000 *2&%000 *2&%000(2%+00%000 0.02 *$)
*22$%000
2. :he fi5ed manufacturing overhead is underallocated by *$+%000.
'. :he ,roductionvolume variance of *'2%000 ca,tures the difference bet-een the budgeted'%200%0000 baguettes and the lo-er actual 2%+00%000 baguettes ,roducedthe fi5ed costca,acity not used. :he s,ending variance of *1%000 unfavorable means that the actualaggregate of fi5ed costs (*2C2%000) e5ceeds the budget amount (*2&%000). or e5am,le%monthly leasing rates for baguettema=ing machines may have increased above those in thebudget for 200#.
+$
*1%000
3,ending variance 4ever a variance
*'2%000
9roductionvolume
variance
*1%000
le5iblebudget variance
*'2%000 9roductionvolume
variance
*$+%000
nderallocated fi5ed overhead
(:otal fi5ed overhead variance)
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8-4< ('0;$0 min.) Ma"#$a%ri"' ()r*a+, )aria"% a"ali.
1. :he summary information isF
T* S(l#&i(" C(r/(ra&i(" 2=#" 4
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Fl5ibl B#+'& All(%a&+
A%al C(& A%al I"/#& 0&. B#+'&+ I"/#&
0&. All(7+ B#+'&+
B#+'&+ I"/#&
0&. All(7+ B#+'&+
I"%#rr+ B#+'&+ Ra& $(r A%al O#&/#& Ra& $(r A%al O#&/#& Ra&Variabl $11 *'0.00 $'2 *'0.00 $'2 *'0.00
Ma"#$a%ri"
' assy. hrs. ,er assy. hr. assy. hrs. ,er assy. hr. assy. hrs. ,er assy. hr.
O)r*a+ *12%$20 *12%''0 *12%#0 *12%#0
*#0 *'0
3,ending variance Efficiency variance 4ever a variance
*&$0
le5iblebudget variance 4ever a variance
*&$0
Overallocated variable overhead
Fl5ibl B#+'& All(%a&+
A%al C(& S&a&i% B#+'& L#!/ S#! S&a&i% B#+'& L#!/ S#!
B#+'&+ I"/#&
All(7+ B#+'&+
I"%#rr+ R'ar+l ($ O#&/#& L)l R'ar+l ($ O#&/#& L)l $(r A%al O#&/#& Ra&Fi5+ $'2 *$+.00
Ma"#$a%ri"
' assy. hrs. ,er assy. hr.
O)r*a+ *20%&0 *1#%200 *1#%200 *20%C'
*1%'0 *1%&'
3,ending Variance 4ever a Variance 9roductionvolume variance
*1%'0 *1%&'
le5iblebudget variance 9roductionvolume variance
*1C
Overallocated fi5ed overhead
+
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:he summary analysis isF
S/"+i"'
Varia"%
E$$i%i"%
Varia"%
Pr(+#%&i("-V(l#!
Varia"%
VariableManufacturingOverhead
*#0 *'0 4ever a variance
i5ed ManufacturingOverhead *1%'0 4ever a variance *1%&'
2. Variabl Ma"#$a%ri"' C(& a"+ Varia"%
a. Variable Manufacturing Overhead !ontrol 12%
$20Accounts 9ayable !ontrol and various other accounts 12%$20
:o record actual variable manufacturing overhead costsincurred.
b. ?or=in9rocess !ontrol 12%#0Variable Manufacturing Overhead Allocated 12%#0
:o record variable manufacturing overhead allocated.
c. Variable Manufacturing Overhead Allocated 12%#0Variable Manufacturing Overhead 3,ending Variance #0
Variable Manufacturing Overhead !ontrol 12%$20Variable Manufacturing Overhead Efficiency Variance '0
:o isolate variances for the accounting ,eriod.
d. Variable Manufacturing Overhead Efficiency Variance '0Variable Manufacturing Overhead 3,ending Variance #0!ost of Goods 3old &$0
:o -rite off variable manufacturing overhead variances to cost of goods sold.
+C
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Fi5+ Ma"#$a%ri"' C(& a"+ Varia"%
a. i5ed Manufacturing Overhead !ontrol 20%&03alaries 9ayable% Acc. @e,reciation% various other accounts 20%&0
:o record actual fi5ed manufacturing overhead costs incurred.
b. ?or=in9rocess !ontrol 20%C'i5ed Manufacturing Overhead Allocated 20%C'
:o record fi5ed manufacturing overhead allocated.
c. i5ed Manufacturing Overhead Allocated 20%C'i5ed Manufacturing Overhead 3,ending Variance 1%'0
i5ed Manufacturing Overhead 9roductionVolume Variance 1%&'i5ed Manufacturing Overhead !ontrol 20%&0
:o isolate variances for the accounting ,eriod.
d. i5ed Manufacturing Overhead 9roductionVolume Variance 1%&'i5ed Manufacturing Overhead 3,ending Variance 1%'0
!ost of Goods 3old 1C:o -rite off fi5ed manufacturing overhead variances to cost of goods sold.
'. 9lanning and control of variablemanufacturing overhead costs has both a longrun and ashortrun focus. /t involves 3olutions ,lanning to underta=e only valueadded overhead activities(a longrun vie-) and then managing the cost drivers of those activities in the most efficient -ay(a shortrun vie-). 9lanning and control offixedmanufacturing overhead costs at 3olutions have,rimarily a longrun focus. /t involves underta=ing only valueadded fi5edoverhead activitiesfor a budgeted level of out,ut. 3olutions ma=es most of the =ey decisions that determine thelevel of fi5edoverhead costs at the start of the accounting ,eriod.
++
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8-41 (101& min.) 9-)aria"% a"ali, $ill i" &* bla">.
Variabl Fi5+
1. 3,ending variance2. Efficiency variance'. 9roductionvolume variance$. le5iblebudget variance&. nderallocated (overallocated) MOB
*$%200 $%&00
4EVEH+%C00 +%C00
*'%000 4EVEH
00 '%000 '%00
:hese relationshi,s could be ,resented in the same -ay as in E5hibit +$.
A%al C(&
I"%#rr+
213
A%al I"/#& 0&.
B#+'&+ Ra&
243
Fl5ibl B#+'&
B#+'&+ I"/#& 0&.
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
23
All(%a&+
B#+'&+ I"/#& 0&.
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
293
Variable
MOB
*'&%C00 *'1%&00 *2C%000 *2C%000
A%al C(&
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a i" S&a&i% B#+'&3
R'ar+l ($
O#&/#& L)l
243
Fl5ibl B#+'&
Sa! B#+'&+
L#!/ S#!
2a i" S&a&i% B#+'&3
R'ar+l ($
O#&/#& L)l
23
All(%a&+
B#+'&+ I"/#& 0&.
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
293
i5edMOB
*1+%000 *1&%000 *1&%000 *1$%$00
+#
*$%200
3,ending variance
*$%&00
Efficiency variance 4ever a variance
*'%000
3,ending variance 4ever a variance
*00
9roductionvolume variance
*+%C00
le5iblebudget variance 4ever a variance
*+%C00
nderallocated variable overhead
(:otal variable overhead variance)
*'%000
le5iblebudget variance
*00 9roductionvolume variance
*'%00
nderallocated fi5ed overhead
(:otal fi5ed overhead variance)
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An overvie- of the $ overhead variances isF
9-Varia"%
A"ali
S/"+i"'
Varia"%
E$$i%i"%
Varia"%
Pr(+#%&i("-V(l#!
Varia"%
VariableOverhead *$%200 *$%&00 4ever a variance
i5edOverhead *'%000 4ever a variance *00
8-44 (20;'0 min.) S&rai'*&$(r7ar+ 9-)aria"% ()r*a+ a"ali.
1. :he budget for fi5ed manufacturing overhead is $%000 units machinehours *1&machinehoursIunit 8 *'0%000.
An overvie- of the $variance analysis isF
9-Varia"%A"ali
S/"+i"'Varia"%
E$$i%i"%Varia"%
Pr(+#%&i("-V(l#! Varia"%
VariableManufacturingOverhead
*1C%+00 *1%000 4ever a Variance
i5edManufacturingOverhead
*1'%000 4ever a Variance *'%000
3olution E5hibit +22 has details of these variances.
A detailed com,arison of actual and fle5ible budgeted amounts isF
A%al Fl5ibl B#+'&
Out,ut units (auto ,arts) $%$00 $%$00Allocation base (machinehours) 2+%$00 2%$00a
Allocation base ,er out,ut unit .$&b .00
Variable MOB *2$&%000 *211%200c
Variable MOB ,er hour *+.'d *+.00i5ed MOB *'C'%000 *'0%000e
i5ed MOB ,er hour *1'.1'f ;a
$%$00 units .00 machinehoursIunit 8 2%$00 machinehoursb2+%$00 $%$00 8 .$& machinehours ,er unitc $%$00 units .00 machinehours ,er unit *+.00 ,er machinehour 8 *211%200d *2$&%000 2+%$00 8 *+.'e $%000 units .00 machinehours ,er unit *1& ,er machinehour 8 *'0%000f *'C'%000 2+%$00 8 *1'.1'
2. Variable Manufacturing Overhead !ontrol 2$&%000Accounts 9ayable !ontrol and other accounts 2$&%000
+10
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?or=in9rocess !ontrol 211%200Variable Manufacturing Overhead Allocated 211%200
Variable Manufacturing Overhead Allocated 211%200Variable Manufacturing Overhead 3,ending Variance 1C%+00Variable Manufacturing Overhead Efficiency Variance 1%000
Variable Manufacturing Overhead !ontrol 2$&%000
i5ed Manufacturing Overhead !ontrol 'C'%000?ages 9ayable !ontrol% Accumulated @e,reciation
!ontrol% etc. 'C'%000
?or=in9rocess !ontrol '#%000i5ed Manufacturing Overhead Allocated '#%000
i5ed Manufacturing Overhead Allocated '#%000i5ed Manufacturing Overhead 3,ending Variance 1'%000
i5ed Manufacturing Overhead 9roductionVolume Variance '%000i5ed Manufacturing Overhead !ontrol 'C'%000
'. /ndividual fi5ed manufacturing overhead items are not usually affected very much bydaytoday control. /nstead% they are controlled ,eriodically through ,lanning decisions andbudgeting ,rocedures that may sometimes have hori
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SOLUTION EXHIBIT 8-44
A%al C(&
I"%#rr+
213
A%al I"/#&
B#+'&+ Ra&
243
Fl5ibl B#+'&
B#+'&+ I"/#&
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
23
All(%a&+
B#+'&+ I"/#&
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
293VariableMOB *2$&%000
(2+%$00 *+)*22C%200
($%$00 *+)*211%200
($%$00 *+)*211%200
A%al C(&
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a i" S&a&i% B#+'&3
R'ar+l ($
O#&/#& L)l
243
Fl5ibl B#+'&
Sa! B#+'&+
L#!/ S#!
2a i" S&a&i% B#+'&3
R'ar+l ($
O#&/#& L)l
23
All(%a&+
B#+'&+ I"/#&
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
293
i5ed
MOB *'C'%000
($%000 *1&)
*'0%000
($%000 *1&)
*'0%000
($%$00 *1&)
*'#%000
+12
*1C%+00
3,ending variance
*1%000
Efficiency variance 4ever a variance
*1'%000
3,ending variance 4ever a variance
*'%000 9roductionvolume
variance
*''%+00
le5iblebudget variance 4ever a variance
*''%+00
nderallocated variable overhead(:otal variable overhead variance)
*1'%000
le5iblebudget variance*'%000
9roductionvolume variance
*2'%000
Overallocated fi5ed overhead
(:otal fi5ed overhead variance)
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8-4 ('0$0 min.) S&rai'*&$(r7ar+ %()ra' ($ !a"#$a%ri"' ()r*a+, &a"+ar+-%(&i"' &!.
1. 3olution E5hibit +2' sho-s the com,utations. 3ummary details areF
A%al Fl5ibl B#+'&
Out,ut units $1%000 $1%000Allocation base (machinehours) 1'%'00 12%'00a
Allocation base ,er out,ut unit 0.'2b 0.'0Variable MOB *1&&%100 *1$C%00c
Variable MOB ,er hour *11.d *12.00i5ed MOB *$01%000 *'#0%000i5ed MOB ,er hour *'0.1&e ;
a $1%000 0.'0 8 12%'00 d *1&&%100 1'%'00 8 *11.b 1'%'00 $1%000 8 0.'2 e *$01%000 1'%'00 8 *'0.1&c $1%000 0.'0 *12 8 *1$C%00
An overvie- of the $variance analysis isF
9-Varia"%
A"ali
S/"+i"'
Varia"%
E$$i%i"%
Varia"%Pr(+#%&i("
V(l#! Varia"%
VariableManufacturingOverhead
*$%&00 *12%000 4ever a variance
i5edManufacturingOverhead
*11%000 4ever a variance *21%000
+1'
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2. Variable Manufacturing Overhead !ontrol 1&&%100Accounts 9ayable !ontrol and other accounts 1&&%100
?or=in9rocess !ontrol 1$C%00Variable Manufacturing Overhead Allocated 1$C%00
Variable Manufacturing Overhead Allocated 1$C%00Variable Manufacturing Overhead Efficiency Variance 12%000
Variable Manufacturing Overhead 3,ending Variance $%&00Variable Manufacturing Overhead !ontrol 1&&%100
i5ed Manufacturing Overhead !ontrol $01%000?ages 9ayable !ontrol% Accumulated
@e,reciation !ontrol% etc. $01%000
?or=in9rocess !ontrol '#%000i5ed Manufacturing Overhead Allocated '#%000
i5ed Manufacturing Overhead Allocated '#%000i5ed Manufacturing Overhead 3,ending Variance 11%000i5ed Manufacturing Overhead 9roductionVolume
Variance 21%000i5ed Manufacturing Overhead !ontrol $01%000
'. :he control of variable manufacturing overhead reuires the identification of the costdrivers for such items as energy% su,,lies% and re,airs. !ontrol often entails monitoring
nonfinancial measures that affect each cost item% one by one. E5am,les are =ilo-atthours used%uantities of lubricants used% and re,air ,arts and hours used. :he most convincing -ay todiscover -hy overhead ,erformance did not agree -ith a budget is to investigate ,ossible causes%line item by line item.
$. :he variable overhead s,ending variance is favorable. :his means the actual rate a,,liedto the manufacturing costs is lo-er than the budgeted rate. 3ince variable overhead consists ofseveral different costs% this could be for a variety of reasons% such as the utility rates being lo-erthan estimated or the indirect materials costs ,er unit of denominator activity being less thanestimated.
:he variable overhead efficiency variance is unfavorable% -hich im,lies that the
estimated denominator activity -as too lo-. 3ince the denominator activity is machine hours%this could be the result of inefficient use of machines% ,oorly scheduled ,roduction runs% ormachines that need maintenance and thus are not -or=ing at the e5,ected level of efficiency.
+1$
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SOLUTION EXHIBIT 8-4
A%al C(&
I"%#rr+
213
A%al I"/#&
B#+'&+ Ra&
243
Fl5ibl B#+'&
B#+'&+ I"/#&
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
23
All(%a&+
B#+'&+ I"/#&
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
293VariableManufacturingOverhead
*1&&%100(1'%'00 *12)
*1%00(12%'00 *12)
*1$C%00(12%'00 *12)
*1$C%00
A%al C(&
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a i" S&a&i% B#+'&3
R'ar+l ($
O#&/#& L)l
243
Fl5ibl B#+'&
Sa! B#+'&+
L#!/ S#!
2a i" S&a&i% B#+'&3
R'ar+l ($
O#&/#& L)l
23
All(%a&+
B#+'&+ I"/#&
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
293
i5ed
ManufacturingOverhead
*$01%000 *'#0%000 *'#0%000
(12%'00 *'0)
*'#%000
8hours.machine1'%000
*'#0%0008 *'0 ,er machinehour.
KAlternative com,utationF 1'%000 denominator hours ; 12%'00 budgeted hours allo-ed 8 C00 hoursLC00 hours *'0 ,er machinehour 8 *21%000
+1&
*$%&00
3,ending variance
*12%000
Efficiency variance 4ever a variance
*11%000
3,ending variance 4ever a variance
*21%000 K
9roductionvolume variance
*C%&00
le5iblebudget variance 4ever a variance
*C%&00
nderallocated variable overhead
(:otal variable overhead variance)
*11%000
le5iblebudget variance
*21%000 K9roductionvolume variance
*'2%000
nderallocated fi5ed overhead
(:otal fi5ed overhead variance)
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8-49 (20;2& min.) O)r*a+ )aria"%, r)i% %&(r.
1.Mal (" ?*l
2Ma 4
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'. :he s,ending variances for variable and fi5ed overhead are both unfavorable. :his meansthat MO? had increases over budget in either or both the cost of individual items (such astele,hone calls and gasoline) in the overhead cost ,ools% or the usage of these individual items,er unit of the allocation base (delivery time). :he favorable efficiency variance for variableoverhead costs results from more efficient use of the cost allocation base;;each delivery ta=es0.& hours versus a budgeted 0.C0 hours.
MO? can best manage its fi5ed overhead costs by longterm ,lanning of ca,acity ratherthan daytoday decisions. :his involves ,lanning to underta=e only valueadded fi5edoverheadactivities and then determining the a,,ro,riate level for those activities. Most fi5ed overheadcosts are committed -ell before they are incurred. /n contrast% for variable overhead% a mi5 oflongrun ,lanning and daily monitoring of the use of individual items is reuired to manage costsefficiently. MO? should ,lan to underta=e only valueadded variableoverhead activities (alongrun focus) and then manage the cost drivers of those activities in the most efficient -ay (ashortrun focus).
:here is no ,roductionvolume variance for variable overhead costs. :he unfavorable,roductionvolume variance for fi5ed overhead costs arises because MO? has unused fi5edoverhead resources that it may see= to reduce in the long run.
+1C
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8-4@ ($0&0 min.) T(&al ()r*a+, -)aria"% a"ali.
1. :his ,roblem has t-o maor ,ur,osesF (a) to give e5,erience -ith data allocated on a totaloverhead basis instead of on se,arate variable and fi5ed bases and (b) to reinforce distinctionsbet-een actual hours of in,ut% budgeted (standard) hours allo-ed for actual out,ut% anddenominator level.
An analysis of direct manufacturing labor -ill ,rovide the data for actual hours of in,utand standard hours allo-ed. One a,,roach is to ,lug the =no-n figures (designated by asteris=s)into the analytical frame-or= and solve for the un=no-ns. :he direct manufacturing laborefficiency variance can be com,uted by subtracting *'%+& from *&%CC. :he com,lete ,icture isas follo-sF
A%al C(&
I"%#rr+
A%al I"/#&
B#+'&+ Ra&
Fl5ibl B#+'&
B#+'&+ I"/#&
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
($%+20 hrs. *1.+0)*+0%#CK
($%+20hrs. *1.00K)*CC%120
($%C00 hrs. *1.00K)*C&%200
K Given
Direct Labor calculationsActual in,ut 7udgeted rate 8 Actual costs ; 9rice variance
8 *+0%#C ; *'%+& 8 *CC%120Actual in,ut 8 *CC%120 7udgeted rate 8 *CC%120 *1 8 $%+20 hours7udgeted in,ut 7udgeted rate 8 *CC%120 ; Efficiency variance
8 *CC%120 ; *1%#20 8 *C&%2007udgeted in,ut 8 *C&%200 7udgeted rate 8 *C&%200 1 8 $%C00 hours
Production Overhead
Variable overhead rate 8 *2&%00K '%200Khrs. 8 *+.00 ,er standard laborhour8 *C#%0$0K; $%000K (*+.00) 8 *$C%0$0
/f total overhead is allocated at 120D of direct laborcost% the single overhead rate mustbe 120D of *1.00% or *1#.20 ,er hour. :herefore% the fi5ed overhead com,onent of the ratemust be *1#.20 ; *+.00% or *11.20 ,er direct laborhour.
+1+
*'%+& K
9rice variance
*1%#20
Efficiency variance
*&%CC K
le5iblebudget variance
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8-46 ('0 min.) O)r*a+ )aria"%, !ii"' i"$(r!a&i(".
1. /n the columnar ,resentation of variable overhead variance analysis% all numbers sho-n inbold are calculated from the given information% in the order (a) (e).
VARIABLE MANUFACTURING OVERHEAD
Fl5ibl B#+'&B#+'&+ I"/#& 0&.
A%al C(&
I"%#rr+
A%al I"/#& 0&.B#+'&+ Ra&
All(7+ $(r B#+'&+
A%al O#&/#& Ra&2b3 2a3 2%3
1&%000 *.00 1$%+&0 *.00mach. hrs. ,er mach. hr. mach. hrs. ,er mach. hr.
8;,64@ ;
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2. /n the columnar ,resentation of fi5ed overhead variance analysis% all numbers sho-n inbold are calculated from the given information% in the order (a) ; (e).
FIXED MANUFACTURING OVERHEAD
Fl5ibl B#+'& All(%a&+
A%al C(&
S&a&i% B#+'& L#!/ S#!
R'ar+l ($ O#&/#&
B#+'&+ I"/#& 0&.
All(7+ $(r B#+'&+
I"%#rr+ L)l A%al O#&/#& Ra&2a3 2b31$%+&0 1.6
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8-4: (1& min.) I+"&i$i"' $a)(rabl a"+ #"$a)(rabl )aria"%.
Scenario
VOH
Spending
Variance
VOH
Efficiency
Variance
FOH
Spending
Variance
FOH
Production-
Volume Variance
Production output is
5% more than
budgeted, and actual
fixed manufacturing
overhead costs are 6%
more than budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Cannot be
determined: no
information on
actual versus
flexible-budget
machine-hours
Unfavorable:
actual fixed
costs are more
than budgeted
fixed costs
Favorable: output
is more than
budgeted causing
FOH costs to be
overallocated
Production output is
10% more than
budgeted; actual
machine hours are 5%
less than budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Favorable: actual
machine-hours less
than flexible-
budget machine-
hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Favorable: output
is more than
budgeted causing
FOH costs to be
overallocated
Production output is
8% less than budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Cannot be
determined: no
information on
actual machine-
hours versus
flexible-budget
machine-hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Unfavorable:
output less than
budgeted will
cause FOH costs to
be underallocated
Actual machine hours
are 15% greater than
flexible-budget
machine hours
Cannot be
determined: no
information on
actual versusbudgeted VOH
rates
Unfavorable: more
machine-hours
used relative to
flexible budget
Cannot be
determined: no
information on
actual versusbudgeted FOH
costs
Cannot be
determined: no
information on
flexible-budgetmachine-hours
relative to static-
budget machine-
hours
Relative to the flexible
budget, actual machine
hours are 10% greater
and actual variable
manufacturing
overhead costs are 15%
greater
Unfavorable:
actual VOH rate
greater than
budgeted VOH
rate
Unfavorable: actual
machine-hours
greater than
flexible-budget
machine-hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Cannot be
determined: no
information on
actual output
relative to
budgeted output
+22
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8-48 ('& min.) Fl5ibl-b#+'& )aria"%, r)i7 ($ C*a/&r : a"+ 8.
1. 3olution E5hibit +2+ contains a columnar ,resentation of the variances for @oor=nob @esign!om,any (@@!) for A,ril 200#.
SOLUTION EXHIBIT 8-48
A%al C(&
I"%#rr+
A%al I"/#& 0&.
A%al I"/#& 0&. B#+'&+ Pri%
Fl5ibl B#+'&
B#+'&+ I"/#& 0&.
All(7+ $(r
A%al O#&/#&
A%al Ra& P#r%*a Ua' B#+'&+ Pri%@irectMaterials
(&0%000 *22.0)*1%100%000
(&0%000 *20.0)*1%000%000
($&%000 *20.0)*#00%000
($C%&00 *20.0)*#&0%000
*100%000 *&0%000
a. 9rice variance b. Efficiency variance
@irectManufacturingabor *&0%000
(20%000 *'0.0)*00%000
(2'%C&0 *'0.0)*C12%&00
*&0%000 *112%&00
c. 9rice variance d. Efficiency variance
A%al C(&I"%#rr+ A%al I"/#& 0&. B#+'&+ Ra&
Fl5ibl B#+'&
B#+'&+ I"/#& 0&.
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
All(%a&+
2B#+'&+ I"/#& 0&.
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&3
VariableManufacturingOverhead *$00%000
($&%000 *10.0)*$&0%000
($C%&00 *10.0)*$C&%000
($C%&00 *10.0) *$C&%000
*&0%000 *2&%000
e. 3,ending variance f. Efficiency variance 4ever a variance
i5edManufacturing
Overhead
*'&0%000 *2&0%000K *2&0%000($C%&00 *&.0)
*2'C%&00
*100%000 *12%&00
h. 3,ending variance 4ever a variance g. 9roduction volume variance
K@enominator level in hoursF 100%000 5 .& 8 &0%000 hours7udgeted i5ed OverheadF &0%000 5 *&Ihr 8 *2&0%000
+2'
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2. :he direct materials ,rice variance indicates that @@! ,aid more for brass than they had,lanned. /f this is because they ,urchased a higher uality of brass% it may e5,lain -hy theyused less brass than e5,ected (leading to a favorable material efficiency variance). /n turn% sincevariable manufacturing overhead is assigned based on ,ounds of materials used% this directly ledto the favorable variable overhead efficiency variance. :he ,urchase of a better uality of brassmay also e5,lain -hy it too= less labor time to ,roduce the door=nobs than e5,ected (thefavorable direct labor efficiency variance). inally% the unfavorable direct labor ,rice variancecould im,ly that the -or=ers -ho -ere hired -ere more e5,erienced than e5,ected% -hich couldalso be related to the ,ositive direct material and direct labor efficiency variances.
8-4; ('0 min.) C(!/r*"i) )aria"% a"ali.
1. 7udgeted number of machinehours ,lanned can be calculated by multi,lying the numberof units ,lanned (budgeted) by the number of machinehours allocated ,er unitF
+++ units 2 machinehours ,er unit 8 1%CC machinehours.
2. 7udgeted fi5ed MOB costs ,er machinehour can be com,uted by dividing the fle5iblebudget amount for fi5ed MOB (-hich is the same as the static budget) by the number ofmachinehours ,lanned (calculated in (a.))F
*'$+%0# 1%CC machinehours 8 *1#.00 ,er machinehour
'. 7udgeted variable MOB costs ,er machinehour are calculated as budgeted variableMOB costs divided by the budgeted number of machinehours ,lannedF
*C1%0$0 1%CC machinehours 8 *$0.00 ,er machinehour.
$. 7udgeted number of machinehours allo-ed for actual out,ut achieved can be calculatedby dividing the fle5iblebudget amount for variable MOB by budgeted variable MOBcosts ,er machinehourF
*C%+00 *$0.00 ,er machinehour8 1%#20 machinehours allo-ed
&. :he actual number of out,ut units is the budgeted number of machinehours allo-ed foractual out,ut achieved divided by the ,lanned allocation rate of machine hours ,er unitF
1%#20 machinehours 2 machinehours ,er unit 8 #0 units.
. :he actual number of machinehours used ,er out,ut unit is the actual number ofmachine hours used (given) divided by the actual number of units manufacturedF
1%+2$ machinehours #0 units 8 1.# machinehours used ,er out,ut unit.
+2$
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8-< (0 min.) =(#r"al "&ri 2%("&i"#a&i(" ($ 8-4;3.
1. ey information underlying the com,utation of variances isFA%al
R#l&
Fl5ibl-B#+'&
A!(#"&
S&a&i%-B#+'&
A!(#"&
1. Out,ut units (food ,rocessors) #0 #0 +++2. Machinehours 1%+2$ 1%#20 1%CC'. Machinehours ,er out,ut unit 1.#0 2.00 2.00
$. Variable MOB costs *C%0+ *C%+00 *C1%0$0&. Variable MOB costs ,er machine hour (Ho- $ Ho- 2) *$2.00 *$0.00 *$0.00. Variable MOB costs ,er unit (Ho- $ Ho- 1) *C#.+0 *+0.00 *+0.00
C. i5ed MOB costs *'&0%20+ *'$+%0# *'$+%0#+. i5ed MOB costs ,er machine hour (Ho- C Ho- 2) *1#2.00 *1+1.'0 *1#.00#. i5ed MOB costs ,er unit (C 1) *'$.+0 *'2.0 *'#2.00
3olution E5hibit +'0 sho-s the com,utation of the variances.
=(#r"al "&ri $(r )ariabl MOH, ar "++ D%!br 1, 4
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2. A+#&!"& ($ COGS
Variable MOB Efficiency Variance '%+$0 i5ed MOB 9roductionVolume Variance 2+%22$ Variable MOB 3,ending Variance '%$+ i5ed MOB 3,ending Variance 2%112
!ost of Goods 3old 2%'0$
SOLUTION EXHIBIT 8-i"' ba%>7ar+ $r(!'i)" )aria"%.
1. 3olution E5hibit +'# outlines the !ha,ter C and + frame-or= underlying this solution.
a. 9ounds of direct materials ,urchased 8 *1C%000 *1.10 8 10%000 ,ounds
b. 9ounds of e5cess direct materials used 8 *#%000 *11.&0 8 %000 ,ounds
c. Variable manufacturing overhead s,ending variance 8 *10%'&0 ; *1+%000 8 *C%&0
d. 3tandard direct manufacturing labor rate 8 *+00%000 $0%000 hours 8 *20 ,er hourActual direct manufacturing labor rate 8 *20 N *0.&0 8 *20.&0Actual direct manufacturing laborhours 8 *&22%C&0 *20.&0
8 2&%&00 hours
e. 3tandard variable manufacturing overhead rate 8 *$+0%000 $0%000
8 *12 ,er direct manuf. laborhourVariable manuf. overhead efficiency variance of *1+%000 *12 8 1%&00 e5cess hoursActual hours ; E5cess hours 8 3tandard hours allo-ed for units ,roduced
2&%&00 ; 1%&00 8 2$%000 hours
f. 7udgeted fi5ed manufacturing overhead rate 8 *$0%000 $0%000 hours8 *1 ,er direct manuf. laborhour
i5ed manufacturing overhead allocated 8 *1 2$%000 hours 8 *'+$%000 9roductionvolume variance 8 *$0%000 ; *'+$%000 8 *2&%000
2. :he control of variable manufacturing overhead reuires the identification of the cost driversfor such items as energy% su,,lies% and re,airs. !ontrol often entails monitoring nonfinancialmeasures that affect each cost item% one by one. E5am,les are =ilo-atts used% uantities oflubricants used% and re,air ,arts and hours used. :he most convincing -ay to discover -hyoverhead ,erformance did not agree -ith a budget is to investigate ,ossible causes% line item byline item.
/ndividual fi5ed overhead items are not usually affected very much by daytoday control./nstead% they are controlled ,eriodically through ,lanning decisions and budgeting ,roceduresthat may sometimes have ,lanning hori
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SOLUTION EXHIBIT 8-;
A%al C(&
I"%#rr+
2A%al I"/#& 0&.
A%al Ra&3
A%al I"/#& 0&.
B#+'&+ Ra&
P#r%*a Ua'
Fl5ibl B#+'&
B#+'&+ I"/#& 0&.
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
@irectMaterials
10%000 *10.$0*1%$%000
10%000 *11.&0*1%+$0%000
#%000 *11.&0*1%10$%000
' '0%000 *11.&0*1%0'&%000
@irectManuf.abor
0.+& '0%000 *20.&0*&22%C&0
0.+& '0%000 *20*&10%000
0.+0 '0%000 *20*$+0%000
A%al C(&
I"%#rr+
A%al I"/#& 0&.
A%al Ra&
A%al I"/#& 0&.
B#+'&+ Ra&
Fl5ibl B#+'&
B#+'&+ I"/#& 0&.
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
All(%a&+
B#+'&+ I"/#& 0&.
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
VariableMOB
0.+& '0%000 *11.C0*2#+%'&0
0.+& '0%000 *12*'0%000
0.+0 '0%000 *12*2++%000
0.+0 '0%000 *12*2++%000
A%al C(&
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a i" S&a&i% B#+'&3
R'ar+l ($
O#&/#& L)l
243
Fl5ibl B#+'&
Sa! B#+'&+
L#!/ S#!
2a i" S&a&i% B#+'&3
R'ar+l ($
O#&/#& L)l
23
All(%a&+
B#+'&+ I"/#& 0&
All(7+ $(r
A%al O#&/#&
B#+'&+ Ra&
293
i5edMOB *C%$0 *$0%000
0.+0 &0%000 *1*$0%000
0.+0 5 '0%000 *1*'+$%000
+$'
*1C%000
9rice variance
*#%000
Efficiency variance
*12%C&0
9rice variance
*'0%000
Efficiency variance
*$2%C&0
le5iblebudget variance
*C%&0
3,ending variance
*1+%000
Efficiency 4ever a variance
*10%'&0
le5iblebudget variance 4ever a variance
*2&%000
*$2%&$0
le5iblebudget variance
*2&%000
9roduction volume variance
4ever a variance
*$2%&$0
3,ending variance
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8-9< ('0&0 min.) R)i7 ($ C*a/&r : a"+ 8, -)aria"% a"ali.
1. :otal standard ,roduction costs are based on C%+00 units of out,ut.
@irect materials% C%+00 *1&.00
C%+00 ' lbs. *&.00 (or 2'%$00 lbs. *&.00) * 11C%000@irect manufacturing labor% C%+00 *C&.00C%+00 & hrs. *1&.00 (or '#%000 hrs. *1&.00) &+&%000
Manufacturing overheadF
Variable% C%+00 *'0.00 (or '#%000 hrs. *.00) 2'$%000i5ed% C%+00 *$0.00 (or '#%000 hrs. *+.00) '12%000
:otal *1%2$+%000
:he follo-ing is for later useFi5ed manufacturing overhead% a lum,sum budget *'20%000K
Ki5ed manufacturing overhead rate 8
*+.00 87udget
$0%000 hours
7udget 8 $0%000 hours *+.00 8 *'20,000
2. 3olution E5hibit +$0 ,resents a columnar ,resentation of the variances. An overvie- ofthe 'variance analysis using the bloc= format of the te5t isF
-Varia"%
A"ali
S/"+i"'
Varia"%
E$$i%i"%
Varia"%
Pr(+#%&i("
V(l#! Varia"%
:otal ManufacturingOverhead
*'#%$00 *%00 *+%000
+$$
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SOLUTION EXHIBIT 8-9