CHAPTER 14: FLEXIBLE-BUDGETS—FA FLEXIBLE-BUDG ETS—FACTOR CTORY Y OVERHEAD QUESTIONS 14-1
a. Yes, es, the factory factory manager manager has done a good good job in controlling controlling factory factory overhead cost costs s if all all fact factor ory y over overhe head ad cost costs s are are fixe fixed. d. Even Even thou though gh the the actu actual al production is only at the 85 percent level of the budgeted production level, the total fixed factory overhead should remain unchanged as long as the operation falls within the “relevant range of operations. b. !o, the the total factory factory overhea overhead d cost incurred incurred during during the period period should have have been less than the budgeted amount. "he variable factory overhead cost should have been approximately approximately 85 percent of the budgeted variable factory overhead, or #5$,%%%, and the total factory overhead around #&$,%%%.
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'oth 'oth the variable variable factory factory overhead overhead effi efficien ciency cy variance variance and the direct direct labor labor efficiency variance will be in the same direction. "he variable factory overhead effi effici cienc ency y varia variance nce will will be favo favorab rable le if the the firm firm has a favora favorable ble direct direct labor labor effic efficienc iency y variance variance and unfavor unfavorable able if its direct direct labor labor efficie efficiency ncy variance variance is unfavorable. (urthermore, the relative amount of the variable factory overhead efficiency variance variance to the direct labor effici efficiency ency variance variance will be the same same as the ratio of the variable factory overhead rate per direct labor hour to the standard hourly wage rate per direct labor hour.
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"he total factory overhead spending variance is a term used in a )*variance analy analysis sis of the the total total overh overhead ead varia variance nce to repre represen sentt the the sum sum of the the variable overhead spending variance and the fixed overhead overhead spending variance. "he determi determinati nation on of the variable variable factory factory overhead overhead effi efficien ciency cy variance variance is indepe independ ndent ent of the the proce procedur dure e or fact factors ors involv involved ed in dete determ rmin inin ing g any of the the factory overhead spending variances.
14.4 + factory overhead flexible*budget flexible*budge t variance is the difference between the amount of fact factory ory overh overhead ead incur incurred red in a period period and and the the flex flexibl ible*bu e*budge dgett for for fact factory ory overhead based on output i.e., based on units produced or, e-uivalently, based on standard activity units allowed for the output of the period. "his variance is also referred to as the controllable overhead variance. "his variance can be decomposed into three variances/ fixed overhead spending variance0 variable overhead spending variance0 and, variable overhead efficiency variance. 14-5 +ny significant variance, be it favorable or unfavorable, should be investigated. 1t might be argued that significant favorable variances should not be investigated since since such such varian variance ces s serve serve to incre increase ase opera operati ting ng inco income me for for the the period period.. !onetheless, an organi2ation would be more li3ely to benefit from the good fortune in the future if it 3nows the factors that led to the favorable variance. "hus, managers should also investigate the cause or causes that led to all significant variances, whether they are favorable or unfavorable.
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"he total factory overhead can be the same as the standard amount allowed allowed for the current current period4 period4s s output while while one or more more of the components of the total factory overhead have significant variances. (or example, a firm can have a subst substant antial ial unfa unfavo vorab rable le fact factory ory overh overhead ead flex flexibl ible*b e*budg udget et varia variance nce and an approxi approximat mately ely e-ual e-ual favorabl favorable e product production ion volume volume variance variance.. "he contribu contributing ting factors to the unfavorable factory overhead flexible*budget variance and to the favorable production volume variance are li3ely to be different. nless corrected, factors that led to the significant unfavorable overhead flexible*budget variance of a peri period od may may cont contin inue ue into into the the futu future re with with the the cons consee-ue uenc nce e that that the the organi2ation continues to suffer from unfavorable flexible*budget variances.
14-! +mong reasons that a firm may use a 6*variance instead of )*variance or 7* variance analysis of overhead variances are/ 1nformation provided by the simpler 6*variance analysis is thought to meet the needs of management, that is, the information is thought to be “good enough. "he firm4s accounting system does not support the detailed data needed for a )*variance or 7*variance analysis. 1t is too too costl costly y to gener generate ate addit addition ional al data data neede needed d for for a more more deta detaile iled d analysis. + more detailed analysis confuses users of accounting reports. "otal overhead costs are not significant in a relative sense.
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"his -uestion pertains to text Exhibits $7.$ and $7.). +s indicated in Exhibit $7.$, $7.$, the the amou amount nt of varia variable ble overh overhea ead d appli applied ed to produ product ction ion for for a perio period d product*costing product*costing purpose is exactly exactly e-ual to the amount of variable overhead in the flexible*budget based on outputs control purpose. 1n short, there is no diffe differen rence ce betwe between en the the tota totall varia variable ble fact factory ory overh overhead ead appli applied ed to the the units units manufactured and the total standard variable factory overhead in the control budget for the period. owever, as indicated in Exhibit $7.), the amount of fixed factory overhead in the flexible*bu flexible*budget dget is li3ely li3ely to be diffe different rent from the amount amount of fixed fixed factory factory overhead assigned to production for the period. "he flexible*budget for fixed overhead includes a “lump*sum amount control purpose while the amount of fixed overhead applied to production is e-ual to the product of a predetermined i.e., standard fixed overhead allocation rate and the standard allowed activity unit units s for for the the prod produc ucti tion on in the the peri period od.. "he "he diff differ eren ence ce is a resu result lt of the the discre discrepa pancy ncy betwe between en the the activ activity ity units units assum assumed ed when when the the fixe fixed d overh overhead ead application rate was determined, what we call the “denominator activity level, and the number of units actually manufactured manufactured during the period. 1n short, when dealing with fixed factory overhead, the “lump*sum amount used for control purposes and the amount applied to production will be identical only if the actual output of the period exactly e-uals the denominator activity level.
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Even though the denominator level a firm selected determined the fixed factory overhead application rate, the selected denominator level has no effect on either the amount or the direction of the fixed factory overhead flexible*budget variance for the operatio operation. n. "he fixed factory factory overhead overhead flexibl flexible*bud e*budget get variance variance for a
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"he total factory overhead can be the same as the standard amount allowed allowed for the current current period4 period4s s output while while one or more more of the components of the total factory overhead have significant variances. (or example, a firm can have a subst substant antial ial unfa unfavo vorab rable le fact factory ory overh overhead ead flex flexibl ible*b e*budg udget et varia variance nce and an approxi approximat mately ely e-ual e-ual favorabl favorable e product production ion volume volume variance variance.. "he contribu contributing ting factors to the unfavorable factory overhead flexible*budget variance and to the favorable production volume variance are li3ely to be different. nless corrected, factors that led to the significant unfavorable overhead flexible*budget variance of a peri period od may may cont contin inue ue into into the the futu future re with with the the cons consee-ue uenc nce e that that the the organi2ation continues to suffer from unfavorable flexible*budget variances.
14-! +mong reasons that a firm may use a 6*variance instead of )*variance or 7* variance analysis of overhead variances are/ 1nformation provided by the simpler 6*variance analysis is thought to meet the needs of management, that is, the information is thought to be “good enough. "he firm4s accounting system does not support the detailed data needed for a )*variance or 7*variance analysis. 1t is too too costl costly y to gener generate ate addit addition ional al data data neede needed d for for a more more deta detaile iled d analysis. + more detailed analysis confuses users of accounting reports. "otal overhead costs are not significant in a relative sense.
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"his -uestion pertains to text Exhibits $7.$ and $7.). +s indicated in Exhibit $7.$, $7.$, the the amou amount nt of varia variable ble overh overhea ead d appli applied ed to produ product ction ion for for a perio period d product*costing product*costing purpose is exactly exactly e-ual to the amount of variable overhead in the flexible*budget based on outputs control purpose. 1n short, there is no diffe differen rence ce betwe between en the the tota totall varia variable ble fact factory ory overh overhead ead appli applied ed to the the units units manufactured and the total standard variable factory overhead in the control budget for the period. owever, as indicated in Exhibit $7.), the amount of fixed factory overhead in the flexible*bu flexible*budget dget is li3ely li3ely to be diffe different rent from the amount amount of fixed fixed factory factory overhead assigned to production for the period. "he flexible*budget for fixed overhead includes a “lump*sum amount control purpose while the amount of fixed overhead applied to production is e-ual to the product of a predetermined i.e., standard fixed overhead allocation rate and the standard allowed activity unit units s for for the the prod produc ucti tion on in the the peri period od.. "he "he diff differ eren ence ce is a resu result lt of the the discre discrepa pancy ncy betwe between en the the activ activity ity units units assum assumed ed when when the the fixe fixed d overh overhead ead application rate was determined, what we call the “denominator activity level, and the number of units actually manufactured manufactured during the period. 1n short, when dealing with fixed factory overhead, the “lump*sum amount used for control purposes and the amount applied to production will be identical only if the actual output of the period exactly e-uals the denominator activity level.
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Even though the denominator level a firm selected determined the fixed factory overhead application rate, the selected denominator level has no effect on either the amount or the direction of the fixed factory overhead flexible*budget variance for the operatio operation. n. "he fixed factory factory overhead overhead flexibl flexible*bud e*budget get variance variance for a
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period is the difference between the actual fixed fixed factory overhead cost and the fixed factory overhead cost for the period. !either of these amounts amounts is budgeted fixed affected by the fixed factory overhead application rate for the period0 both can be thought of as being “lump*sum amounts. "he production volume variance of a period is the difference between the budgeted fixed factory overhead “lump*sum amount amount and the total fixed factory over overhe head ad appl applie ied d to prod produc ucti tion on of the the peri period od base based d on the the fixe fixed d fact factor ory y overhead overhead applicat application ion rate. rate. 9onse-u 9onse-uentl ently y, the product production ion volume volume variance variance is dire direct ctly ly a func functi tion on of the the sele select cted ed deno denomi mina nato torr leve levell assu assume med d when hen the the application rate was developed. + high denominator level increases an otherwise unfavorable production volume variance or decreases an otherwise favorable volume variance. :n the other hand, a low denominator level increases an otherw otherwise ise favorabl favorable e product production ion volume volume variance variance or decrease decreases s an otherw otherwise ise unfavorable production volume variance. 14-1$ + price variance is the difference between the actual price paid to ac-uire a resource and the standard cost for the resource. "he standard costs to ac-uire factory overhead items are not used in calculating factory overhead variances. 1n its place, one or more activity measures such as direct labor hours, machine hours, number of set*ups, and number of orders are used in the calculations of fact factor ory y over overhe head ad vari varian ance ces. s. "hes "hese e cost costs s are are not not stan standa dard rd cost costs s for for the the ac-uisitions ac-uisitions of the factory overhead items. items. 1t is precisely because of this reason that hat we refe referr to over overhe head ad spending , and not overh overhead ead cost, cost, varia variance nces. s. 1f spending on on variable overhead cost is different from planned, the accountant can can perf perfor orm m an anal analys ysis is for for indi indivi vidu dual al vari variab able le over overhe head ad cost costs, s, such such as electric electricity ity.. !ote, !ote, howeve however, r, that this this would would re-uire re-uire more more detailed detailed informa informatio tion/ n/ standard electricity cost per 3ilowatt hour and standard number of 3ilowatts per unit produced. "he variable overhead efficiency variance, a component of the total overhead variance for the period, is the result of inefficient inefficient or efficient efficient uses of the activity activity measure used to construct the flexible control budget for the period for the factory overhead0 it is not a result of using more or less than the standard amount amount of individu individual al factory factory overhead overhead costs. costs. "hat "hat is, the variable variable overhea overhead d efficiency efficiency variance is controlled by controlling controlling the use of the activity variable, not indivi individua duall varia variable ble overh overhea ead d comp compon onen ents ts.. (inal (inally ly,, note note that that the the varia variable ble overh overhead ead effi efficie ciency ncy varia variance nce each each period period is li3ely li3ely attri attribut buted ed in part part to the the imperfect relationship between the activity variable chosen and the incurrence of variable overhead costs. 14-11 ;ossible contributing factors to a variable overhead spending variance include/
;rices paid to ac-uire one or more variable factory overhead items differ from those specified as standard prices.
14-12 'ecause an alternative activity measure usually is used as the basis for applying
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factory overhead to production, a variable factory overhead efficiency variance can be a result of efficiencies or inefficiencies regarding the use of this activity measure. (or example, a favorable factory overhead efficiency variance for a firm that uses machine hours to apply factory overhead can be a result of the firm4s use of fewer machine hours than the standard machine hours for the units manufactured. 1n short, the variable overhead efficiency variance does not measure efficiency regarding consumption of variable overhead costs electricity, indirect labor, etc.0 it represents an impact on variable overhead cost of efficiency or inefficiency in the use of the activity measure used to construct the flexible*budget. 14-13 + fixed factory overhead spending variance is defined as the difference between the actual fixed factory overhead and the budgeted fixed factory overhead for the period. + fixed factory overhead spending variance can be a result of unanticipated changes in spending, for example/
+ factory manager was given a bonus or raise that was not in the original budget. !ew machinery and e-uipment, with attendant depreciation charges, was ac-uired during the period but not envisioned in the original budget for the period. 9lean*up fees or expenses for an unexpected accident. (ailure to properly forecast property taxes for the year such forecasts are embodied in the fixed overhead budget for the coming year. 1nsurance premiums for factory and e-uipment were different than anticipated. +dditional salaried employees, not envisioned when the original budget was prepared, were added during the period.
14-14 + production volume variance results when actual output differs from the output level assumed when the fixed overhead application rate was developed. +mong reasons for this discrepancy are/
nexpected stoppage or slowdown of operations because of unscheduled e-uipment maintenance, stri3e, or wor3ers4 slow*down. 9hanges in mar3et demand for the products of the firm. =ost decreased production traceable to poor*-uality materials purchased and used in production during the period. ;oor production scheduling. 9hoice of denominator activity level e.g., if budgeted activity, rather than practical capacity, is used, the amount of the production volume variance will li3ely be smaller>in the extreme, it would be 2ero.
14-15 "he “denominator activity level refers to the si2e of the denominator when determining the standard fixed overhead application rate for product*costing purposes. ?arious options for the volume of the denominator are possible, including budgeted volume, practical capacity, and theoretical capacity. @ost writers today recommend the use of practical capacity for at least two reasons/
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logical consistency between the numerator and denominator in the determination of the fixed overhead allocation rate>the numerator represents spending for the amount of capacity resources available while the denominator represents, in practical terms, the amount of capacity available. "he resulting volume variance for a period can be thought of as a measure of capacity utili2ation and, as such, can be used to inform managerial judgments regarding the spending on and utili2ation of manufacturing support resources i.e., overhead items.
14-1 +mong characteristics that distinguish service firms from manufacturing firms are/ $. 6. ). 7.
+bsence of output inventory ;redominance of fixed costs =abor*intensiveness, and =ac3 of a common measure for outputs
"he production volume of a service firm always e-uals its sales volume because it has no output inventory. + production volume variance is not a result of changes in inventory levels as in the case of some manufacturing firms. "he production volume variance of a service firm measures direct effects that deviations from the planned activity have on the revenue and operating income of the period. ;redominance of fixed costs in the total cost structure of many service firms ma3es fixed overhead variances important variances for managers to monitor. 1mprovements or deteriorations in operating results often are the result of productive or unproductive uses of resources whose costs are fixed in the short run. =abor*intensiveness increases the importance of labor*related measures such as labor rate and efficiency variances. @any service firms do not measure materials variances because of the relative insignificance of materials in their operations. =ac3 of a common measure for the output of a service firm often leads management of the firm to rely primarily on input*based performance measures. Aith each patient re-uiring different care, for example, hospitals often use one or more input measures such as number of patient*days, number of admissionsBdischarges, and number of procedures performed as the basis for activity analysis and construction of flexible control budgets. 14-1! @any firms no longer trac3 and report direct materials price variances because of the importance and advantages of maintaining long*term relationships with suppliers. =ong*term contractual agreements with suppliers stress reliability of
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on*time delivery of -uality materials or components at an agreed*upon price structure. "hus, price variances for material purchases should be small in amount. (urthermore, favorable price variances often result from purchasing materials either in large -uantities or of low -uality. + favorable price variance obtained through either practice can substantially increase the total costs to the firm. 14-1" 1f a standard cost system is used, variances related to overhead costs can be recorded formally in the accounting records. Cuch variances, however, are considered “temporary accounts, which at the end of the year must be closed out. "here are two primary methods for doing this at the end of the year/ $ 9losing the net variance to cost of goods sold for example, if the net overhead variance is favorable, then the 9DC account would be decreased, that is credited, at the end of the year. "his practice can be defended for several reasons. :ne, it is the most expedient and therefore least costly method to use. "wo, one can argue that the incremental information that results from the more*complicated proration allocation method is small relative to cost involved. "hree, some accountants would argue that variances inherently represent inefficiencies and, as such, should not be carried forward on the balance sheet through adjustment to inventory accounts. (our, when companies maintain minimal inventories, the bul3 of the adjustment for the period under the proration method would go to the 9DC account anyway. 6 ;rorating allocating the variance among accounts that contain standard manufacturing costs. (or factory overhead costs, this means that the net variance can be allocated among A1; inventory, (inished Doods 1nventory, and 9ost of Doods Cold 9DC based on the amount of the current period4s standard overhead costs contained in the end*of*period balance in these accounts. !ote that when we expand the analysis to include direct materials, any price variance that occurs during the period should be allocated to the materials inventory account, the materials -uantity efficiency variance, the A1; 1nventory account, the (inished Doods 1nventory account, and 9DC. Cimilarly, any fixed overhead spending variance should, in theory, be partially allocated to the production volume variance for the period. "he proration method is re-uired in some contexts e.g., any government contract wor3 for which the contractor must comply to the standards set by the 9ost +ccounting Ctandards 'oard 9+C'F. :thers would defend this approach because the resulting data approximate actual*cost results. :ne variation of the allocation method is to use the total end*of*period dollar balance not standard costs from this period in relevant accounts to determine allocation percentages. "his method is simpler to implement, but would result in a different end*of*year allocation of the net manufacturing cost variance for the year compared to the conceptually correct method noted above. 14-1# (actors that need be considered include/
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@agnitude of the variance "rend of the variance over time =i3elihood that an investigation will eliminate future occurrences of the variance 9ost and benefit of investigating the variance
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BRIEF EXERCISES 14-2$ "he budgeted supervisory salary per month is/ #)J%,%%% I #)%,%%% per month $6 months "hus, the flexible*budget variance for the production supervisory salaries in +ugust is/ #6G,%%% H #)%,%%% I %1&$$$ '()*+(, 14-21 Ctandard indirect labor cost per unit/
I
#$77,%%% per year I #6.7% per unit 5,%%% units per month x $6
"otal actual indirect labor cost incurred in +pril "otal standard indirect labor cost for the 7,5%% units manufactured in +pril/ 7,5%% units x #6.7%Bunits I 1ndirect labor flexible*budget variance
#$%,$%% $%,8%% % !$$ F
14-22 (ixed overhead variances for the year/ a Cpending ?ariance I +ctual fixed overhead costs H 'udgeted fixed overhead I #675,%%% H #65%,%%% I %5&$$$F b ;roduction ?olume ?ariance I 'udgeted fixed overhead H +pplied fixed overhead I #65%,%%% H 6%,%%% units x 6 hrs.Bunit x #5Bhr. I #65%,%%% H #6%%,%%% I %5$&$$$U or, I denominator activity volume H C< x fixed overhead rateBmachine hr. I 5%,%%% hrs. H 7%,%%% hrs. x #5.%%Bhour I %5$&$$$U or, I denominator output volume H actual units produced x fixed overhead rateBunit produced I 65,%%% units H 6%,%%% units x #$%.%%Bunit I %5$&$$$U "hat is, fixed overhead was underapplied by #5%,%%% during the period. 14-23 ?ariable overhead variances for the year/
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a Cpending variance I +ctual variable overhead * (lexible*budget based on Inputs
I #).G%Bunit x 6%,%%% units H 7$,%%% hours. x #6.%%Bhr. I #&8,%%% H #86,%%% I %4&$$$F or,
I +< x +; H C; I 7$,%%% hrs. x #$.G%677 H #6.%%Bhr. I %4&$$$F rounded
b Efficiency variance I (lexible*budget based on Inputs H (lexible*budget based on output I #86,%%% H 6%,%%% units x 6 hrs.Bunit x #6.%%Bhr. I #86,%%% H #8%,%%% I %2&$$$U or,
I C; x +< H C< I #6.%%Bhr. x 7$,%%% H 7%,%%% I %2&$$$U
14-24 Cummary journal entries for the year/ +ctual :verhead 9osts Kr. (actory :verhead 9r. +ccumulated Kepreciation>(actory 9r. Calaries ;ayable 9r. tilities ;ayable
#)6),%%% #$5%,%%% # G5,%%% # &8,%%%
:verhead 9osts +pplied to ;roduction Kr. A1; 1nventory 6%,%%% units x 6 hrs. x #&.%%Bhr. 9r. (actory :verhead
#68%,%%% #68%,%%%
14-25 "o Lecord (actory :verhead ?ariances Kr. ;roduction ?olume ?ariance Kr. ?ariable :verhead Efficiency ?ariance 9r. ?ariable :verhead Cpending ?ariance 9r. (ixed :verhead Cpending ?ariance 9r. (actory :verhead
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#5%,%%% # 6,%%% # 7,%%% # 5,%%% #7),%%%
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14-25 /C*00 "o 9lose the !et :verhead ?ariance to 9DC at Year*End Kr. 9DC Kr. ?ariable :verhead Cpending ?ariance Kr. (ixed :verhead Cpending ?ariance 9r. ;roduction ?olume ?ariance 9r. ?ariable :verhead Efficiency ?ariance
#7),%%% # 7,%%% # 5,%%% #5%,%%% # 6,%%%
14-2 "o +llocate the !et (actory :verhead ?ariance at Year*End Kr. A1; 1nventory $%M of #7),%%% Kr. (inished Doods 1nventory 6%M of #7),%%% Kr. 9DC &%M x #7),%%% Kr. ?ariable :verhead Cpending ?ariance Kr. (ixed :verhead Cpending ?ariance 9r. ;roduction ?olume ?ariance 9r. ?ariable :verhead Efficiency ?ariance
# 7,)%% # 8,J%% #)%,$%% # 7,%%% # 5,%%% #5%,%%% # 6,%%%
14-2! (actory :verhead ?ariance/ "wo*?ariance Kecomposition a "otal :verhead ?ariance I actual overhead * overhead applied to production I #)6),%%% H 6%,%%% units x 6 hrs.Bunit x #&.%%Bhr. I #)6),%%% H #68%,%%% I %43&$$$U b "otal (lexible*budget ?ariance I +ctual overhead H (lexible*budget for :verhead based on Output I #)6),%%% H #6Bhr. x 6hrs.Bunit x 6%,%%% units N #65%,%%%F I #)6),%%% H #))%,%%% I %!&$$$F or,
I ?ariable overhead flexible*budget variance N fixed overhead flexible*budget variance I #&8,%%% H 6%,%%% x #6 x 6F N #675,%%% H #65%,%%%F I #6,%%%( N #5,%%%( I %!&$$$F
c ;roduction ?olume variance I budgeted fixed overhead * applied fixed overhead I #65%,%%% H 6%,%%% units x 6 hrs.Bunit x #5.%%Bhr. I #65%,%%% H #6%%,%%% I #5%,%%% i.e., fixed overhead was underapplied by #5%,%%% during the year
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14-2" Cummary 14-2" Cummary Oournal Entries a +ctual :verhead 9osts Kr. (actory :verhead 9r. +ccumulated Kepreciation>(actory 9r. Calaries ;ayable 9r. tilities ;ayable
#)6),%%% #$5%,%%% # G5,%%% # &8,%%%
:verhead 9osts +pplied to ;roduction Kr. Kr. A1 A1; ; 1nv 1nven ento tory ry 6%, 6%,%% %%% % uni units ts x 6 hrs. hrs. x #&. #&.%% %%Bh Bhrr. 9r. (actory :verhead
#68% #68%,% ,%%% %% #68%,%%%
b "o Lecord :verhead :verhe ad ?ariances sing a "wo*?ariance "wo*?ariance +pproach +pproach Kr. ;roduction ?olume ?ariance 9r. "otal (lexible*'udget ?ariance 9r. (actory :verhead
#5%,%%% # &,%%% # 7),%%%
End*of*Year Oournal Entry to 9lose :ut ?ariance ?ariance +ccounts 14-2# End*of*Year a !et ?ariance 9losed to 9DC/ Kr. 9DC Kr. "otal (lexible*'udget ?ariance 9r. ;roduction ?olume ?ariance
#7),%%% # &,%%% #5%,%%%
b !et ?ariance +llocated to Ending 1nventories and 9DC/ Kr. A1; 1nventory $%M x #7),%%% Kr. (inished Doods 1nventory 6%M x #7),%%% Kr. 9DC &%M x #7),%%% Kr. "otal (lexible*'udget ?ariance 9r. ;roduction ?olume ?ariance
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# 7, 7,)%% # 8,J%% #)%,$%% # &,%%% #5%,%%%
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EXERCISES 14-3$ 14-3$
V(+(, V(+(, F(6*+7 F(6*+7 O) O)+8 +8( ( V( V(+(069 +(069 /2$25 /2$25 ;09 ;09
$. Ctandard Ctandard ?ari ?ariable able factory factory overhead overhead rate rate per direct labor labor hour/ 'udgeted"otal ?ariable (actory:verhead 'udgeted"otal Kirect =abor 8ours
I #$5,%%%B6,5%% hours I #J.%% per direct*labor hour Ctandard direct*labor hours per unit/ 'udgeted "otal Kirect=abor 8ours 'udgeted "otal 5nits
I 6,5%% hoursB5,%%% units I %.5% hoursBunit V(+(, V(+(, O)+8( V(+(06 V(+(06 A0(799 A6( C*9 /AQ < AP 6,&%% 6,&%% hrs. hrs. x #5.& #5.&&& &&&B &Bhr hr.. I #$5,J%%
FB B(9 *0 Inputs /AQ < SP 6,&%% 6,&%% x #J.% #J.%%B %Bhr hr.. I #$J,6%%
FB B(9 *0 Output /SQ < SP 7,8%% 7,8%% x %.5 %.5 x #J.%%B #J.%%Bhr hr.. I #$7,7%%
Cpending variance
Efficiency variance
I #J%% (
I #$,8%%
or , I +< x +; H C;
or,
I + H C x CL
I 6,&%% x #5.&&&& * #J.%%
I 6,&%% H 6,7%% x #J.%%Bhr.
= %$$F
I %1&"$$U F<, B> B(9 *0 O? #$7,7%%
A6( C*9 #$5,J%% (lexible*budget (lexible*bu dget variance I #$5,J%% H #$7,7%% I %1&2$$U
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14-3$ 9ontinued 14-3$ 9ontinued 6. "o Lecord (avorable ?ariable :verhead Cpending ?ariance/ ?ariance/ Kr. (actory :verhead or, ?ariable ?ariable (actory :verhead 9r. ?ariable :verhead Cpending ?ariance
# J%% # J%%
"o Lecord nfavorable ?ariable ?ariable :verhead Efficiency ?ariance/ ?ariance/ Kr. ?ariable :verhead Efficiency ?ariance #$,8%% 9r. (actory :verhead or, ?ariable ?ariable (actory :verhead
#$,8%%
). "he "he fact factor ory y had had a favo favora rabl ble e vari variab able le facto factory ry overh overhea ead d spending variance. "his could be a result of conscientious efforts of wor3ers and the manager of the factory in conserving uses of variable factory items. +lternatively, it could have been due, at least in part, to the use of an inappropriate activity measure direct labor*hours for assigning variable factory overhead costs. "he #$,8%% #$,8%% unfavor unfavorable able variable variable overhea overhead d efficiency variance is a result of using more direct labor hours to manufacture the output of the period 6,&%% hours to ma3e 7,8%% units of output than the standard labor hours allowed 6,7%% hours for this level of output. +s long as direct labor hours wor3ed is related to variable overhead overhead costs incurred, incurred, then the effi efficien ciency cy variance variance indicate indicates s the cost to the company in terms of variable overhead of using )%% extra labor hours this period. "he #$,6%% #$,6%% unfavo unfavorable rable flexib flexible*bu le*budget dget variance variance indicate indicates s that that the firm firm did not exercise good overall control regarding variable factory overhead costs. +gain, +gain, this is a valid conclusion provided that direct labor*hour is a reasonably good activity measure for the consumption of variable factory overhead cost.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 14-1!
©The McGraw-Hill Companies 200
14-31 F< F(6*+7 O)+8( V(+(069 /2$25 ;09 $. Ctandard (ixed factory overhead application rate per direct labor hour K=/ 'udgeted(ixed(actory :verhead =
"otal Kirect =abor 8ours, ;ractical9apacity
I #G%,%%%B6,5%% hours I #)J.%% per K= Ctandard direct*labor hours K= per unit/ 'udgeted "otal Kirect =abor 8ours =
;ractical 9apacity 5nits
I 6,5%% hoursB5,%%% units I %.5 K=s per unit F< O)+8( V(+(06 A0(799 +pplied 'udget
+ctual 9ost #)JBhr. #G6,%%%
C< x C; 7,8%% units x %.5 hrs. x
#G%,%%% Cpending variance
I #8J,7%%
;roduction ?olume variance
I #G6,%%% H #G%,%%%
I #G%,%%% H #8J,7%%
I %2&$$$U
I #),J%% or, I C; x Kenominator ?olume H C< I #)JBhr. 6,5%% hrs. H 6,7%% hrs. I #)JBhr. x $%% hrs. I %3&$$U
6. (ixed factory overhead (: flexible*budget variance I (: spending variance I %2&$$$U ). "o Lecord nfavorable (ixed :verhead Cpending ?ariance Kr. (ixed :verhead Cpending ?ariance 9r. (actory :verhead or, (ixed (actory :verhead
Blocher, Stout, Cokins, Chen, Cost Management, 4/e
14-14
# 6,%%% #6,%%%
©The McGraw-Hill Companies 200
14-31 9ontinued "o Lecord nfavorable ;roduction ?olume ?ariance/ Kr. ;roduction ?olume ?ariance 9r. (actory :verhead or, (ixed (actory :verhead
# ),J%% # ),J%%
7. "he #6,%%% unfavorable fixed factory overhead spending variance could be a result of unexpected fluctuations, overspending, or budgeting errors in one or more fixed overhead items. owever, since the amount is small 6.66M of the budget amount, it is unli3ely that the management needs to spend any time or resources to investigate this variance. "he #),J%% unfavorable production volume variance is a result of the lower output for the period 7,8%% units as compared to the volume of output 5,%%% units assumed when the fixed overhead allocation rate was determined. "he production manager is responsible for the unfavorable variance if the reason for the lower output is a result of activities or events in the factory such as e-uipment failure, inefficient wor3ers, or high defective rates. owever, the factory is doing its job if the lower production is a result of the decreased demand for its product. +s indicated in the text, this variance generally has shared responsibility with mar3eting, purchasing, etc.. !ote that when the denominator activity level is set at practical capacity, then resulting production volume variances can be interpreted as the cost of unused capacity. "he disclosure of this information over time can help managers ma3e better decisions regarding capacity*related spending.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 14-1"
©The McGraw-Hill Companies 200
14-32 T8+-V(+(06 F(6*+7 O)+8( A0(799 /2$25 ;09 $. Ctandard ?ariable factory overhead rate per direct labor hour/ 'udgeted"otal ?ariable (actory :verhead 'udgeted"otal Kirect=abor 8ours
I #$5,%%%B6,5%% hours I
#J.%%BK=
Ctandard fixed factory overhead rate per direct labor hour/ 'udgeted "otal (ixed(actory :verhead ;ractical 9apacity =abor 8ours
I #G%,%%%B6,5%% hrs. I
#)J.%%BK=
Ctandard factory overhead rate per direct labor hour K=
#76.%%BK=
Ctandard direct*labor hours K= per unit/ ;ractical 9apacity=abor 8ours =
;ractical9apacity, in nits
%.5 K=8 per unit
T8+-V(+(06 O)+8( A0(799
A6( C*9
F<, B> B(9 *0 Inputs AQ < SP
F<, B> B(9 *0 Output /SQ < SP
A?? /SQ < SP
# $5,J%% N G6,%%%
6,&%% x #J I# $J,6%% N G%,%%%
6,7%% x #J I #$7,7%% N G%,%%%
6,7%% x #76
#$%&,J%%
#$%J,6%%
#$%7,7%%
I #$%%,8%%
Cpending variance
Efficiency ?ariance
I #$%&,J%% H #$%J,6%% I %1&4$$U
I #$%J,6%% H #$%7,7%% I %1&"$$ U
Blocher, Stout, Cokins, Chen, Cost Management, 4/e
14-1#
;roduction ?olume ?ariance I #$%7,7%% H #$%%,8%% I %3&$$U
©The McGraw-Hill Companies 200
14-32 9ontinued 6. "otal overhead spending variance I variable overhead spending variance N fixed overhead spending variance I #J%%( N #6,%%% I %1&4$$U "otal overhead efficiency variance I variable overhead efficiency variance I %1&"$$U that is, there is no fixed overhead efficiency variance ;roduction ?olume ?ariance I %3&$$U the same as under the four*way analysis of the overhead variance 1n sum, the only difference between the three*way and four*way analysis is that in the former, the spending variances for fixed and for variable overhead reported in the latter are combined into a single overhead spending variance. T8+- (0 F*+-V(+(06 F(6*+7 O)+8( A0(799: S;;(+7 (actory overhead spending variance/ ?ariable overhead spending variance # J%%( (ixed overhead spending variance 6,%%% (actory overhead efficiency variance: ?ariable overhead efficiency variance (actory overhead production volume variance: (ixed overhead production volume variance "otal :verhead ?ariance I
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 14-1$
#$,7%% #$,8%% #),J%% #J,8%%
©The McGraw-Hill Companies 200
14-33 T@*-V(+(06 A0(799 *' 8 T*( O)+8( V(+(06 /2$25 ;09 $. Ctandard variable factory overhead rate per direct labor hour # J.%% Ctandard fixed factory overhead rate per direct labor hour Ctandard factory overhead rate per direct labor hour
)J.%% #76.%%
Ctandard direct*labor hours per unit I %.5 K= T@*-V(+(06 O)+8( A0(799 A6( C*9 # $5,J%% N G6,%%% #$%&,J%%
F<, B> B(9 *0 O? 6,7%% x #J I #$7,7%% N G%,%%% #$%7,7%% Cpending variance I #$%&,J%% H #$%7,7%% I %3&2$$U
O)+8( A?? 6,7%% x #76 I #$%%,8%%
;roduction ?olume ?ariance I #$%7,7%% H #$%%,8%% I %3&$$U
6. "otal 9ontrollable (lexible 'udget ?ariance for :verhead/ a ?ariable :verhead Cpending ?ariance # J%%( b ?ariable :verhead Efficiency ?ariance #$,8%% c (ixed :verhead Cpending ?ariance #6,%%% ;roduction ?olume ?ariance "otal :verhead ?ariance
#),6%% ),J%% #J,8%%
"hat is, three items from the four*variance analysis vi2., variable overhead spending variance, variable overhead efficiency variance, and fixed overhead spending variance are combined into one variance, the "otal 9ontrollable (lexible 'udget ?ariance, under the two*variance analysis. "he production volume variance component is the same in the two*variance, the three*variance, and the four* variance brea3down of the total overhead variance. ). "he two*variance brea3down of the total overhead variance reports two important factors concerning overhead costs. "he flexible-budget (controllable) variance measures the difference between the actual overhead incurred and the overhead that should have been incurred based on the actual output of the period. "his latter term is referred to as the “(lexible*budget 'ased on :utput. "o motivate cost*control on the part of managers, the total (lexible*budget ?ariance is sometimes as in this exercise referred to as the total “controllable overhead variance>it signals to managers the need to control costs vis*P*vis the amounts reflected in the flexible*budget based on outputs for the period.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e
14-1
©The McGraw-Hill Companies 200
14-33 9ontinued "he production volume variance, when the fixed overhead application rate is based on practical capacity, reports the effectiveness of the organi2ation in using available capacity. :ver time, this variance can signal to managers the existence of excess capacity or the need for capacity expansion. 1n short, this variance helps managers control capacity*related resource spending.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 14-1%
©The McGraw-Hill Companies 200
14-34
F(6*+7 O)+8( V(+(06: F*+ V(+(06 A0(799 /4$ 09
$. "otal (actory :verhead +pplication Late/ (ixed factory overhead application rate/ "otal machine hours at practical capacity/ !umber of units of output at practical capacity I
7%,%%%
@achine hours per unit
x
Ctandard machine hours Q practical capacity
6 8%,%%%
(ixed factory overhead rate per machine hour I budgeted (ixed :verheadBmachine hours Q practical capacity I #)J%,%%%B8%,%%% machine hours I
#7.5%
?ariable factory overhead rate per machine hour given
N
"otal overhead application rate per machine hour
).%% %!.5$
6. "otal (lexible 'udget (' for :verhead 'ased on nits ;roduced/ "otal standard machine hours allowed for the units produced H 76,%%% units produced x 6 machine hours per unit I
87,%%% hours
@anufacturing overhead in the flexible budget for 76,%%% units/ ?ariable factory overhead I #).%%Bhr. x 87,%%% hrs. I
#656,%%%
(ixed factory overhead “lump*sum amount
)J%,%%%
"otal (' for :verhead based on nits ;roduced
%12&$$$
). ;roduction ?olume ?ariance for 6%%&/ (ixed :verhead/ +ctual 9ost
'udget #)J%,%%%
+pplied #)&8,%%% I 87,%%% hrs. x #7.5%Bhr.
;roduction volume variance I #)J%,%%% H #)&8,%%% I %1"&$$$F or, ;roduction ?olume ?ariance I C; x Kenominator ?olume H C< I #7.5%Bmachine hr. x 8%,%%% H 87,%%% machine hours I %1"&$$$F
Blocher, Stout, Cokins, Chen, Cost Management, 4/e
14-20
©The McGraw-Hill Companies 200
14-34 9ontinued*$ 7. R 5. A6(
FB B(9 *0 Inputs
?: hrs.
#) x 85,%%% hrs.
FB B(9 *0 Output
#) x 87,%%% hrs. #) x 87,%%%
I #655,%%%
I #656,%%%
)J%,%%% #J$5,%%%
)J%,%%% J$6,%%%
(: #J65,%%% Cpending ?ariance
Efficiency ?ariance
I #J65,%%% H #J$5,%%% I %1$&$$$U
A??
I #656,%%% #7.5% x 87,%%% hrs. I )&8,%%% #J)%,%%%
;rod. ?olume ?ariance
I #J$5,%%% H #J$6,%%% I %3&$$$U
"otal factory overhead incurred
#J65,%%%
(' for :verhead 'ased on Inputs i.e., actual machine hours/ ?ariable factory overhead/
85,%%% x #) I
#655,%%%
(ixed factory overhead/
)J%,%%%
% 1$&$$$U
Factory overhead spending variance
5. (' for :verhead 'ased on Inputs i.e., actual machine hours (' for :verhead 'ased on Output from 6. above (Variable) Factory Overhead Efficiency Variance
J$5,%%%
#J$5,%%% J$6,%%% %
3&$$$U
or, Efficiency ?ariance I C; x +< H C< I #).%%Bmachine hr. x 85,%%% H 87,%%% hours I %3&$$$U
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 14-21
©The McGraw-Hill Companies 200
14-34 9ontinued*6
J. ?:
A6(
FB B(9 *0 Inputs /AQ < SP
#65%,%%%
#655,%%%
Cpending ?ariance
(:
FB B(9 *0 O? /SQ < SP
A??
#656,%%%
Efficiency ?ariance
I #65%,%%% H #655,%%%
I #655,%%% H #656,%%%
I %5&$$$F
I #),%%%
#)&5,%%%
#)J%,%%%
#)&8,%%%
Cpending 'udget ?ariance
;roduction ?olume ?ariance
I #)&5,%%% H #)J%,%%%
I #)J%,%%% H #)&8,%%%
I %15&$$$F
I #$8,%%%(
+n Excel spreadsheet solution file for this assignment is embedded below. You can open this “object by doing the following/ $. Light clic3 anywhere in the wor3sheet area below. 6. Celect “wor3sheet object and then select “:pen. ). "o return to the Aord document, select “(ile and then “9lose and return to... while you are in the spreadsheet mode. "he screen should then return you to the Aord document.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e
14-22
©The McGraw-Hill Companies 200
14-35 F(6*+7 O)+8( F<, B> (0 V(+(06 A0(799 /4$ ;09 $. "otal factory overhead in the master budget given #$8%,%%% =ess/ 'udgeted fixed factory overhead given H J%,%%% 'udgeted total variable factory overhead #$6%,%%% "otal machine hours @ in the master budget )&,5%% ÷ Ctandard variable factory overhead rate per machine hour #).6% Ctandard machine hours per unit/ )&,5%% @B$5%,%%% units I %.65 @ (lexible 'udget (' for the $%,8%% units produced during the period 'udgeted variable factory overhead/ !umber of units manufactured in @arch $%,8%% Ctandard machine hours per unit x %.65 "otal standard @ for the units manufactured 6,&%% ?ariable factory overhead rate per @ x # ).6% "otal budgeted variable factory overhead 'udgeted fixed factory overhead per month #J%,%%% ÷ $6 I (' for overhead based on $%,8%% units produced in @arch I 6. "otal factory overhead incurred given (' for factory overhead based on output (actory overhead flexible*budget controllable variance
#8,J7% 5,%%% %13&4$ #$),%%% $),J7% % 4$F
). "otal factory overhead spending variance a. Variable factory overhead spending variance ?ariable factory overhead incurred #$),%%% H #7,5%% (' for variable overhead based on Inputs/ +ctual machine hours @ wor3ed 6,85% Ctandard ?: rate per @ x # ).6% ?ariable factory overhead spending variance
#8,5%%
G,$6% % 2$F
Fixed factory overhead spending variance
(ixed factory overhead incurred 'udgeted fixed factory overhead for the month (ixed factory overhead spending variance
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 14-2!
#7,5%% 5,%%% % 5$$F
©The McGraw-Hill Companies 200
14-35 9ontinued b. ?ariable factory overhead efficiency variance/ @achine hours wor3ed at standard ?: rate from )a "otal standard variable factory overhead for the output
#G,$6% 8,J7% % 4"$U
Variable factory overhead efficiency variance
c. (ixed factory overhead production volume variance/ 'udgeted fixed factory overhead for the month I #J%,%%% ÷ $6 I (ixed factory overhead applied to the units manufactured/ "otal standard @ for the units manufactured I 6,&%% Ctandard fixed factory overhead per @ I 'udgeted total fixed overhead ÷ "otal 'udgeted machine hours @ I #J%,%%% ÷ )&,5%% (actory overhead production volume variance
I
#$.J%
#5,%%%
7,)6% % "$U
+lternatively, the production volume variance can be computed using the difference between the budgeted units in general, the denominator activity level and the units actually manufactured during the month/ nits actually manufactured in @arch 'udgeted units to manufacture per month I $5%,%%% ÷ $6 I Kifference in units Ctandard fixed overhead costBunit I #$.J% x %.65 @ I (actory overhead production volume variance I
$%,8%% $6,5%% $,&%% # %.7% % "$U
+lternatively, the production volume variance I standard fixed overhead rate per @ x denominator hours H C< I #$.J%B@ x )&,5%%B$6F H 6,&%% @ I #$.J% x ),$65 H 6,&%% I #$.J%B@ x 765@ I %"$U 7. ?ariable factory overhead spending variance answer )a (ixed factory overhead spending variance answer )a ?ariable factory overhead efficiency variance answer )b (actory overhead (' controllable variance answer 6
Blocher, Stout, Cokins, Chen, Cost Management, 4/e
14-24
#J6%( 5%%( 78% #J7%(
©The McGraw-Hill Companies 200
14-35 9ontinued 5. @anagement of the =ope2 9o. should consider using “practical capacity as the denominator volume denominator activity volume when establishing its standard fixed overhead allocation rate. "his procedure, contrary to the use of budgeted activity for the upcoming period, does not spread the cost of unused facilities over the units produced during the period. Lather, the cost of unused capacity is reflected in the production volume variance for the period. "his variance can be monitored over time to provide managers with feedbac3 regarding capacity utili2ation. !ote, too, that when the fixed overhead rate is calculated using practical capacity as the denominator, the numerator budgeted spending for capacity*related costs is consistent with the denominator capacity supplied.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 14-2"
©The McGraw-Hill Companies 200
14-3 T8+-V(+(06 (0 T@*-V(+(06 A0(799 /1$-15 ;09 $. a. "otal factory overhead spending variance/ ?ariable overhead spending variance see )a, $7*)5 (ixed overhead spending variance see )a, $7*)5 (actory overhead spending variance
# J6%( 5%%( %1&12$F
b. (actory overhead efficiency variance see )b, $7*)5
%4"$U
or, ?: efficiency variance I C; x +< H C< I #).6%B@ x 6,85% H $%,8%% units x %.65@BunitF I #).6%B@ x 6,85% H 6,&%% @ I #).6%B@ x $5% @ I %4"$U c. ;roduction volume variance see )c, $7*)5
%"$U
6. a. (actory overhead controllable flexible*budget variance/ (actory overhead spending variance $a, above
#$,$6%(
(actory overhead efficiency variance $b, above
78%
(actory overhead controllable variance see 6, $7*)5 b. ;roduction volume variance see )c, $7*)5
%4$F %"$U
). 1n all cases four*way, three*way, and two*way variance decompositions the total overhead variance for the month of @arch is the same, %4$U, as follows/ "otal factory overhead variance I total actual factory overhead H factory overhead applied to production I #$),%%% H $%,8%% units x %.65 @Bunit x #$8%,%%%B)&,5%%@F I #$),%%% H $%,8%% units x %.65 @Bunit x #7.8%B@ I #$),%%% H 6,&%% @ x #7.8%B@ I #$),%%% H #$6,GJ% I %4$U
Blocher, Stout, Cokins, Chen, Cost Management, 4/e
14-2#
©The McGraw-Hill Companies 200
14-3! F<, B> (0 V(+(069 '*+ D?+6(*0 /152$ ;09 $.
'udgeted depreciation, factory e-uipment for Ceptember/ #658,%%% ÷ $6 I
6.
%21&5$$
Cpending ?ariance>E-uipment Kepreciation Expense/ +ctual depreciation for the month
#6%,5%%
'udgeted depreciation for the month
6$,5%%
Cpending variance>E-uipment Kepreciation
% 1&$$$F
). ;roduction ?olume ?ariance>;ortion ;ertaining to Kepreciation/ 'udgeted depreciation for the month
#6$,5%%
"otal standard depreciation expense applied/ "otal chargeable hours for the month I
8,$&%
Ctandard depreciation per chargeable hour/ "otal budgeted depreciation ÷ "otal budgeted hours I #658,%%% ÷ $%),6%% hours I
#6.5%
;roduction ?olume ?ariance ;ertaining to Kepreciation
6%,765 % 1&$!5U
I0+?+(*0/ 'ecause chargeable hours i.e., “activity or “volume were less than anticipated, a portion of the budgeted depreciation expense for e-uipment did not get charged to the output of the period. 7. Leasons for the favorable spending variance regarding e-uipment depreciation expense include/
"he company disposed of some of its e-uipment during the period "he company changed the method used to calculate depreciation +n accounting error was found regarding the amount of capitali2ed cost of the e-uipment i.e., the actual cost is less than what was originally recorded "he estimated residual value of the e-uipment was increased, or "he length of the period for calculating depreciation was increased.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 14-2$
©The McGraw-Hill Companies 200
14-3" F*+-V(+(06 A0(799 *' T*( O)+8( V(+(06 /3$ ;09 (ixed factory overhead application rate/ #$8,%%% ÷ 7,5%% I #7.%%BK= +ctual fixed factory overhead/ #7%,%%% H #67,$5% I #$5,85%0 +ctual variable : rateBK= I #67,$5%B7,6%%K=s I #5.&5BK=
A6( /AQ < AP
S(0(+ C*9 F<, B> A?? * B(9 *0 Outputs P+*6*0 /SQ < SP /SQ < SP
F<, B> B(9 *0 Inputs /AQ < SP
?ariable 7,6%% x #5.&5 7,6%% x #5.%% 7,%%% x #5.%% :verhead I %24&15$ I %21&$$$ I %2$&$$$ Cpending Efficiency ?ariance I %3&15$U ?ariance I %1&$$$U A6( (ixed :verhead
L;?-9; A;*0
7,%%% x #5.%% I #6%,%%% !B+
L;?-S; A;*0
A?? /SQ < SP 7,%%% x #7.%% I %1&$$$ %1"&$$$ ;roduction ?olume ?ariance I %2&$$$U
%15&"5$ %1"&$$$ Cpending !B+ ?ariance I %2&15$F
7,%%% x #G.%% %4$&$$$
%3&$$$
"otal :verhead "otal :verhead ?ariance I #7,%%% from a product*costing standpoint this is referred to as total under applied overhead of #7,%%% F*+-V(+(06 D6*;?*9*0 *' T*( O)+8( V(+(06 '*+ D6;,+: $ ?ariable :verhead Cpending ?ariance I
#),$5%
6 ?ariable :verhead Efficiency ?ariance I
#$,%%%
) (ixed :verhead Cpending ?ariance
I
#6,$5%(
7 ;roduction ?olume ?ariance
I
#6,%%%
"otal :verhead ?ariance
I
%4&$$$U
Blocher, Stout, Cokins, Chen, Cost Management, 4/e
14-2
©The McGraw-Hill Companies 200
14-3# G+(?86( A0(799: V(+(, O)+8( V(+(069 /2$25 ;09 &(' &C' (rea &G' &)'
(rea &'
(rea &H'
&B' &*'
&+'
S**0: + I ?ariable :verhead 9osts per @achine our label ' I @achine ours i.e., the activity measure used to apply variable overhead costs label 9 I +ctual variable overhead cost per machine hour I +; K I Ctandard variable overhead cost per machine hour I C; E I Ctandard machine hours allowed in total for output achieved I C< ( I +ctual machine hours wor3ed in total for output achieved I +< D I ?ariable overhead spending variance I +< x +; H C; I Ctandard variable overhead cost applied to production I (lexible budget for variable overhead based on units produced i.e., based on standard allowed machine hours I C< x C; 1 I ?ariable :verhead Efficiency ?ariance I C; x +< H C< Cum of areas D, , and 1 I actual variable overhead cost for the period I +; x +<
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 14-2%
©The McGraw-Hill Companies 200
14-4$ G+(?86( A0(799—F< O)+8( V(+(069 /3$4$ ;09 &(' &C'
Slope o/ ine &)'
&H' &.' &'
&' &*'
&' &*'
&B' &+'
&G'
S**0: + I (ixed :verhead 9ost label ' I @achine ours I +ctivity @easure for +pplying (ixed :verhead 9ost label 9 I +pplied (ixed :verhead 9ost K I Ctandard (ixed :verhead +pplication Late per @achine our E I 'udgeted (ixed :verhead “=ump*Cum +mount ( I Kenominator +ctivity =evel for setting the fixed overhead allocation rate D I Ctandard +llowed @achine ours for nits ;roduced this ;eriod I Ctandard (ixed :verhead +pplied to nits ;roduced I D x K 1 I +ctual (ixed :verhead 9osts 1ncurred Kuring the ;eriod O I (ixed :verhead ;roduction ?olume ?ariance I K x D H ( S I "otal (ixed :verhead ?ariance I O N = = I (ixed :verhead Cpending 'udget ?ariance I 1 * E
Blocher, Stout, Cokins, Chen, Cost Management, 4/e
14-!0
©The McGraw-Hill Companies 200
14-41 F< O)+8( R(& D0*;0(*+ L)& (0 2-V(+(06 A0(799 *' F< O)+8( V(+(06 /15 ;09 1. Ctandard fixed factory overhead rate I budgeted total overhead cost per machine hour H budgeted variable overhead cost per machine hour I #7.5% H #).%% I %1.5$H 2. Kenominator activity level used to set the standard fixed overhead allocation rate I 'udgeted (ixed :verheadB(ixed :verhead +llocation Late per @ I #&,6%% ÷
#$.5%B@ I 4&"$$H
). "wo*Aay +nalysis 'rea3down of "otal :verhead ?ariance Ctandard : +ctual ?: (: "otal :
#68,8%%
Ctandard 9ost (lexible 'udget +pplied to 'ased on Outputs ;roduction ),5%% x #) I #$%,5%% ),5%% x #) I #$%,5%% # &,6%% ),5%% x #$.5% I # 5,65% # $&,&%% #$5,&5% (lexible*budget 9ontrollable ?ariance I %11&1$$U
;roduction ?olume ?ariance I %1$U
"otal (actory :verhead ?ariance I %13&$5$U I
!nder applied :verhead
N*: from a product*costing standpoint, we use the term “overBunder*applied overhead0 for control purposes, the term “total factory overhead variance is typically preferred.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 14-!1
©The McGraw-Hill Companies 200
14-42 P+'*+;(06 R?*+0>: 8 U9 *' S(0(+ C*9 V(+(06 I0'*+;(*0 /2$25 ;09 +mong recommended improvements to the cost*variance report currently used by +'9 @anufacturing 9ompany to evaluate subunit performance are the following/ $
"he reports should emphasi2e that the terms “favorable and “unfavorable should not automatically be interpreted, without further consideration, as “good performance and “bad performance. "hese labels simply reflect the impact of the calculated amount on the operating profit of the current period. "hus, a “favorable cost variance is not necessarily good and an “unfavorable variance is not necessarily bad.
6
"he current use of cost*variance information by managers at the +'9 @anufacturing 9ompany seems to be punitive, that is, an attempt to fix “blame for not achieving budgeted costs. "his negative use of variance information will most li3ely lead to dysfunctional behavioral conse-uences e.g., employees “gaming the performance indicators, providing excessive “slac3 in determining standard costs for manufacturing operations.
) Chort*term financial performance measured, for example, by the type of cost* variance report used by the +'9 @anufacturing 9ompany, while important, is not inclusive enough to achieve operational control. +s such, the performance report might be made more “balanced by including one or more non*financial performance indicators, such as -uality indicators, on*time delivery, or manufacturing cycle*time, depending on the critical success factors associated with the strategy the company is pursuing. 7
"he current variance report does not report for manufacturing overhead “controllable vs. “non*controllable variances. (or example, some decisions, which have cost implications, are made by the next*higher level of management in the plant. "he cost variance reports to individual line managers should include only items over which these managers exercise control.
5 Lelated to 7 above, the current profit*variance report does not admit to shared responsibility. (or example, excessive consumption of direct materials could be traceable to poor -uality materials purchased by the ;urchasing @anager. +s such, at least a portion of some of the other manufacturing cost variances would be attributable to the purchasing, not the manufacturing, function. J :f significant concern is the need to incorporate flexible budgets into the cost* variance report. 9urrently, there is no way to evaluate efficiency consumption of resources relative to output0 the use of the master budget amounts to calculate cost variances compounds efficiency and effectiveness dimensions of performance. "he use of a flexible budget based on output achieved results in a better assessment of efficiency of operations since the actual costs incurred during the period are compared to the budgeted costs that should have been incurred given the actual output achieved during the period .
Blocher, Stout, Cokins, Chen, Cost Management, 4/e
14-!2
©The McGraw-Hill Companies 200
14-42 9ontinued & =evel of detail. ?ariable*cost variances can be decomposed into price and efficiency effects. 1t would seem as if the performance report would be improved by at least allowing for the possibility of including these component variances, particularly since they are li3ely the responsibility of different individuals in the organi2ation. 8 1t is not clear from the sample report, but it may be the case that +'9 9ompany uses a single activity measure e.g., machine hours as the basis for applying overhead costs to products product*costing purpose and for developing the flexible*budget for control purposes. "o the extent that the chosen measure or measures does do not accurately predict changes in manufacturing support factory overhead costs, “noise is introduced into the variance*decomposition process. "hat is, a portion of any calculated variance for overhead is attributable to the method used to generate estimates of standard costs, against which actual costs are compared.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 14-!!
©The McGraw-Hill Companies 200
14-43 O)+8( ( T@* A6)7 L)9 (0 4-(7 )+99 2-(7 A0(799 *' 8 T*( O)+8( V(+(06 /455$ ;09 $. 'udgeted fixed factory overhead/ "otal standard factory overhead at 8%M level of theoretical capacity I
6%,%%% machine hours @ x #$6.J%B@ I
'udgeted variable factory overhead at 8%M level of operation
I
#656,%%% &6,%%% %1"$&$$$
'udgeted fixed factory overhead at both 8%M and $%%M 6. Ctandard overhead application rates, 6%%&/
?ariable factory overhead rate per machine hour @, 6%%& I budgeted variable overhead, 6%%J ÷ standard direct machine hours allowed for output achieved, 6%%J I #&6,%%% ÷ 6%,%%% @ I %3.$H (ixed factory overhead rate per machine hour, 6%%& I 'udgeted fixed factory overhead, 6%%& ÷ denominator activity hours, 6%%& I #$8%,%%% ÷ 65,%%% @ x G%M I #$8%,%%% ÷ 66,5%% @ I %".$$H ). (actory overhead flexible budget for 6%%&/ (lexible budget for variable factory overhead, based on output in 6%%& I $$,)%% units x 6 @Bunit x #).J%B@ I I 66,J%% @ x #).J%B@ I
# 8$,)J%
"otal fixed factory overhead same as 6%%J
$8%,%%%
"otal flexible budget for factory overhead, 6%%&
%21&3$
7. ?ariable (actory :verhead ?ariances, 6%%&/ +ctual variable factory overhead incurred I "otal standard variable factory overhead for the units manufactured NBH "otal variable overhead variance/ "otal standard variable factory overhead see ) above I "otal variable overhead variance/ "otal factory overhead flexible*budget variance #$6,%%% (ixed factory overhead flexible*budget variance +ctual variable factory overhead incurred
5,%%%
#8$,)J%
&,%%% #88,)J%
14-43 9ontinued*$ +ctual 9ost 1ncurred #88,)J%
(' based on Inputs i.e., standard ?: cost for the @ Aor3ed 6),%%%@ x #).J%B@ I #86,8%% a. Cpending ?ariance
(' based on Output i.e., standard ?: cost for standard @ allowed 66,J%%@ x #).J%B@ I #8$,)J%
b. Efficiency ?ariance
I #88,)J% H #86,8%%
I #86,8%% H #8$,)J%
I %5&5$U
I %1&44$U
+lternative calculations/ a. ?ariable overhead spending variance I +< x +; H C; I 6),%%% @ x #).87$&)G$ H #).J%B@ I 6),%%% @ x #%.67$&)G$B@ I %5&5$U b. ?ariable overhead efficiency variance I C; x +< H C< I #).J%B@ x 6),%%% H 66,J%% @ I #).J% x 7%% @ I %1&44$U (ixed (actory :verhead ?ariances, 6%%&/ +ctual fixed factory overhead incurred I budgeted fixed overhead NBH fixed overhead spending budget variance 'udgeted fixed overhead I (ixed factory overhead budget variance given
#$8%,%%% 5,%%%
+ctual fixed factory overhead incurred
#$85,%%%
(ixed :verhead ?ariances/ A6( #$85,%%%
B> #$8%,%%% Cpending ?ariance I %5&$$$U
A?? #$8%,8%% ;roduction ?olume ?ariance I %"$$F
14-43 9ontinued*6 +lternative calculation/ (ixed overhead production volume variance, 6%%& I I C; x denominator volume H C< I #8.%%B@ x 66,5%% @ H 66,J%% @ I #8.%%B@ x $%% @ I %"$$ 5. "wo*Aay 'rea3down of "otal :verhead ?ariance/ a. (actory overhead flexible*budget variance I ?ariable overhead spending variance N variable overhead efficiency variance N fixed overhead spending variance I #5,5J% N #$,77% N #5,%%%
I
%12&$$$U
b. (actory overhead production volume variance
I
%"$$F
I
#$$,6%%
"otal :verhead ?ariance
+lternatively, we can calculate the total controllable flexible*budget variance and the production volume variance directly, as follows/ a. "otal overhead variance I actual overhead H standard overhead applied to production based on allowed machine hours for the $$,)%% units produced I #88,)J% N #$85,%%% $ H 66,J%% @ x #$$.J%B@6 I #6&),)J% H #6J6,$J% I #$$,6%% i.e., under applied overhead b. "otal flexible control budget variance I actual overhead H flexible budget (' for total overhead based on output i.e., based on allowed @ for the $$,)%% units produced I I I
#6&),)J% H #$8%,%%% N 66,J%% @ x #).J%B@F #6&),)J% H #$8%,%%% N #8$,)J% #6&),)J% H #6J$,)J% I %12&$$$U
c. ;roduction volume variance I (' based on output H +pplied :verhead I #6J$,)J% H #6J6,$J% I %"$$F N*9: $ Cee part 7 above 6 Cee part 6 above #).J%B@ variable overhead rate N #8.%%B@ fixed overhead rate
14-44 F<, O)+8( B>9 '*+ C*0+* /4$45 ;09 N*: +n Excel spreadsheet solution file for this assignment is embedded below. You can open this “object by doing the following/ $. Light clic3 anywhere in the wor3sheet area below. 6. Celect “wor3sheet object and then select “:pen. ). "o return to the Aord document, select “(ile and then “9lose and return to... while you are in the spreadsheet mode. "he screen should then return you to the Aord document.
14-45 *+0( E0+9: F(6*+7 O)+8( C*99 (0 S(0(+ C*9 V(+(069 /5$$ ;09 N*: +n Excel spreadsheet solution file for this assignment is embedded below. You can open this “object by doing the following/ $. Light clic3 anywhere in the wor3sheet area below. 6. Celect “wor3sheet object and then select “:pen. ). "o return to the Aord document, select “(ile and then “9lose and return to... while you are in the spreadsheet mode. "he screen should then return you to the Aord document.
14-4 2-V(+(06 A0(799 (0 D+6 L(,*+ V(+(06 /3$4$ ;09 $. 'rea3*down of total direct labor variance for +pril/
A6( /AP < AQ #J.6% x $7,%%% I #8J,8%%
FB B(9 *0 I0?9 /SP < AQ
FB B(9 *0 O? /SP < SQ
T x $7,%%% hours Late ?ariance #6,8%%
T x $5,%%% hours
Efficiency ?ariance T
Ctandard direct labor hourly wage rate, C;/ (' 'ased on Inputs hours wor3ed +ctual direct labor hours wor3ed, +< Ctandard direct labor rate per hour, C; I
I #8J,8%% H #6,8%% I #87,%%% $7,%%% ÷ #J.%%
Kirect labor efficiency variance/ (' 'ased on Inputs i.e., based on actual hours wor3ed I (' 'ased on Output i.e., C; x C< I #J.%% x $5,%%% I Kirect labor efficiency variance
#87,%%% G%,%%% % &$$$F
+lternatively, we can calculate the Kirect =abor Efficiency ?ariance as/ C; x +< H C< I #J.%% x $7,%%% H $5,%%% hours I
%&$$$F
14-4 9ontinued 6. and ).
Total Actual Overhead !2,000
Controllable Variance "003
Total Overhead Variance = $1!"#F
Flexible Budget Based on Outputs &(llowe9 )Hs' %,000 : &S 5 S6;'
Total Applied Overhead &S 5 S6t' 1",000 hrs7 5
272"8hr7 !!,$"0
Production Volume Variance 2,2"0+
%,000 : &1",000 5 17"08hr7' !1,"00
L>0: C< I standard labor hours allowed for units produced I $5,%%% +< I actual labor allowed for units produced I $7,%%% C;t I standard total overhead cost I #6.65BK= C;v I standard variable overhead cost I #6.65BK= H #G,%%%B$6,%%%K=s I #$.5%BK= "otal :verhead ?ariance I +ctual :verhead * Ctandard :verhead +pplied to ;roduction I #)6,%%% H #)),&5% I #$,&5%( "otal :verhead ?ariance I 9ontrollable (lexible 'udget ?ariance N ;roduction ?olume ?ariance I #5%% N #6,65%( I #$,&5%(
7. Ahen variable overhead costs are related to the number of direct labor hours wor3ed, then to the extent there is a direct*labor efficiency variance there will a variable overhead efficiency variance in the same direction. "he former variance reflects the impact on manufacturing costs of using a nonstandard amount of direct labor hours based on the production for a given period. "he latter variance represents the impact on variable overhead cost of using a nonstandard amount of direct labor hours for the period. !ote, however, the 3ey assumption that there is a strong relationship between number of labor hours wor3ed activity and variable overhead cost. "his reinforces the need for selecting the appropriate activity measure for applying variable overhead costs.
14-4! T8+-V(+(06 B+(*@0 *' T*( O)+8( V(+(06 /3$4$ ;09 $., 6., and ).
Total Actual Overhead !2,000
'pending Variance 2,0003
Total Applied Overhead &S 5 S6t'
Total Overhead Variance = $1!"#F
1",000 hrs7 5 272"8hr7 !!,$"0
Controllable Variance "003
Flexible Budget Based on Inputs &actual )Hs' %,000 : &( 5 S6;'
%,000 : &14,000 5 17"08hr7' !0,000
%%icienc& Variance 1,"00+
Production Volume Variance 2,2"0+ Flexible Budget Based on Output &allowe9 )Hs' %,000 : &S 5 S6;'
%,000 : &1",000 5 17"08hr7' !1,"00
7. Leconciliation of two*variance and three*variance analysis of the total overhead variance/ $ "otal :verhead ?ariance I +ctual H +pplied
I
%1&!5$F
6 "wo*Aay 'rea3down of "otal :verhead ?ariance Ex. $7*7J/ "otal (lexible*budget 9ontrollable ?ariance ;roduction ?olume ?ariance "otal :verhead ?ariance
I I I
#5%% #6,65%( %1&!5$F
) "hree*Aay 'rea3down of "otal :verhead ?ariance Ex. $7*7&/ "otal :verhead Cpending ?ariance ?ariable :verhead Efficiency ?ariance ;roduction :verhead ?ariance "otal :verhead ?ariance
I I I I
#6,%%% #$,5%%( #6,65%( %1&!5$F
14-4"
F*+-V(+(06 A0(799 *' T*( O)+8( V(+(06 /4$-45 ;09
Actual Variable Overhead &( 5 (6' = 21,%0 'pending Variance ( 5 &(6 - S6' %03
Total Variable Overhead Variance = $"(#F Controllable Variance "20+
Flexible Budget Based on Inputs &( 5 S6' 21,000
%%icienc& Variance
Applied Variable Overhead &S 5 S6' 22,"00
)ever a variance
Flexible Budget Based on Output &S 5 S6' 22,"00
S6 5 &( - S' 1,"00+
*egend+ S stan9ar9 laariaariance Spen9in= >ariance : *//icienc@ >ariance
A6( F< O)+8( #)6,%%% H #6$,G8% I #$%,%6%
S?00> V(+(06 I #$,%6%
T*( F< O)+8( V(+(06 = %1&23$F
B> F< O)+8( /L;?S; I #G,%%%
A?? F< O)+8( = C< x C; I $5,%%% x #%.&5 I #$$,65%
P+*6*0 V*; V(+(06 I C; x C< H Kenominator ?olume I #6,65%(
*egend+ S stan9ar9 9irect laolume numariance Spen9in= &Bu9=et' >ariance : 6ro9uction >olume >ariance
14-4# *+0> B(6@(+9: T*( F(6*+7 O)+8( /3$4$ ;09 $.
(lexible 'udget 'ased on Output i.e., standard allowed @
+ctual 9osts hours ?:/ T (:/ T
+pplied :verhead based on standard allowed machine
#J%%,%%% #)%%,%%%
(lexible*budget ?ariance
#J%%,%%% #)J%,%%%
;roduction ?olume ?ariance
#$6%,%%%( "otal factory overhead applied to production, 6%%&/ ?ariable factory overhead given (ixed factory overhead given
#J%%,%%% )J%,%%%
(avorable total factory overhead variance ∴
$6%,%%%
+ctual factory overhead cost incurred, 6%%&
6.
%"4$&$$$
(lexible 'udget 'ased on Output i.e., actual machine hours
+ctual 9osts hours ?/ (/
#GJ%,%%%
+pplied :verhead based on standard allowed machine
#J%%,%%% #)%%,%%%
#J%%,%%% #)J%,%%%
#$6%,%%% ( (lexible 'udget for overhead based on output / ?ariable factory overhead (ixed factory overhead "otal favorable flexible*budget variance "otal factory overhead incurred, 6%%&
#J%%,%%% )%%,%%%
#G%%,%%% $6%,%%% %!"$&$$$
14-4# 9ontinued ). 'udgeted fixed overhead "otal fixed overhead applied to the units manufactured ;roduction volume variance for both
#)%%,%%% )J%,%%% % $&$$$F
7. a. Ctandard allowed machine hours for this period4s production I flexible*budget for variable overhead based on output ÷ standard variable overhead rate per machine hour I #J%%,%%% ÷ #$%.%%B@ I $&$$$H b. variable overhead efficiency variance I C; x +< H C< I #$%.%%B@ x 5%,%%% H J%,%%% @ I #$%.%%B@ x $%,%%%@ I %1$$&$$$F c. variable overhead spending variance I +< x +; H C; I 5%,%%%@ x #5%7,%%%B5%,%%%@F H #$%.%%B@ I 5%,%%%@ x #$%.%8B@ H #$%.%%B@ I 5%,%%%@ x #%.%8B@ I %4&$$$U d. fixed overhead spending variance I total flexible*budget controllable variance H variable overhead efficiency variance H variable overhead spending variance I #$6%,%%%( H #$%%,%%%( H #7,%%% I %24&$$$F C86: total flexible*budget controllable variance I variable overhead efficiency variance N variable overhead spending variance N fixed overhead spending variance I #$%%,%%%( N #7,%%% N #67,%%%( I #$6%,%%%(
14-5$ F(6*+7 O)+8( V(+(069 /3$4$ ;09 Ctandard @ per unit/ $%,%%% @ ÷ 5,%%% units I 6 @ per unit $ R 6/ ?ariable factory overhead variances (lexible 'udget on Inputs i.e., actual machine hours G,5%% x #) I #68,5%%
+ctual #)6,5%%
(lexible 'udget 'ased on Output i.e., standard allowed machine hours 7,5%% x 6 x #) I #6&,%%%
Cpending ?ariance
Efficiency ?ariance
I #)6,5%% H #68,5%%
I #68,5%% H #6&,%%%
I %4&$$$U $
I %1&5$$U 6
) R 7/ (ixed factory overhead variances/ 'udgeted fixed overhead given
#6%,%%%
Kenominator volume machine hours
÷
$%,%%%
Ctandard fixed overhead rate per machine hour +ctual #6$,7%%
'udget #6%,%%%
Cpending ?ariance
#6.%% Ctandard +pplied 7,5%% x 6 x #6 I #$8,%%%
;roduction ?olume ?ariance
I #6$,7%% H #6%,%%%
I #6%,%%% H #$8,%%%
I %1&4$$U )
I %2&$$$U 7
5. ?ariable factory overhead spending variance $, above I
#7,%%%
(ixed factory overhead spending variance ), above I
$,7%%
"otal factory overhead spending variance
%5&4$$U
14-5$ 9ontinued J. "otal factory overhead spending variance 5, above I ?ariable factory overhead efficiency variance 6, above I (actory overhead controllable variance
#5,7%% $,5%% %&#$$U
N*: +n Excel spreadsheet solution file for this assignment is embedded below. You can open this “object by doing the following/ $. 6. ).
Light clic3 anywhere in the wor3sheet area below. Celect “wor3sheet object and then select “:pen. "o return to the Aord document, select “(ile and then “9lose and return to... while you are in the spreadsheet mode. "he screen should then return you to the Aord document.
14-51 ABC C*90> /3$4$ ;09 Ctandard @ per unit I )6,%%% @ ÷ J,7%% units I 5 @ per unit !o. of units manufactured during the period I standard allowed @ ÷ standard @Bunit I )%,%%%@ ÷ 5@Bunit I J,%%% units 'udgeted no. of unitsBsetup I J,7%% units ÷ )6 set*ups I 6%% unitsBset*up Ctandard no. of setups for the units manufactured I J,%%% ÷ 6%% I )% (' based on Inputs i.e., based on actual standard $. ?:/ Cetup @ (:/ "otal :
+ctual
activity units 68 x #J%% I )5,%%% x #5 I
#78%,%%%
allowed activity units
# $J,8%% $&5,%%% 6J7,%%% #755,8%%
Cpending ?ariance I #67,6%%
(' based on Output i.e., based on
)% x #J%% I )%,%%% x #5 I
# $8,%%% $5%,%%% 6J7,%%% #7)6,%%%
Efficiency ?ariance I #6),8%%
(lexible*budget 9ontrollable ?ariance I #78,%%% (' based on Inputs i.e., on actual standard 6. units ?:/ Cetup @ (:/ "otal :
+ctual
(' 'ased on Output i.e., based on
activity units 68 x #6,J%% I )5,%%% x #5 I
#78%,%%% Cpending ?ariance I #)6,6%%
# &6,8%% $&5,%%% 6%%,%%% #77&,8%%
allowed activity )% x #6,J%% I )%,%%% x #5 I
Efficiency ?ariance I #$G,8%%
(lexible*'udget ?ariance I #56,%%%
# &8,%%% $5%,%%% 6%%,%%% #768,%%%
14-51 9ontinued ). Ctandard variable overhead application rate I budgeted variable manufacturing overhead in the master budget ÷ practical capacity @ Cetup cost #J7,%%% N #J%% x )6 I +pplied based on machine hours )6,%%% x #5.%% I "otal variable factory overhead Q practical capacity I ;ractical capacity machine hours Ctandard variable factory overhead rateB@ (' based on Inputs i.e., on actual activity units
+ctual
# 8),6%% $J%,%%% #67),6%% ÷ )6,%%% #&.J%
(' 'ased on Output i.e., on standard allowed activity
units ?:/ (:/ "otal :
#78%,%%%
)5,%%% x #&.J% I 6JJ,%%% 6%%,%%% #7JJ,%%%
Cpending ?ariance I #$7,%%%
)%,%%% x #&.J% I 668,%%% 6%%,%%% #768,%%%
Efficiency ?ariance I #)8,%%%
(lexible*'udget ?ariance I #56,%%% !otice that assumptions made regarding the number and type of activity measures used to apply standard overhead costs to production can affect both the total flexible* budget controllable variance and the components of this variance. (or this reason, the activities used to construct flexible*budgets for control purposes should be carefully selected.
14-52 ABC (0 P+(66( C(?(67 /4$45 ;09 N*: +n Excel spreadsheet solution file for this assignment is embedded below. You can open this “object by doing the following/ $. Light clic3 anywhere in the wor3sheet area below. 6. Celect “wor3sheet object and then select “:pen. ). "o return to the Aord document, select “(ile and then “9lose and return to... while you are in the spreadsheet mode. "he screen should then return you to this document.
14-53 F< O)+8( V(+(069 /15 ;09 $. 'udgeted monthly salary I #)67,%%%Byear ÷ $6 mos.Byear I
#6&,%%%
+ctual salary in Ceptember
68,%%%
'udget spending variance
%1&$$$U
6. %$. "here is no efficiency variance for fixed overhead. "he efficiency variance for overhead refers to the effect on overhead costs of efficiency or inefficiency in the use of the activity measures used to construct the flexible*budget for variable overhead cost. ). nits manufactured during the month
I
Ctandard fixed ovh. rateBunit I #)67,%%%Byear ÷ $8%,%%% units I
$5,&5% #$.8%
"otal fixed overhead applied to production
I
#68,)5%
'udgeted monthly fixed overhead cost
I
6&,%%%
(ixed overhead production volume variance
I
% 1&35$F
7. (or product*costing purposes, companies must “uniti2e fixed overhead costs. "his is done by dividing budgeted fixed overhead i.e., capacity*related manufacturing costs by some level of activity, called the “denominator volume. "hus, strictly spea3ing, the resulting fixed overhead cost per unit is valid only at the denominator activity level. (or this reason, when actual activity is different from the denominator activity level a “production volume variance will occur. "his variance represents the difference between total budgeted fixed overhead cost and the amount of fixed overhead cost assigned to production. +s such, the variance is referred to as “overBunder*applied fixed overhead.
14-54 F<, B>9 @8 ABC /3$ ;09 $ 'udgeted manufacturing support costs/ :utput =evel 7,%%% 5,%%% nit*level support costs/ Electricity @aintenance labor "otal unit*level support
J,%%%
#7,%%% #J,%%% #$%,%%%
#5,%%% #&,5%% #$6,5%%
#J,%%% #G,%%% #$5,%%%
'atch*level support costs/ ;roduction set*ups 1ncoming inspections "otal batch*level support
#J,%%% #$,%%% #&,%%%
#&,6%% #$,5%% #8,&%%
#8,7%% #6,%%% #$%,7%%
;roduct*level support costs/ Engineering support
#67,%%%
#)%,%%%
#)J,%%%
(acilities*level support costs/ (actory depreciation ;roperty taxesBinsurance "otal facilities*level support
#$5,%%% #5,%%% #6%,%%%
#$5,%%% #5,%%% #6%,%%%
#$5,%%% #5,%%% #6%,%%%
"otal @anufacturing Cupport
%1&$$$
%!1&2$$
%"1&4$$
N*: +n Excel spreadsheet solution file for part $ of this assignment is embedded below. You can open this “object by doing the following/ $. Light clic3 anywhere in the wor3sheet area. 6. Celect “wor3sheet object and then select “:pen. ). "o return to the Aord document, select “(ile and then “9lose and return to... while you are in the spreadsheet mode. "he screen should then return you to this document. 14-54: C(;.+*0 C*+?*+(2*0 I0?39
nit*level support c osts / Electricity @aintenance labor
#$.%% per machine hour #$.5% per machine hour
14-54 9ontinued 6. Ahen a single activity measure is used to construct the flexible control budget for factory overhead costs, then all component overhead costs must be categori2ed as variable or fixed with respect to changes in this single activity measure. (or example, some overhead costs that are characteri2ed as fixed under the conventional approach e.g., with respect to changes in machine hours are not fixed in terms of changes in other activities e.g., number of production runs. nder +'9, as seen in this example, factory overhead costs are modeled as a function of several activity measures cost drivers. +s such, the resulting overhead flexible control budget can provide a more accurate benchmar3 of manufacturing support costs. (or example, some support costs can be modeled as variable with respect to number of production runs or number of purchase orders. !ote that when a conventional system uses a volume*based cost driver e.g., machine hours, then unit*level manufacturing support costs and facilities*level support costs under +'9 will be treated as variable and fixed costs under a conventional cost system. +s such, differences in cost estimates between +'9 and conventional systems are li3ely attributable to the different ways that each system treats batch*level and product*sustaining support costs. 1n this example, the traditional system would treat production set*up costs, incoming inspection costs, and engineering support costs as fixed with respect to volume of output. (rom a cost*control standpoint, these differences are important because they affect the nature favorable or unfavorable and dollar amount of the flexible *budget variances calculated under each system. (or further information, the interested reader can consult any of the following/ Saplan, L. C. $GG7. (lexible*budgeting in an activity*based costing framewor3. "ccounting #ori$ons Oune, pp. $%7H$%G. @a3, Y. ". and Loush, @. =. $GG7. (lexible*budgeting and variance analysis in an activity*based costing environment. "ccounting #ori$ons Oune, pp. G)H$%). Luhl, O. @. $GG7. +ctivity*based variance analysis. %ournal of &ost 'anagement OulyB+ugust, pp. )8H7&.
14-55 P(7*'' T(,9 '*+ V(+(06 I0)9>(*0 /2$3$ ;09 $ Expected value of the decision to investigate the variance/ E 1nvestigate I 1 x $ H pF N 1 N 9 x pF
I #&5% x $ H %.$5F N #&5% N #),%%% x %.$5F I #J)&.5% N #5J6.5% I %1&2$$ 6 ;ayoff table/ @anagement +ction 1nvestigate Kon4t 1nvestigate
Ctates of !ature prob. Landom 85M Cystematic $5M
Expected ?alue
#&5%
#),&5%
#$,6%%
*%*
#65,%%%
#),&5%
) =et p I the indifference probability, that is, the probability of for a nonrandom variance such that management is indifferent between the two courses of action, investigate or do not investigate. p I I B H &
I #&5%B#65,%%% H #),%%% I #&5%B#66,%%% I 3.41 where I I the expected cost to conduct an investigation, L I expected loss associated with leaving an out*of*control process out of control i.e., the present value of losses the organi2ation will experience until the next decision point, and C I the expected cost to correct the process if the variance is found to have a nonrandom cause. "hat is, if the probability for a nonrandom cause or causes is ).7$M, management would be indifferent, in expected value terms, between investigating and not investigating the variance. "he expected cost of each course of action to the organi2ation would be the same. 1f, as in the present case, p U ).7$M, the indicated course of action is not to investigate.
14-55 9ontinued N*: +n Excel spreadsheet solution for this exercise is embedded below. You can open this “object by doing the following/ $. Light clic3 anywhere in the wor3sheet area below. 6. Celect “wor3sheet object and then select “:pen. ). "o return to the Aord document, select “(ile and then “9lose and return to... while you are in the spreadsheet mode. "he screen should then return you to this document
PROBLES 14-5 F*+-V(+(06 A0(799 *' T*( O)+8( V(+(06 /$ ;09 V(+(, '(6*+7 *)+8(
+ctual #)56,%%%
(lexible*budget (' based on Inputs i.e., hrs. wor3ed +< x C; 77%,%%% x C;
Cpending ?ariance
(' 'ased on Output i.e., allowed hours C< x C; C< x C;
Efficiency ?ariance
F< '(6*+7 *)+8( 'udget +pplied “=ump*Cum C< x C; 6%%,%%% units x #)Bunit I #J%%,%%% )GJ,%%% x C;
+ctual #5&5,%%%
Cpending ?ariance
;roduction ?olume ?ariance
$. a. "otal units manufactured Ctandard hours allowed per unit manufactured "otal standard hours for the units manufactured
$G8,%%% x 6 3#&$$$
b. Ctandard variable factory overhead rate per hour "otal budgeted factory overhead Kenominator activity capacity level (ixed factory overhead rate per unit "otal budgeted fixed factory overhead "otal budgeted variable factory overhead "otal direct labor hours Q capacity 6%%,%%% x 6 Ctandard variable factory overhead rate per hour
#G%%,%%% 6%%,%%% x # ).%% #J%%,%%% #)%%,%%% ÷ 7%%,%%% #%.&5
?ariable factory overhead efficiency variance I 77%,%%% H )GJ,%%% K=s x #%.&5BK= I
%33&$$$U
14-5 9ontinued*$ c. ?ariable factory overhead incurred given (' based on Inputs I 77%,%%% K=s x #%.&5BK=
I
#)56,%%%
I
))%,%%%
?ariable overhead spending variance
% 22&$$$U
d. (ixed factory overhead incurred given 'udgeted fixed factory overhead
I
#5&5,%%%
I
J%%,%%%
(ixed factory overhead spending variance
% 25&$$$F
e. "otal standard hours allowed for units manufactured Ctandard fixed overhead rateBK= I #).%%
÷
6
I
)GJ,%%%
I
#$.5%
"otal fixed factory overhead applied to production
%5#4&$$$
+lternative computation/ nits manufactured given
$G8,%%%
Ctandard fixed factory overhead rateBunit given
x #).%%
"otal fixed overhead applied
%5#4&$$$
f. "otal budgeted fixed factory overhead
#J%%,%%%
"otal applied fixed factory overhead
#5G7,%%%
(ixed factory overhead production volume variance
% &$$$U
6 Oournal entries/ Kr. ?ariable :verhead #)56,%%% 9r. +ccounts payable, etc. "o record actual variable overhead costs for the period.
#)56,%%%
Kr. A1; 1nventory #%.&5 x )GJ,%%% #6G&,%%% 9r. ?ariable :verhead #6G&,%%% "o apply standard variable overhead costs to production for the period. Kr. ?ariable :verhead Cpending ?ariance #66,%%% Kr. ?ariable :verhead Efficiency ?ariance #)),%%% 9r. ?ariable :verhead "o record variable overhead variances for the period.
#55,%%%
14-5 9ontinued*6 Kr. (ixed (actory :verhead #5&5,%%% 9r. +ccumulated depreciation, etc. "o record actual fixed overhead costs for the period.
#5&5,%%%
Kr. A1; 1nventory )GJ,%%% x #$.5% #5G7,%%% 9r. (ixed (actory :verhead #5G7,%%% "o apply standard fixed overhead costs to production for the period. Kr. ;roduction ?olume ?ariance#J,%%% Kr. (ixed (actory :verhead 9r. (ixed :verhead Cpending ?ariance "o record fixed overhead variances for the period.
#$G,%%% #65,%%%
) :ne view of the production volume variance is an artifact of the product*costing purpose of standard costing. "o “uniti2e budgeted fixed overhead for product* costing purposes, a “denominator activity level must be chosen over which the budgeted fixed overhead costs can be spread. 1f the actual level of activity differs from the level chosen to establish the fixed overhead application rate, a production volume variance will occur. (rom a cost*control standpoint, the production volume variance, particularly when the denominator activity level is defined as “practical capacity, can be thought of as representing the “cost of unused capacity. +s such, this variance information can be monitored over time to help better manage the supply of capacity*level resources. "he fixed overhead spending variance represents the difference between planned budgeted fixed overhead costs and actual fixed overhead costs for the period. 1f management desires, this total variance can be bro3en down on a line*item basis. "he variable overhead spending variance is partly attributable to the fact that the measures chosen to budget variable overhead costs are imperfect. 1n the present case, a single activity measure, K=s, is used to construct the flexible control budget for variable overhead cost. Ae 3now that such a simplification introduces error into the variance*determination process. "his variance is also attributable to spending on overhead items being different from expectations. "hese variances e.g., spending on electricity can theoretically be decomposed into price and -uantity components, much the same as we did in chapter $) for direct manufacturing costs. "he variable overhead efficiency variance refers to the impact of manufacturing overhead of efficiency or inefficiency in the use of the activity measures used to construct the flexible*budget for variable overhead. 1t is a misnomer, therefore, to interpret this variance as measuring the effect of efficienciesBinefficiencies associated with the consumption of individual variable overhead components. !ote, too, that this variance is affected by the strength of the relationship between variable overhead cost and the activity measures used to budget these costs for control purposes. "hat is, a “clean interpretation of this variance exists only if the
relationship between cost and activity is perfect.
14-5! A (0'(6+0> V(+(069 /455$ ;09 $. +t the time of purchase. Lecording the price variance for materials at time of purchase recogni2es the variance at the point it occurs. (urther, if the organi2ation in -uestion uses a standard cost system, then this practice results in the materials inventory being carried at standard cost, which is consistent with the way A1; 1nventory and (inished Doods 1nventory are carried. (inally, recogni2ing the price variance at point of purchase provides management with timely information that, presumably, can be used to correct any problems that arise. 6. "otal actual direct labor cost I 6,%%% x #& N $,7%% x #&.6% I "otal actual hours at the standard hourly rate I ),7%% x #& I Kirect labor rate price variance ). "otal actual direct labor hours at standard wage rates I % +< x C; I ),7%% x #&.%% "otal standard direct labor cost for units manufactured I 8%% units x 7 hoursBunit x #&.%%Bhour Kirect labor efficiency variance I C; x +< H C< 7. +< +; 1ron 5,%%% #6 9opper 6,6%% #).$% Kirect @aterials purchase price variance
;rice C; #6 #)
I I I
#6),8%% 66,7%% % 1&4$$U
+;*C; *%* #%.
%$;rice ?ariance *%* #66% %22$U
C; #6.%% #).%%
sage ?ariance #6%%( J%% %4$$U
5. +< C< +< H C< 1ron ),G%% 8%% x 5 I 7,%%% $%%( 9opper 6,J%% 8%% x ) I 6,7%% 6%% Kirect @aterials usage -uantity variance
#67,%8% 6),8%% % 2"$U
J. +ctual variable overhead given (' for ?ariable :verhead based on 1nputs actual hours wor3ed I ),7%% hours x #).%%Bhours ?ariable overhead spending variance
I I I
+lternative formula for variable overhead spending variance/ ?ariance I +< x +; H C; I ),7%% hours x #$6,%%%B),7%% hoursF H #).%%Bhour I ),7%% hours x #).56G7$$& H #).%%Bhour I ),7%% hours x #%.56G7$$&Bhour I %1&"$$U
#$6,%%% $%,6%% %1&"$$U
14-5! 9ontinued &. (' for ?ariable :verhead based on 1nputs i.e., based on actual hours wor3ed>see J above I "otal standard variable overhead applied for units manufactured I 8%% units x 7 hoursBunit x #)Bhour I ?ariable overhead efficiency variance I
#$%,6%% G,J%% % $$U
+lternative formula for variable overhead efficiency variance/ ?ariance I C; x +< H C< I #).%%Bhour x ),7%% H ),6%% hours I #).%%Bhour x 6%% hours I %$$U 8. +ctual fixed overhead given 'udgeted fixed overhead I 7,%%% hours x #6.%%Bhour (ixed overhead budget spending variance G. 'udgeted fixed overhead see 8 above (ixed overhead applied to units manufactured I 8%% units x 7 hoursBunit x #6.%%Bhour (ixed overhead production volume variance
#8,8%% 8,%%% % "$$U
I
#8,%%% I I
+lternative formulae for fixed overhead production volume variance/ ?ariance I C; x Kenominator activity level H C< I #6.%%Bhour x 7,%%% hours H ),6%% hours I #6.%%Bhour x 8%% hours I %1&$$U ?ariance I C; x Kenominator volume H +ctual nits ;roduced I #8.%%Bunit x $,%%% units H 8%% units I %1&$$U
J,7%% %1&$$U
14-5" S+(>8'*+@(+ F*+-(7 A0(799 *' T*( O)+8( V(+(06 /4$45 ;09 "he following solution is based on the model presented in text Exhibit $7.$8. $. and 6. Actual Variable Overhead &( 5 (6' = 10,"00
Total Variable Overhead Variance = $,"## -
'pending Variance ( 5 &(6 A S6' ",!003
Flexible Budget Based on Inputs &(ctual Machine Hours' &( 5 S6' 10!,200
%%icienc& Variance S6 5 &( 5 S' 1,2003
Flexible Budget Based on Output &Stan9ar9 Machine Hours' &S 5 S6' 102,000
Applied Variable Overhead &S 5 S6' 102,000
$#..These t/o are always e0ual
*egend+ S stan9ar9 laariaariance Spen9in= >ariance : *//icienc@ >ariance
14-5" 9ontinued ). and 7. A6( F< O)+8( #68,%%%
S?00> V(+(06 I #$,%%%
T*( F< O)+8( V(+(06 = %5&$5$U
B> F< O)+8( /L;? S; #6&,%%%
A?? F< O)+8( = C< x C; I #66,G5%
P+*6*0 V*; V(+(06 I C; x Kenominator ?olume H C< I #7,%5%
*egend+ S stan9ar9 )H allowe9 /or units pro9uce9 ,"00 units 5 2 hours8unit 1$,000 hours S6 stan9ar9 /i5e9 o;erhea9 cost per )H &1!",000 5 0720'8&10,000 units 5 2 hours8unit' 2$,000820,000 )Hs 17!"8)H )enominator >olume numariance Spen9in= &Bu9=et' >ariance : 6ro9uction >olume >ariance
5. 1f the denominator activity level is set at budgeted planned output, the fixed overhead application rate I 'udgeted overheadBstandard labor hours for planned output I #$)5,%%% x %.6%BG,%%% units x 6 hoursBunit I #6&,%%%B$8,%%% hours I #$.5%Bhour. ?olume variance I C; x Kenominator activity level H C< I #$.5%Bhr. x $8,%%% H 8,5%% units x 6 hoursBunitF I #$.5%Bhr. x $,%%% hours I %1&5$$U Ahen budgeted planned output is used to determine the fixed overhead application rate, the cost of unused capacity is allocated to the units produced. Ahen practical capacity is used to allocate budgeted fixed overhead costs to products, the resulting product costs will be lower since the cost of unused capacity is reported separately i.e., is not allocated to units produced. "he separate reporting of the “cost of unused capacity is thought to inform managerial decisions regarding spending on capacity*related resources.
14-5# F*+-(7 A0(799 *' T*( O)+8( V(+(06 /45 ;09 $. 'udgeted fixed manufacturing overhead fixed overhead allocation rateBhr. practical capacity hours I #$6Bhour x )%%,%%% hours I #),J%%,%%% a R b/ (ixed @anufacturing :verhead ?ariances B> /L;?-9;
A6( #),&5%,%%%
#),J%%,%%%
;roduction ?olume ?ariance I %24$&$$$U
Cpending ?ariance I %15$&$$$U c R d/ ?ariable @anufacturing :verhead ?ariances A6( +< x +; #6,)7%,%%%
FB ,(9 *0 Inputs +< x +; 6&5,%%% hrs. x #8Bhr. I #6,6%%,%%%
Cpending ?ariance I %14$&$$$U
A?? 5J,%%% units x 5 hrs.Bunit x #$6Bhr. I #),)J%,%%%
FB B(9 *0 Output C< x C; 5J,%%% units x 5 hrs.Bunit x #8Bhr. I #6,67%,%%%
Efficiency ?ariance I %4$&$$$F
+lternative formulas/ ?ariable overhead spending variance I +< x +; H C; I 6&5,%%% hrs. x #6,)7%,%%%B6&5,%%% hrs.F H #8.%%Bhr. I 6&5,%%% hrs. x #8.5%G%G%G H #8.%%Bhr. I I 6&5,%%% hrs. x #%.5%G%G%GBhr. I %14$&$$$U ?ariable overhead efficiency variance I C; x +< H C< I #8.%%Bhr. x 6&5,%%% hrs. H 5J,%%% units x 5 hrs.BunitF I #8.%%Bhr. x 6&5,%%% H 68%,%%% hrs. I #8.%%Bhr. x 5,%%% hrs. I %4$&$$$F
x
17
14-5# 9ontinued
6. "he production manager is right in that the firm probably needs to use a more up*to* date base or set of measures for applying factory overhead to products and for constructing its flexible*budgets for control purposes. Aith an up*to*date system, the factory overhead variances may disappear or be substantially altered. "he favorable variable overhead efficiency variance is a result of using fewer labor hours than the number of hours specified in the standard cost system for the output achieved. owever, with an out*of*date standard costing system the firm may have “allowed more variable overhead costs than a more accurate standard cost system would have. +s such, the favorable variable overhead efficiency variance may decrease or even be unfavorable with an up*to*date standard cost system that relies on the use multiple cost drivers, including non*volume*based measures, to construct flexible control budgets.
14-$ F0 8 U00*@09& F*+-V(+(06 A0(799 75H5% minutes C(9 1 A6( O?+(0> L) (0 C*99 I06++ +ctual machine*hours wor3ed ?ariable factory overhead incurred (ixed factory overhead incurred FB B(9 *0 O? /(*@ ;(680 8*+9 'udgeted variable factory overhead 'udgeted fixed factory overhead "otal budgeted factory overhead S(0(+ 6*9 (( ?ariable factory overhead rate per machine hour (ixed factory overhead rate per machine hour Kenominator level in machine hours "otal standard machine hours for output achieved "otal standard variable factory overhead applied "otal standard variable overhead for the actual @ "otal standard fixed factory overhead applied F(6*+7 O)+8( V(+(069 ?ariable factory overhead spending variance ?ariable factory overhead efficiency variance (ixed factory overhead spending variance
A
600 K #&,5%% L #$$,7%% M
C(9 2
C(9 3
600 U $3,960 W $7,200
1,280 $6,850 #$$,5%%
B $8,800 N $3,960 X #$%,%%% O $8,000 C $18,800 #$$,GJ% Y
$6,200 #$J,5%% $22,700
D $1100 ! $1250 " 8%% & 800 #8,8%% ' ( $6,600 ) #$%,%%% *
#G%% + $2,200& I $1,%00U (ixed factory overhead production volume variance $0
#J.J% #5.%% $1250 # $1375 6%0 $,6%% J%% AA 1,2%0 $3,960 BB $6,200 $3,960 CC $6,%00 $7,500 DD $17,050 #% #% #8%%( !! #5%%
#75% #6%% $5,000& #55%(
9ase $/ :verhead ?ariance Cummary #&,5%%
#8,8%%
#8,8%%
#G%% F< *)+8( #$$,7%%
#$%,%%%
#$%,%%%B8%% I #$6.5%B@0 C< x #$6.5%B@ I #$%,%%%
14-$ 9ontinued*$ ' (lexible budget for variable factory overhead I "otal standard variable overhead applied I %"&"$$ 9 "otal flexible budget for factory overhead I #8,8%% N #$%,%%% I
%1"&"$$
D "otal variable overhead at actual @ I #&,5%% H #G%% I
%&$$
E (ixed overhead rate per @ I #$%,%%% ÷ 8%% I
%12.5$
?ariable overhead efficiency variance I #J,J%% H #8,8%% I
%2&2$$F
( "otal standard @ for the units manufactured I #$%,%%% ÷ #$6.5% I
"$$
K Ctandard variable overhead rateB@ I #8,8%% ÷ 8%% I
%11.$$
+ +ctual @ spent I #J,J%% D ÷ #$$ K I
$$
1 (ixed overhead spending variance I #$$,7%% H #$%,%%% I
%1&4$$U
O ;roduction volume variance I #$%,%%% 'udgeted H #$%,%%% +pplied I
%$
9ase 6/ :verhead ?ariance Cummary ?ariable overhead #J.J% x J%% I #),GJ%
#J.J% x T #%
#),GJ%
#%
(ixed overhead J%% x T I T #8%%(
#5%%
S +ctual machine*hours spent same as total standard hours
I
$$
! (lexible control budget variable overhead I #J.J% x J%%
I
%3&#$
L "otal standard variable overhead applied I !
I
%3&#$
= +ctual variable overhead cost incurred in this case, same as total standard variable cost applied to production
I
%3&#$
C "otal variable overhead for the actual @ wor3ed in this case, same as total standard variable cost applied to production I
%3&#$
14-$ 9ontinued*6 :"otal budgeted fixed overhead I #$$,GJ% H #),GJ% !
I
%"&$$$
" "otal fixed overhead applied I #8,%%% : H #5%%
I
%!&5$$
; Ctandard fixed overhead rate I #&,5%% "
I
%12.5$
I
4$
I
%!&2$$
< Kenominator level I #8,%%% :
÷
÷
J%%
#$6.5% ;
@ (ixed factory overhead incurred I #8,%%% : H #8%%
9ase )/ :verhead ?ariance Cummary ?ariable overhead #5 x T #75%
#5 x T #6%%
(ixed overhead #$$,5%%
#$J,5%% #55% (
V Ctandard fixed overhead rate I
#$J,5%% ÷ $,6%% I %13.!5
KK "otal fixed overhead applied I
#$J,5%% N #55% I %1!&$5$
++ "otal standard machine*hours allowed for the output achieved I ''"otal standard ?: applied W (lexible*budget for variable overhead I ''
#$&,%5% KK ÷ #$).&5 V I 1&24$ I
#5 x $,67% ++ I %&2$$ I
%&2$$
99 "otal variable overhead for the actual @ wor3ed I #J,6%% W N #6%% I %&4$$ +ctual machine*hours spent I
#J,7%% 99 ÷ #5.%% I 1&2"$
A +ctual variable overhead incurred I
#J,7%% 99 N #75% I %&"5$
Y"otal budgeted factory overhead I
#J,6%% W N #$J,5%% I %22&!$$
EE (ixed factory overhead spending variance I #$$,5%% H #$J,5%% I
%5&$$$F
14-1 C*;?+809) V(+(06 A0(799 /$ ;09 $. "otal manufacturing cost for units produced in (ebruary "otal standard cost for the units manufactured in (ebruary/ #7 per unit x 8,5%% units I "otal manufacturing cost variance I 6. +ctual fixed overhead given 'udgeted fixed overhead per month I )%,%%% hrs. ÷ $6 x #$.6%Bhr. (ixed overhead budget spending variance ). "otal actual hours at standard hourly rate I 6,)%% N 7%% hours x #G.%%Bhr. "otal standard direct labor cost I I 8,5%% units x %.) hrs.BunitF x #G.%%Bhr. Kirect labor efficiency variance +lternatively, direct labor efficiency variance I C; x +< H C< I #G.%%Bhr. x 6,&%% H 6,55% hrs. I #G.%%Bhr. x $5% hrs. I 7. "otal direct labor cost incurred I #6),%%% N #J,%%% "otal actual hours at standard hourly rate Kirect labor rate price variance
#7$,J&% )7,%%% %!&!$ U I I I
#),$%% ),%%% %1$$ U
I
#67,)%%
I I
66,G5% % 1&35$ U
I
%1&35$ U
I I
#6G,%%% 67,)%%
I
% 4&!$$ U
I
%4&!$$ U
+lternatively, the direct labor rate price variance is I +< x +; H C; I 6,&%% hrs. x #6G,%%%B6,&%%hrs. H #G.%%Bhr. I 6,&%% hrs. x #$%.&7%&7 H #G.%%Bhr. I 6,&%% hrs. x #$.&7%&7Bhr.
"he company includes overtime premiums as part of direct labor cost. + company that treats overtime premium as variable factory overhead would have #6&,%%% as the total direct labor cost incurred and #6,&%% as the direct labor rate price variance. 5. "otal variable manufacturing cost incurred I #7$,J&% H #),$%% I #)8,5&% "otal standard variable cost for units manufactured in (ebruary/ "otal standard cost for the units manufactured I #7.%%Bunit x 8,5%% I #)7,%%% "otal standard fixed overhead applied I #$.6%Bhr. x %.) hr.Bunit x 8,5%% units I H ),%J% )%,G7% "otal variable cost variance % !&3$ U
14-1 9ontinued*$ J. "otal variable overhead cost incurred given (' for variable overhead based on actual labor hours wor3ed I 6,&%% hrs. x #$.J%Bhr. ?ariable overhead spending variance
I I I
#5,6%% 7,)6% % ""$ U
X 1f the firm considers overtime premiums as variable factory overhead, the total variable factory overhead cost incurred would be #&,6%% and the variable factory overhead spending variance would be #6,88% . +lternatively, the variable overhead spending variance I +< x +; H C; I 6,&%% hrs. x #5,6%%B6,&%%hrs.F H #$.J%Bhr. I 6,&%% hrs. x #$.G65G65G H #$.J%Bhr I 6,&%% hrs. x #%.)65G65GBhr. I (' for variable overhead based on actual labor hrs. above (' for variable overhead based on alloed labor hrs. I 8,5%% units x %.) hrs.Bunit x #$.J%Bhr. ?ariable overhead efficiency variance
% ""$U I
# 7,)6%
I
+lternatively, the variable overhead efficiency variance I C; x +< H C< I #$.J%Bhr. x 6,&%% hrs. H 6,55% hrs. I #$.J%Bhr. x $5% hrs.
7,%8% % 24$U
I
% 24$U
?ariable overhead flexible*budget variance I variable overhead spending variance N variable overhead efficiency variance I # 88% N #67% I
%1&12$U
&. 'udgeted fixed overhead per month from 6 above I "otal fixed overhead applied I 8,5%% x #%.)J per unit I ;roduction volume variance I +lternatively, production volume variance I C; x Kenominator activity level H C< I #$.6%Bhr. x )%,%%% hrs.B$6F H 6,55% hrs. I #$.6%Bhr. x 6,5%% H 6,55% hrs.
I
#),%%% ),%J% % $F
% $F
8. +luminum/ ;rice variance/ +ctual price paid given # 8J7 Ctandard cost for the -uantity purchased I $,8%% lbs. x #%.7%Blb. I &6% ;urchase price variance I %144 U
14-1 9ontinued*6 sage variance/ Ctandard cost for the -uantity used I $,G%% pounds x #%.7%Blb. I "otal standard cost allowed for the units produced I 8,5%% units x %.6 lb.Bunit x #%.7%Blb. I sage variance #%.7%Blb. x $,&%% H $,G%%F lbs. I
# &J% J8% %"$ U
;lastic ;rice variance +< x +; H C;/ Legular I ),%%% lb. x #%.5% H #%.)8Blb.I =ow grade I J,%%% lb. x #%.6G H #%.)8Blb.I ;urchase price variance I sage variance C; x +< H C< I G,5%% H 8,5%% x #%.)8Blb. I
#)J% 57% ( % 1"$ F %3"$ U
"he #)8% unfavorable materials usage variance is probably the result of using low*grade plastics. "he cost overrun is mitigated by the lower purchase cost of low*grade plastics that saved #)$5 ),5%% pounds at #%.%G per pound. "he high rejection rate due to the use of low*grade materials leads to the need to manufacture more units that, in turn, may have contributed to the unfavorable direct labor efficiency variance and the need for paying overtime premium for excess hours wor3ed.
14-2 S(0(+ (0'(6+0> C*9 ?+ U0 /5$-$ ;09 $. Kirect materials used/ D6& @$7 "otal !umber of units manufactured +ctual materials cost per unit manufactured
#6&%,%%% N 8),7%% #)5),7%% J,6%% ÷ %5!.$$
6. "otal standard materials cost at )$,%%% machine hours I #6J%,7%% N #8%,J%% I !umber of machine hours Ctandard materials cost per standard machine hour I
#)7$,%%% ÷ )$,%%% %11.$$
N*: either of the other two flexible budgets in the problem could have been used to generate the #$$.%% answer. Cince it ta3es, at standard, 5 @s per unit, the standard materials costBunit I 5 x #$$.%% I %55.$$. ). 'udgeted direct labor cost for J,%%% units/ +ssembler Drinder "otal 'udgeted number of units 'udget direct labor cost per unit
#6&),%%% 6)7,%%% #5%&,%%% J,%%% ÷ %"4.5$
N*: either of the other two flexible budgets in the problem could have been used to generate the #87.5% answer. 7. "otal manufacturing : at )6,%%% machine hours "otal manufacturing : at )$,%%% machine hours Kifference in manufacturing overhead Kifference in machine hours ?ariable manufacturing : rate per machine hour
#J7&,6%% H J)&,$%% # $%,$%% $,%%% ÷ %1$.1$
N*: the same answer, #$%.$% per machine hour, would be obtained by ta3ing the change in costs divided by the change in machine hours for any two of the three output levels reflected in the flexible*budget presented in the problem.
14-2 9ontinued*$ 5. "otal manufacturing overhead in the profit plan J,%%% units of output, or )%,%%% standard machine hours I =ess/ "otal variable manufacturing : in the profit plan I #$%.$%Bunit x )%,%%% units I "otal fixed manufacturing : in the profit plan !umber of machine hours in the profit plan 'udgeted fixed overhead rate per machine hour "otal standard machine hours for the units manufactured I J,6%% units x 5 hoursBunit I (ixed manufacturing cost per machine hour "otal fixed manufacturing cost applied to production "otal budgeted fixed manufacturing cost for the period @anufacturing : production volume variance
#J6&,%%% )%),%%% #)67,%%% )%,%%% ÷ %1$."$
I I
)$,%%% x # $%.8% #))7,8%% )67,%%% %1$&"$$F
C*;;0: "he 9ain 9ompany uses a single activity measure as the basis for product*costing standard overhead cost per unit produced and for cost*control purposes flexible*budget. 1f there is a strong relationship between the chosen activity measure and the incurrence of overhead costs, then this simple approach has merit. owever, more modern approaches to product costing e.g., +'9 provide multiple allocation bases for allocating manufacturing support i.e., overhead costs to products. Cuch improved cost*allocation procedures provide cost variances that are both more readily interpretable and economically meaningful, albeit at an increased cost. +lso, the 9ain 9ompany currently uses planned budgeted output as the basis for setting the standard fixed overhead cost per unit. + more appealing approach would be to use “practical capacity volume defined as a percentage of theoretical capacity for setting the fixed overhead allocation rate. nder this approach, the cost of unused capacity is not assigned to the output of the period. Lather, it is treated more as a period cost, assigned for control purposes to departments or managers who are responsible for the capacity*related decisions. +lso, the use of practical capacity as the “denominator activity level results in more stable unit costs over time as compared to the use of budgeted or planned output, which can change from period to period. (inally, when practical capacity is used as the basis for determining fixed overhead allocation rates under either traditional or +'9 systems there is a logical consistency between the numerator and denominator in the calculations/ the numerator represents spending on capacity*related resources i.e., the cost of resources supplied while the denominator represents the amount of capacity obtained.
14-2 9ontinued*6 J. "otal actual manufacturing overhead given I #J)),%%% (' for overhead based on )6,%%% machine hours wor3ed/ ?ariable manufacturing overhead I )6,%%% @ x #$%.$%B@ I #)6),6%% (ixed manufacturing overhead 5, above I )67,%%% I J7&,6%% "otal manufacturing overhead spending variance I %14&2$$F &. "otal direct materials cost in the profit plan !umber of units 'udget direct materials cost per unit produced
I # ))%,%%% ÷ J,%%% I #55.%%
(lexible*budget for J,%5% nits of :utput/ Kirect materials #55.%%Bunit x J,%5% units I #))6,&5% Kirect labor 87.5%Bunit x J,%5% units I 5$$,665 @anufacturing overhead/ ?ariable #$%.$%Bhr. x 5 hrs.Bunit x J,%5% units I )%5,565 (ixed )67,%%% %1&4!3&5$$ ":"+= 8. Kay*to*day control of overhead costs/ a Fixed Overhead &osts/ these costs are essentially capacity*related costs and as such are typically “managed prior to the start of the year e.g., through capital budgeting procedures, through the use of 2ero*based budgeting, etc.. 9apacity* related decisions are of strategic importance/ having too much capacity results in wasted resources0 having too little capacity involves opportunity costs lost sales and associated profit. @any overhead costs that traditional accounting systems treat as short*term fixed costs are variable, in a longer*term perspective, in terms of non*volume* related activities such as number of batch*level inspections performed. (or costs associated with these activities, the focus of modern systems such as +'9 is to identify non*value added activities so these activities can be eliminated and to develop ways to perform value*added activities more efficiently e.g., through process reengineering. b Variable Overhead &osts/ the 3ey to controlling these support costs is through an activity*cost analysis revealed, for example, through +'9. "hat is, it is necessary for managers to understand 3ey manufacturing support activities and then to try to eliminate non*value*added activities and to develop ways to perform value*added activities more efficiently. Come of these costs are volume* based i.e., unit*level support costs e.g., electricity. "hese costs can be “controlled using the procedures discussed in chapter $) where the goal was to isolate price and usage effects of spending on variable costs. :ther manufacturing support costs that
14-2 9ontinued traditional accounting systems may treat as variable costs are variable only in terms of non*volume*related activity measures. "hese costs, as with capacity* related costs, can be controlled by reducing consumption of underlying activities i.e., operating more efficiently :L by eliminating non*value*added activities, as noted above. !otice the subtle, but critical, message in the preceding answer/ generally spea3ing, typical accounting systems cannot provide the type of detail that is needed to appropriately “control manufacturing support costs in today4s operating environment.
14-3 C(?(67 L)9 (0 F< O)+8( R(9 /5$ ;09 $. +s the name suggests, suggests, maxi maximum mum theoretical theoretical capacity is the maximu maximum m output output level for the plant, one that assumes operating at maximum efficiency. "his level of productivity suggests no “down time for machine maintenance, no internal disruptions to the manufacturing process, and no slac3 in external sales demand. +s such, maximum capacity levels are unattainable in the “real world. (rom a behavioral standpoint, the use of such tight expectations can be dysfunctional. (rom a product*costing standpoint, the use of maximum capacity may result in unrealistically low indicated product costs. +s indicated in the text, at least three other options exist for determining the denomin denominato atorr activit activity y level level when when settin setting g the fixed fixed overhea overhead d allocati allocation on rate/ rate/ forecast asted ed activity 0 practical capacity i.e., i.e., theoret theoretical ical capacity capacity budgeted forec reduced by external demand considerations and normal internal losses due to mach machin ine e downt downtim ime, e, empl employ oyee ee person personal al time time,, etc. etc.0 0 and, and, normal capacity capacity expected sales demand over an upcoming three* to five*year period. 6. + revi revise sed d vari varian ance ce repo report rt for for Yuba @ach @achin ine e 9omp 9ompan any y usin using g expe expect cted ed budge budgete ted d activi activity ty as the the basis basis for for apply applying ing fixe fixed d fact factory ory overh overhead ead is presented below. Y,( Y,( (680 (680 C*;?(07 C*;?(07 R)9 V(+(06 R?*+ '*+ S< *089 0 (7 31& 2$$"
"otal variable factory overhead (ixed factory overhead/ Calaries Kepreciation and amorti2ation :ther expenses "otal fixed factory overhead
+ctual 9osts
+pplied :verhead 9osts
#$6%,66%
#$6%,%%%
# 6 66%
# )G,%%% 65,%%% $5,)%% # &G,)%%
# 7%,%%% 65,%%% $5,%%% # 8%,%%%
# $,%%% H )%% # &%%
?ariance ?ariance
Levised (ixed :verhead +pplication Late I 'udgeted (ixed :verheadB;ractical 9apacity K=s I #$J%,%%%B8%,%%% K=s I %2.$$DLH +pplied (ixed :verhead, :ver head, (irst Cix @onths Calaries/ 7%,%%% K=s x #$.%%BK= I Kepreciation and amorti2ation/ 7%,%%% K=s x #%.J65BK= I :ther expenses/ 7%,%%% K=s x #%.)&5BK= I "otal "otal +pplied (ixed :verhead :verhe ad Q#6BK= I
#7%,%%% #65,%%% #$5,%%% %"$&$$$
14-3 9ontinued*$ 14-3 9ontinued*$ ). 1f the fixed fixed factory factory overhead overhead rate was based based on practica practicall capacit capacity y rather than theoretical maximum capacity, Yuba @achine 9ompanyZs reported operating income at @ay )$, 6%%8 would be #&8,%%%, not #G%,%%% as reported, a reduction of #$6,%%%, calculated as follows. 9ost of goods sold 9DC, revised amount/ 9DC, as originally reported =ess/ fixed :? included by Cid "horpe 9DC prior to allocation of fixed overhead ;lus revised fixed :? $.% H %.65F x #8%,%%% applied 9DC, revised
#)8%,%%% 78,%%% #))6,%%% J%,%%% %3#2&$$$
Y,( Y,( (680 (680 C*;?(07 C*;?(07 I0+; I06*; S(;0& '-./s- F*+ S< *089 E0 (7 31& 2$$" Cales 9DC #)8%,%%% N #$6,%%% Dross profit =ess/ Celling expense Kepreciation expense +dministrative expense :perating income
#J65,%%% )G6,%%% #6)),%%% # 77,%%% 58,%%% 5),%%%
$55,%%% % !"&$$$
P+06?( P+06?( ?*0: choice ?*0: choice of the denominator volume affects product costs. 1f resulting overhead variances for a period are closed to 9DC rather than allocated, then these differences will affect “the bottom line. 7 +s noted in part $, the use of theoretical capacity capacity is generally not recommended recommended,, although perhaps some might argue that in an increasingly competitive environment this alternative has some merit since it will result in the smallest, that is, tightest, standard costs. +s discussed in the text, the ultimate choice of the denominator activity level is affected by subjective considerations, which derive largely from the fact fact that that the the resu result ltin ing g prod produc uct* t*co cost st data data can can be used used for for mult multip iple le purp purpos oses es performance evaluation, federal income*tax purposes, financial reporting purposes, etc.. :verall, however, we feel that companies should use practical capacity as the denom denomin inat ator or level level in sett settin ing g fixe fixed d overh overhead ead alloca allocatio tion n rates rates in conve convent ntion ional al accounting systems and in +'9 systems as well. (rom a managerial standpoint, the use of practical capacity has a number of 3ey advantages. (or one thing, it “reveals the cost of unused capacity rather than “hiding this cost as part of the cost of good units produced. (or another thing, it helps managers avoid what has been referred to as the “death spiral, which can occur if
14-3 9ontinued*6 management management sets selling prices on the basis of full*cost information information in this case, to include the cost of unused capacity. "he use of practical capacity also is consistent with the way the numerator in the application application rate is defined. "hat is, the numerator represents planned spending on capacity*related resources and the denominator represents, in practical terms, the supply of resources made available. "hus, the resulting cost figure represents the cost of capacity as the cost of capacity supplied, not cost based on the amount of capacity demanded. "he time*series reporting of the cost cost of unused unused capacity capacity i.e., producti production on volume volume variances variances under under practica practicall capaci capacity ty enable enables s mana manage gers rs to bette betterr mana manage ge spend spending ing on capac capacit ity*r y*rela elate ted d resources. "he use of practical capacity, at least compared to the use of budgeted activity, results in more stable unit*cost data, which some managers find appealing. (inally, (inally, we note that for .C. federal income tax purposes, companies are re-uired to base their overhead rates on practical capacity. capacity. Co, for all of the above reasons, we recommend the use of practical capacity as as the denominator activity level used to calculate predetermined fixed overhead allocation rates.
14-4 F*+-V(+(06 A0(799 *' T*( O)+8( V(+(06 /45 ;09 Ctandard factory overhead rates/ ?ariable/ #%.65 N #%.)7 I (ixed/ #%.$8 N #%.$5 N #%.68 I "otal standard factory overhead rate per K= I "otal actual factory overhead/ ?ariable/ #&5,%%% N #$$$,%%% I (ixed/ #5$,%%% N #57,%%% N #87,%%% I "otal actual factory overhead incurred
#%.5G #%.J$ #$.6%
#$8J,%%% $8G,%%% #)&5,%%%
Ctandard K=s per unit/ ),J%%,%%% hours ÷ &6%,%%% units I 5 hours per unit "otal standard direct labor hours for the units manufactured in @ay/ JJ,%%% units x 5 hours per unit I ))%,%%% hours $. +pplied overhead costs I
))%,%%% hrs. x #$.6%Bhr. I
%3#&$$$
6. ?ariable*overhead spending variance/ +ctual variable overhead incurred see above I (' for variable overhead based on Inputs actual hours wor3ed I )$5,%%% hr. x #%.5GBhr. I ?ariable overhead spending variance
#$8J,%%% $85,85% % 15$ U
+lternatively, variable overhead spending variance I +< x +; H C; I )$5,%%% hrs. x #$8J,%%%B)$5,%%%hrs. H #%.5GBhr.F I )$5,%%% hrs. x #%.5G%7&J$ H #%.5GBhr. I )$5,%%% hrs. x #%.%%%7&J$Bhr. I %15$.$$U ). ?ariable*overhead efficiency variance/ (' for variable overhead based on Inputs actual hours wor3ed see 6 above I #$85,85% (' for variable overhead based on output allowed hours for units manufactured in @ay I ))%,%%% hrs. x #%.5GBhr. I $G7,&%% % "&"5$ F +lternatively, variable overhead efficiency variance I C; x +< H C< I #%.5GBhr. x )$5,%%% H ))%,%%% hrs. I #%.5GBhr. x $5,%%% hrs. I %"&"5$F
14-4 9ontinued 7. (ixed*overhead spending variance/ "otal actual fixed factory overhead "otal budgeted fixed factory overhead for @ay
$8G,%%% $8),%%% % &$$$ U
5. ;roduction volume variance: "otal budgeted fixed factory overhead for @ay "otal standard fixed overhead applied to the nits manufactured in @ay/ ))%,%%% units x #%.J$ I
#$8),%%% 6%$,)%% %1"&3$$ F
+lternatively, production volume variance I C; x Kenominator ?olume H +ctual ?olume I #).%5Bunit x J%,%%% H JJ,%%% units I #).%5Bunit x J,%%% units I %1"&3$$ F N*: +n Excel spreadsheet solution for this problem is embedded below. You can open this “object by doing the following/ $. Light clic3 anywhere in the wor3sheet area below. 6. Celect “wor3sheet object and then select “:pen. ). "o return to the Aord document, select “(ile and then “9lose and return to... while you are in the spreadsheet mode. "he screen should then return you to this document
14-5 P+*+(*0 *' V(+(069 /4$ ;09 ;roration of Kirect @aterials ?ariances ;roration of K@ Ctandard ;rice ?ariance, ;? K@ 9ost M +mount K@, E1 # J5,%%% $).7% # $,)7% K@, ? H$5,%%% H ).%G H )%G (D, E1 8&,%%% $&.G7 1&!#4 9DC )78,%%% &$.&5 &,$&5 "otal #785,%%% $%%.%% #$%,%%%
"otal after ;rorating ;? # JJ,)7% H $5,)%G 88,&G7 )55,$&5 #7G5,%%%
;roration of K@ sage ?ariance M +mount 6% 8% $%%
H # ),%J6 H $6,67& H#$5,)%G
!et 9hange +fter ;roration # $,)7%
"otal #K@ +fter ;roration # JJ,)7%
H $,6J8 H 5,%&6 H #5,%%%
"5&!32 )76,G68 #7G5,%%%
$. "he amount of direct materials price variance, ;?, prorated to finished goods ending inventory/ %1&!#4 6. "he total amount of direct materials in finished goods ending inventory after proration of all materials variances/ %"5&!32 ;roration of Kirect =abor R @anufacturing : ?ariances Kirect labor rate variance Kirect labor efficiency variance "otal direct labor variance +ctual manufacturing overhead incurred @anufacturing overhead applied to/ (inished goods inventory 9ost of goods sold @anufacturing overhead overapplied
#6%,%%% 5,%%%( #$5,%%% #JG%,%%% #$%7,7%% 5G$,J%%
JGJ,%%% # J,%%%
14-5 /C*00
(D 9DC "otal
"otal 9ost 'efore ;roration )6$,G%% $,J&G,$%% 6,%%$,%%%
K= 9ost before ;roration Kollar M $5 13$&5$$ &)G,5%% 85 8&%,%%% $%%
;roration of K= : ?ariance ?ariance G%%( 2&25$ $6,&5% 5,$%%( $5,%%% J,%%%(
K@
;rorated 9ost after ?ariance $,6J8( 5,%&6( J,)7%(
"otal ;roration )6$,G86 1&"1&!" 6,%%),JJ%
).
"he total amount of direct labor in finished goods inventory at Kecember )$, after all variances have been prorated/ #$)%,5%% N #6,65% I %132&!5$
7.
"he total cost of goods sold for the year ended Kecember )$ after all variances have been prorated/ %1&"1&!"
14-5 /C*00
(D 9DC "otal
"otal 9ost 'efore ;roration )6$,G%% $,J&G,$%% 6,%%$,%%%
K= 9ost before ;roration Kollar M $5 13$&5$$ &)G,5%% 85 8&%,%%% $%%
;roration of K= : ?ariance ?ariance G%%( 2&25$ $6,&5% 5,$%%( $5,%%% J,%%%(
K@
;rorated 9ost after ?ariance $,6J8( 5,%&6( J,)7%(
"otal ;roration )6$,G86 1&"1&!" 6,%%),JJ%
).
"he total amount of direct labor in finished goods inventory at Kecember )$, after all variances have been prorated/ #$)%,5%% N #6,65% I %132&!5$
7.
"he total cost of goods sold for the year ended Kecember )$ after all variances have been prorated/ %1&"1&!"
14- *+0> B(6@(+9: 2-V(+(06 A0(799 *' T*( O)+8( V(+(06 /2$ ;09 F<,-,> B(9 *0 O? S(0(+ A6( /9(0(+ (*@ 8*+9 A?? ?:/
$8,%%% x #7Bhr. I # &6,%%%
(:/ "otal
N T
5%,%%% #$66,%%%
'udget ?ariance I #$,%%%
T
;roduction ?olume ?ariance
I #&,J%%(
"otal flexible budget for factory overhead based on output i.e., based on standard allowed hours for the actual units manufactured>see above/
14- *+0> B(6@(+9: 2-V(+(06 A0(799 *' T*( O)+8( V(+(06 /2$ ;09 F<,-,> B(9 *0 O? S(0(+ A6( /9(0(+ (*@ 8*+9 A?? ?:/
$8,%%% x #7Bhr. I # &6,%%%
(:/ "otal
N T
5%,%%% #$66,%%%
'udget ?ariance I #$,%%%
T
;roduction ?olume ?ariance
I #&,J%%(
"otal flexible budget for factory overhead based on output i.e., based on standard allowed hours for the actual units manufactured>see above/ $8,%%% hours x #7BK= N #5%,%%% I #$66,%%% $. +ctual total factory overhead incurred I #$66,%%% N #$,%%% I
%123&$$$
6. "otal factory overhead applied in :ctober I #$66,%%% N #&,J%% I
%12#&$$
). "otal factory overhead application rate per K= I #$6G,J%% ÷ $8,%%% I ?ariable overhead application rate per K= I (ixed factory overhead application rate per K=
#&.6% 7.%%
I
'udgeted total K=s I 'udgeted (ixed :verhead ÷ (ixed :verhead +llocation LateBK= I #5%,%%% ÷ #).6%BK= I
#).6% 15&25 DLH
14-! F*+-V(+(06 A0(799 *' T*( O)+8( V(+(06 (0 S;;(+7 *+0( E0+9 /45 ;09 $. Ctandard (actory :verhead Lates ?ariable factory : (ixed factory : "otal
#),J%%,%%% ÷ J%%,%%% K=s I # J.%%per K= #),%%%,%%% ÷ J%%,%%% K=s I # 5.%%per K= #$$.%% per K=
a. R b. ?ariable manufacturing overhead variances
+ctual 9ost
#)$5,%%%
(' for ?ariable :verhead based on Inputs i.e., +ctual ours Aor3ed I C; x +<
(' for ?ariable :verhead based on Output i.e., on allowed hours for nits produced I C; x C<
5),5%% K=s x #J.%%BK= I #)6$,%%%
6J,%%% units x 6 K=Bunit I 56,%%% K=s x #JBK= I #)$6,%%%
Cpending ?ariance
Efficiency ?ariance
I %&$$$ F a
I %#&$$$ U b
c. R d. (ixed manufacturing overhead variances 'udgeted fixed manufacturing overhead per month/ #),%%%,%%% ÷$6 months I #65%,%%% A6(
B>
#6J%,%%%
#65%,%%%
A?? 6J,%%% x 6 x #5 I #6J%,%%%
Cpending ?ariance
;roduction ?olume ?ariance
I %1$&$$$ U c
I %1$&$$$ F d
e. nder* or overapplied manufacturing overhead #)$5,%%% N #6J%,%%% H #)$6,%%% N #6J%,%%% I #),%%% underapplied or, #J,%%%( H #G,%%% H #$%,%%% N #$%,%%%( I #),%%% underapplied
14-! 9ontinued 6. S;;(+7 *+0( E0+9 this solution assumes that the company uses an actual and an applied account for variable overhead and an actual and an applied account for fixed overhead costs/ Kr. ?ariable (actory :verhead>+ctual #)$5,%%% 9r. tilities ;ayable, wages payable, etc. "o record actual variable overhead costs for the period.
#)$5,%%%
Kr. A1; 1nventory #)$6,%%% 9r. ?ariable (actory :verhead>+pplied "o apply standard variable overhead costs to production.
#)$6,%%%
Kr. ?ariable (actory :verhead>+pplied #)$6,%%% Kr. ?ariable :verhead Efficiency ?ariance #G,%%% 9r. ?ariable :verhead Cpending ?ariance 9r. ?ariable (actory :verhead>+ctual "o record variable overhead variances for the period.
#J,%%% #)$5,%%%
Kr. (ixed (actory :verhead>+ctual #6J%,%%% 9r. Calaries payable, accumulated depreciation, etc. "o record actual fixed overhead costs for the period.
#6J%,%%%
Kr. A1; 1nventory #6J%,%%% 9r. (ixed (actory :verhead>+pplied "o apply standard fixed overhead costs to production.
#6J%,%%%
Kr. (ixed (actory :verhead>+pplied Kr. (ixed (actory :verhead Cpending ?ariance 9r. ;roduction ?olume ?ariance 9r. (ixed (actory :verhead>+ctual "o record fixed overhead variances for the period.
#6J%,%%% #$%,%%% #$%,%%% #6J%,%%%
). 9losing Oournal Entry/ Kr. ?ariable :verhead Cpending ?ariance Kr. ;roduction ?olume ?ariance Kr. 9ost of Doods Cold 9DC 9r. ?ariable :verhead Efficiency ?ariance 9r. (ixed :verhead Cpending ?ariance
#J,%%% #$%,%%% #),%%% #G,%%% #$%,%%%
14-" A V(+(, (0'(6+0> C*9 V(+(069 /5$$ ;09 $. "he #77,%%% unfavorable variance between budgeted and actual contribution margin for the chocolate nut supreme coo3ie product line during +pril 6%%& is explained by the following variances. a. Celling price variance I +< x +; H C; +ctual/ #),555,%%% ÷ 75%,%%% units I 'udgeted/ #),6%%,%%% ÷ 7%%,%%% units I Celling price variance per unit +; H C;/ !umber of units +< "otal selling price variance b. @aterial price variance I +< x +; H C;/ 9oo3ie mix/ 7,J5%,%%% x #%.%6 H #%.%6 I @il3 9hocolate/ 6,JJ%,%%% x #%.6% H #%.$5 I +lmonds/ 78%,%%% x #%.5% H #%.5% I "otal
#&.G% per unit 8.%% per unit #%.$% x 75%,%%% %45&$$$ U #
% $)),%%% % %133&$$$ U
c. @aterial usage variance I C; x +< H C</ 9oo3ie mix/ #%.%6 x 7,J5%,%%% H $% x 75%,%%% unitsF I #),%%% @il3 9hocolate/ #%.$5 x 6,JJ%,%%% H 5 x 75%,%%% unitsF I J$,5%% +lmonds/ #%.5% x 78%,%%% H $ x 75%,%%% unitsF I $5,%%% "otal %!#&5$$ U d. =abor efficiency variance I C; x +< H C</ @ixing/ #$7.7% per hour ÷ J% minutes x 75%,%%% minutes H $ min. x 75%,%%%F I 'a3ing/ #$8.%% per hour ÷ J% minutes x 8%%,%%% minutes H 6 min. x 75%,%%% unitsF I "otal
#
%
)%,%%% ( % 3$&$$$ F
e. ?ariable overhead efficiency variance I C; x +< H C< Ctandard variable overhead rate per minute, C;/ #)6.7%BK= ÷ J% minutesBK= I #%.57 Ctandard hours in minutes, C
%54&$$$ F
14-" continued*$ f. ?ariable overhead spending variance I actual variable overhead H actual minutes x standard overhead rate +ctual minutes/ $,65%,%%% Ctandard variable : rate per minute/ x #%.57 #J&5,%%% +ctual total variable overhead H &5%,%%% %!5&$$$ U ?ariable overhead spending variance g. Cales volume variance, in terms of contribution margin I 'udgeted cmBunit x +< H 'udgeted Cummary/ a. Cales price variance b. @aterial price variance c. @aterial -uantity variance d. =abor efficiency variance e. ?ariable overhead efficiency variance f. ?ariable overhead spending variance g. Cales volume variance "otal
#7.%G x
5%,%%% %2$4&5$$ F # 75,%%% $)),%%% &G,5%% )%,%%% ( 57,%%% ( &5,%%% 6%7,5%% ( # 77,%%%
6. a. K=s may not be the most appropriate base for +unt @ollyZs :ld (ashioned 9oo3ies because it may not be the activity that drives variable overhead costs. + good indication of this disconnection is shown in the variance analysis. "he labor efficiency variance is favorable, while the variable overhead spending variance is unfavorable. +nother problem is that ba3ing re-uires considerably more power than mixing. +s such, indicated product costs might be distorted if K=s rather than a more meaningful activity measure were used to assign factory overhead costs i.e., manufacturing support costs to products. b. +ctivity*based costing +'9 may solve the problems described in Le-uirement 6a above and, therefore, is an alternative that +unt @ollyZs should consider. Cince K= does not seem to have a direct cause*and*effect relationship with variable overhead costs, the company should try to identify the activity or activities that drive these costs. 1f the same proportion of these activities is used in all of +unt @ollyZs products, then +'9 may not be worthwhile, in a cost*benefit sense0 however, if the products re-uire a different mix of these activities, then +'9 might be worthwhile because it yields more accurate product*cost data for decision*ma3ing and more accurate flexible*budgets for cost*control purposes.
14-" 9ontinued*6 N*: +n Excel spreadsheet solution for part $ of this problem is embedded below. You can open this “object by doing the following/ $. Light clic3 anywhere in the wor3sheet area. 6. Celect “wor3sheet object and then select “:pen. ). "o return to the Aord document, select “(ile and then “9lose and return to... while you are in the spreadsheet mode. "he screen should then return you to this document
14-# C*;?(+0> A6( @8 B> O)+8( C*99 /45 ;09 $. "he four cost variances covered below in items a H d provide the basis for a reconciliation of the #7$,G%% variance between budgeted and actual factory overhead costs for !ovember 6%%&. a. *ales volume variance, measured in terms of variable overhead cost I +ctual units H 'udgeted units x Ctandard variable overhead rate I 86,%%% H 8%,%%% x #$Bunit I %2&$$$ U b. Variable overhead efficiency variance I +ctual hours H Ctandard hours allowed for output achieved x Ctandard variable overhead rateBhour I C; x +< H C< +ctual hours wor3ed, +< I
#67J,%%% ÷ #$6BK= I
6%,5%% K=s
Ctandard hours allowed, C< I 86,%%% units x %.65K=Bnit I
6%,5%% K=s
Kifference in hours, +< H C< I ∴
?ariable overhead efficiency variance I
*%* %$
c. Variable overhead spending variance I +ctual variable overhead H (' based on Output I +ctual variable :? H +ctual units x Ctandard variable overhead rate I #G8,7%% H 86,%%% x #$Bunit I #G8,7%% H #86,%%% I
%1&4$$ U
+lternatively, VO# spending variance I +< x +; H C; I 6%,5%% K=s x #G8,7%%B6%,5%%K=sF H #7.%%BK= I I 6%,5%% K=s x #7.8% H #7.%%BK= I
%1&4$$ U
d. Fixed overhead spending variance I +ctual fixed overhead cost H 'udgeted fixed overhead cost I +ctual fixed :? cost H "otal budgeted :? H budgeted variable :?F I #$7),5%% H #6%%,%%% H 8%,%%% x #$F I #$7),5%% H #$6%,%%% I %23&5$$ U Leconciliation of factory overhead master budget variance Cales volume variance, in terms of ?: costs
# 6,%%%
?ariable overhead efficiency variance
*%*
?ariable overhead spending variance
$J,7%%
(ixed overhead spending variance
6),5%%
"otal overhead master budget variance
#7$,G%%
14-# 9ontinued 6. 'ob Lic3er is li3ely to be pleased with some of the information provided by the analysis and should be motivated to see3 new productivity improvements. !evertheless, some of the information may be confusing and cause him to be concerned about some areas of the budget/
"he variable overhead sales volume variance shows that #6,%%% of the total variance was due to the increase in production from 8%,%%% to 86,%%% units0 if Lic3er was authori2ed to produce 86,%%% units, this variance is strictly a budgeting problem. :f the factory overhead variances the one that is most li3ely to reflect his performance is the factory overhead efficiency variance. "he report shows the operation meets the efficiency standard. "he variable overhead efficiency variance, which is 2ero, shows that direct labor has been productive. "he other variances are li3ely to contain the effects of factors beyond 'ob4s control. "he variable overhead spending variance, from the information provided, shows that most of the variance is due to overspending on indirect labor and power usage. Lic3er may be responsible for indirect labor and should be concerned about loo3ing for the causes of the overspending and implementing corrective action. "he fixed overhead spending variance reflects items in fixed overhead that would not generally be under Lic3erZs control. owever, there is a significant increase in -uality inspection expenses. +s the -uality of the wor3 that Lic3er is responsible for may affect expenditures in this area, he may wish to investigate this area more thoroughly.
14-!$ /A??0<: V(+(06 I0)9>(*0 0+ U06+(07 /2$25 ;09 $. ;ayoff "able Ctates of !ature
9ourses of +ction 1nvestigate Kon4t 1nvestigate
1n*9ontrol
:ut*of*9ontrol
(+ p) I %.8%
p I %.6%
#6%,%%% #%
#6%,%%% N #5%,%%% #65%,%%%
6. Expected cost of conducting/ +n investigation/
#6%,%%% x %.8 N #&%,%%% x %.6 I
!o investigation/
#65%,%%% x %.6 I#5%,%%%
#)%,%%%
'ased on the expected value of each course of action decision alternative, the manager should not conduct an investigation/ the expected cost of ma3ing an investigation U expected cost of not conducting an investigation. !7 Expected ?alue of ;erfect 1nformation E?;1 I maximum value the manager would
pay to have 3nowledge i.e., certainty of whether the process is in control or out of control. 1n this decision context, the E?;1 can be thought of as the difference between the expected cost with perfect information and the expected cost without perfect information. "o calculate the former, we need to choose for each possible state of nature the better course of action decisionF and then multiply the associated “cost by the probability of that state of nature occurring. Ae then sum these resulting expected costs to get the expected cost ith perfect information . E?;1 I expected average cost with perfect information H expected cost without perfect information I #6%,%%% x %.8% N #65%,%%% x %.6F H #)%,%%% I #)J,%%% I #$J,%%% N #5%,%%% H #)%,%%% I #JJ,%%% H #)%,%%% I %3&$$$
14-!1 /A??0<: I0)9>(*0 *' V(+(06 0+ U06+(07 /25 ;0 ;ayoff "able
27
Ctate of the @ar3et ;ossible 9ourses of +ction
Expected ?alue of Each +ction
Ctrong
Aea3
rob. I %.J
rob. I %.7
+dvertising
#$%,%%%,%%%
#7,%%%,%%%
#&,J%%,%%%
!o +dvertising
#8,%%%,%%%
#5,%%%,%%%
#J,8%%,%%%
Yes, the firm has a higher expected profit with advertising #&,J%%,%%% than without advertising #J,8%%,%%%. !ote that this conclusion is valid for decision* ma3ers who are ris3*neutral. 6. =et p be the probability that the mar3et is strong0 thus, the probability that the mar3et is wea3 is +p. +t the indifference point/ E +dvertising I E !o +dvertising
#$%,%%%,%%% p N #7,%%%,%%% +p I #8,%%%,%%% p N #5,%%%,%%% +p p I $B) and + p I 6B)
∴
"he manager is indifferent when the chance of a strong mar3et is ))M. ). E?;1 I Expected i.e., long*run average profit ith perfect information H expected i.e., long*run average profit ithout perfect information I #$%,%%%,%%% x %.J N #5,%%%,%%% x %.7F H #&,J%%,%%% E?;1 I #8,%%%,%%% H #&,J%%,%%% I %4$$&$$$ ∴
"he maximum amount, on an expected*value basis, that a rationale decision* ma3er would pay for perfect information is #7%%,%%%. :n average, perfect information would return #8,%%%,%%% per year, which is #7%%,%%% more than the expected payoff under uncertainly, #&,J%%,%%% see payoff table above.
14-!2 /A??0<: V(+(06 I0)9>(*0 U0+ U06+(07 /2$ ;09 =et p be the probability of the departmental labor process being out*of*control, 1 I the cost of conducting an investigation #J,%%%, the anticipated cost, 9, to correct an out*of*control process I #$8,%%%, and the accumulated costs, to the next decision point, of an out*of*control process I #)),%%%. "hen, ;ayoff "able Ctates of !ature
9ourses of +ction 1nvestigate
1n*9ontrol
:ut*of*9ontrol
+p
p
#J,%%%
Ko !ot 1nvestigate
#%
#J,%%% N #$8,%%% #)),%%%
(rom the above payoff table, we can represent the problem as follows/ we are loo3ing for the probability, p, such that the expected cost of each decision alternative course of action is the same. "hat is, E 1nvestigate I E Ko !ot 1nvestigate
#J,%%% x $H p N #67,%%% p I #)),%%% p
#$5,%%% p I #J,%%% p I $.4$
"hus, if the probability of the process being out*of*control, p, is 7%M, the decision*ma3er would be indifferent between conducting and not conducting an investigation of the reported variance/ the expected cost associated with each decision alternative would be the same. Ae can also use the formula in the text to calculate the indifference probability, p/ p I 1 B = H 9 I #J,%%%B#)),%%% H #$8,%%% I $.4$
14-!3 T@*-V(+(06 A0(799: S+)6 C*;?(07 E<(;? /3$ ;09 14-!3 T@*-V(+(06 A0(799: S+)6 C*;?(07 E<(;? /3$ ;09 $. 'udgeted number of letters of credit approved/ #$,%%%,%%% ÷ #6,%%% I 5%% :verhead application rates/ ?ariable/ #6,%%%Bletter of credit given N $M of the amount of credit issued (ixed/ #5%%,%%% N #5%,%%% N #$%,%%% ÷ 5%% I #$,$6%Bletter of credit issued ). +ctual overhead costs incurred/ ?ariable/ (ixed/ "otal
#6,%%% x J%% x %.&5 x $$%M I#GG%,%%% 1nsurance premium 6&%,%%% #5J%,%%% x G5M I
#$,6J%,%%% 5)6,%%% #$,&G6,%%%
(lexible 'udget/ ?ariable/
#6,%%% x J%% x %.&5 1nsurance premium #6&%,%%% ÷ %.G I
I #G%%,%%% I )%%,%%% #$,6%%,%%%
(ixed
5J%,%%%
"otal
#$,&J%,%%%
:verhead controllable flexible*budget variance
% 32&$$$ U
(lexible*budget/
#$,&J%,%%%
:verhead applied
#),$6% x J%% x %.&5 I #$,7%7,%%% #6,&%%,%%%B$ * %.$% I
)%%,%%%
:verhead volume variance
$,&%7,%%% %
5&$$$ U
"otal overhead variance for the period I actual overhead costs H applied overhead costs I #$,&G6,%%% H #$,&%7,%%% I #88,%%% underapplied
14-!4 E86( C*09+(*09 /4$ ;09 $.
:perating income as currently reported
#G,J%%,%%%
;roduction volume variance/
#G,%%%,%%% x %.6 I
:perating income before adjusting for volume variance
$,8%%,%%% #&,8%%,%%%
9urrent fixed overhead application rate per machine hour/ #G,%%%,%%%
÷
5%,%%% machine hours I
#$8%.%%
Levised fixed overhead application rate per machine hour/ #G,%%%,%%%
÷
6,5%%,%%% machine hours I
).J%
Kecrease in fixed overhead application rate per machine hour "otal standard hours for the units manufactured in 6%%& Kecrease in fixed overhead applied I increase in reported operating income if the volume variance is capitali2ed Levised operating income under given assumptions
#$&J.7% x
7%,%%%
#&,%5J,%%% #&77,%%%
9hanges in operating income :perating income as currently reported Levised operating income
#G,J%%,%%% &77,%%%
9hange improvement in operating income
#8,85J,%%%
Elimination of unfavorable production volume variance
#$,8%%,%%%
or, Kecrease in fixed overhead applied to production 9hange improvement in operating income 6.
&,%5J,%%% #8,85J,%%%
+s indicated by the discussion in the text, there is a great deal of judgment involved in determining the “denominator activity level used to set the predetermined fixed overhead application rate. "hat is, there is not necessarily a clear*cut answer to this issue. ;ossible denominator levels include/ budgeted forecasted output, normal capacity, practical capacity, or theoretical capacity. "he numbers assumed in this problem might be viewed as extreme or contrived, but this was done to drive home the point to students that choices made regarding the treatment of fixed overhead for product*costing purposes, including how variances are disposed of for reporting purposes, can affect the amount of operating profit that an organi2ation reports. "hat is, these choices can be used by managers to “smooth reported earnings i.e., can be used to increase or to decrease reported accounting income.
14-!4 9ontinued :ur position is that a certain amount of latitude should be afforded managers in regard to setting fixed overhead rates specifically, choice of denominator activity level and the manner in which standard cost variances are treated at the end of the year. "hus, one approach to this -uestion is to focus on intent. ere the 1@+4s *tatement of Ethical rofessional ractice www.imanet.org may be helpful. "his statement refers to four ethical standards of behavior for management accountants/ 9ompetence0 9onfidentiality0 1ntegrity0 and, 9redibility. "he present case raises issues regarding the fourth of these standards, 9redibility. “Each member of the profession has a responsibility to/ communicate information fairly and objectively0 and, to disclose all relevant information that could reasonably be expected to influence an intended user4s understanding of reports, analyses, or recommendation. nder this standard, therefore, one might argue that it would be unethical for the ?; of (inance to change the denominator activity level solely to improve reported operating results, particularly when these results would then be communicated to financial analysts i.e., to the “mar3et. +t a minimum, full disclosure would dictate that this corporate executive would accompany any such operating results with details regarding the treatment of fixed overhead costs for product*costing and income*determination purposes. (inally, students might note that the standard of “competence applies to the given scenario. ;art of this *tandard states that members are expected “to perform professional duties in accordance with relevant...technical standards. +t issue is whether a production volume variance should be capitali2ed carried forward on the balance sheet. 1n order to do this, one would have to maintain that this item meets the test of being an “asset>that is, something that would benefit one or more future periods. "he underlying costs associated with a production volume variance are capacity*related costs which, by definition, expire with the passing of time. "hus, by capitali2ing the volume variance the ?; of (inance may, in fact, be violating a basic accounting standard.
14-!5 ABC )+99 T+(*0( A??+*(689 * C*0+* *' O)+8( C*99 /5$ ;09 +dditional information needed to solve this problem highlighted in bold/
nits produced and sold 'atch si2e units N*. *' ,(689 Cet*up hours per batch T*( S-? 8*+9 ?ariable :? cost per set*up hour T*( 9-?-+( )(+(, *)+8( 6*99 (ixed set*up*related costs per year F< 9-?-+( 6*999-? 8*+: %2$&$$$1$ 8*+9 %21&$$$1#1.25 8*+9
'udgeted Lesults $%,%%% 65% 4$ 7 1$ #6%.%% %3&2$$ #6%,%%%
+ctual Lesults G,%%% 6%% 45 7.65 1#1.25 #$G.%% %3&33.!5 #6$,%%%
%125.$$ %1$#."$4
!ote that the control flexible budget for set*up*related variable overhead costs should be based in this case on set*up hours the controllable factor. "hus, given an output last year of G,%%% units, the company should have used )J batches G,%%% unitsB65% units per batch. +t a standard of 7.% set*up hours per batch, the G,%%% units produced e-uates to $77 set*up hours. $ a (ixed overhead spending variance I +ctual fixed setup*related costs H budgeted fixed setup*related costs I #6$,%%% H #6%,%%% I %1&$$$U b ;roduction volume variance I budgeted fixed setup*related costs H applied fixed setup*related overhead costsI #6%,%%% H )J batches x 7 setup*hoursBbatch x #$65.%%Bsetup hour I #6%,%%% H #$8,%%% I %2&$$$U "otal fixed overhead variance I fixed overhead spending variance N production volume variance I #$,%%% N #6,%%% I #),%%% +s the name implies, the fixed overhead spending variance means that last spending on setup*related fixed overhead costs was #$,%%% more than what was envisioned when the master budget was prepared. "he production volume variance in this context means that capacity, measured in terms of budgeted setup hours, was not fully utili2ed during the period. Cpecifically, the standard allowed setup hours for this year4s production, $77, was $J less than capacity available $J% hours. "hus, #6,%%% I $J hours x #$65Bhour.
14-!5 9ontinued*$ 6 a variable setup*related overhead spending variance I actual variable setup* related overhead costs H budgeted variable setup*related overhead costs based on inputs i.e., based on actual setup hours wor3ed during the year I actual batches x actual setup hoursBbatch x actual variable setup*related overhead costsBsetup hour H actual batches x actual setup hoursBbatch x budgeted variable setup*related overhead costsBsetup hour I 75 batches x 7.65 setup*hoursBbatch x #$G.%%Bsetup hour H 75 batches x 7.65 setup*hoursBbatch x #6%.%%Bsetup hour I #),J)).&5 H #),865.%% I %1#1.25F b variable setup*related overhead efficiency variance I (' for variable setup* related overhead costs based on Inputs H (' for variable setup*related overhead costs based on Outputs I #),865 H )J batches x 7 setup*hoursBbatch x #6%.%%Bsetup hour I #),865 H #6,88% I %#45U "he favorable spending variance is attributable to spending on variable setup* related overhead costs being #$.%% per hour less than budgeted. "his amount could be bro3en down further if we had additional data regarding the components of this cost i.e., materials and electricity costs. "he unfavorable efficiency variance for variable setup*related overhead costs is due to a combination of the following two factors/ $ the actual output of the period G,%%% units too3 G more batches than standard actual [ of batches I 750 standard allowed batches I )J, as shown above0 and 6 each setup too3 slightly more time than standard 7.65 hoursBsetup vs. 7.%% hoursBsetup. "he net unfavorable variable setup*related overhead variance indicates that the favorable spending variance was not enough to offset the unfavorable efficiency variance. ) (ixed setup*related overhead costs are controlled primarily prior to the point of operations. "hat is, they are controlled primarily through the planning process for example, the capital budgeting process or the use of 2ero*based budgeting. "hese costs basically relate to the capacityBability to produce. :n the other hand, variable setup*related costs, by definition, vary in response to one or more underlying causal factors cost drivers. "herefore, these costs are controlled by attempting to identify and eliminate non*value*added activities and to perform value*added activities more efficiently. +'9 systems, because of their focus on costing of activities, should provide greater control of variable setup* related overhead costs, compared to the use of traditional systems. (or example, in this problem we assumed that prior to the current year the company in -uestion allocated all setup*related overhead costs by a single, volume*based activity measure/ number of machine hours. "his approach a fails to recogni2e that some of these overhead costs are capacity*
14-!5 9ontinued*6 related and therefore controlled differently, and b fails to identify meaningful strategies for cost control. Ahen machine hours are used as the basis for cost allocation and some costs as in this case are not related to machine hours, then the variable overhead spending variance based on machine hours will include the effect of spending on these other activities>in other words, the reported variance does not yield actionable information. (urther, the use of +'9 allows the accountant to isolate spending and efficiency variances at different levels in the cost hierarchy. +s in the present case, the analysis of batch*level support costs would reveal financial tradeoffs of using larger lot si2es compared to the lot si2e assumed for flexible*budgeting purposes. 7 @ost companies find that a comprehensive control system consists of both financial and nonfinancial performance indicators. "hus, one would expect that operating units in the 'angor @anufacturing 9ompany would have timely access to nonfinancial performance indicators such as process yields e.g., ratio of good outputs to inputs, manufacturing processing time, reject rates, percent first*pass yield, defect rates e.g., parts*per*million, ppm, etc. Cuch information has the advantage of being expressed in a manner that is readily interpretable by operating personnel. +s well, these data direct wor3er attention to actionable steps when a process is perceived to be out of control. "he financial performance indicators are also helpful. (or one thing, they provide a common measure dollars that managers can use to evaluate tradeoffs e.g., larger lot si2es. (or another thing, dollar*based variance information provides decision*ma3ers with information that can be used to determine which variances should be investigated. (inally, the periodic financial performance indicators remind operating personnel of the financial impact of their actions and decisions.
14-! I06*;-S(;0 E''69 *' A+0() D0*;0(*+ A6)7 L)9 /455$ ;09 $ ;roduction ?olume ?ariance/
+lternative "heoretical ;ractical !ormal 'udgeted
'udgeted (ixed :verhead #)5%,%%% #)5%,%%% #)5%,%%% #)5%,%%%
Ctandard (ixed :? LateBour #$$.JJJ& #$6.GJ)% #$7.%%%% #$7.58))
Ctandard +llowed ours 67,5%% 67,5%% 67,5%% 67,5%%
(ixed :? +pplied to ;roduction #685,8)) #)$&,5G) #)7),%%% #)5&,6G6
;roduction ?olume ?ariance %4&1!U %32&4$!U %!&$$$U %!&2#2F
6 Ending 1nventory of (inished Doods/ "heoretical 'eg. 1nventory % ;lus/ nits ;roduced $6,65% =ess/ nits Cold $$,5%% nits in End. 1nventory &5% @fg. 9ostBnit/ ?ariable (ixed "otal End. 1nv. Q Ctd. 9ost
;ractical % $6,65% $$,5%% &5%
!ormal % $6,65% $$,5%% &5%
'udgeted % $6,65% $$,5%% &5%
#J%.65 #6).)) #8).58
#J%.65 #65.G) #8J.$8
#J%.65 #68.%% #88.65
#J%.65 #6G.$& #8G.76
%2&""
%4&32
%&1""
%!&$3
) ;rofit Leports/ "heoretical Levenues #$,$5%,%%% 9DC Q Ctandard 9ost #G$J,%6$ ;lusB@inus ?ol. ?ariance #J7,$J& 9DC, +djusted #G8%,$88 Dross ;rofit #$JG,8$) =ess/ :perating Expenses/ ?ariable #5J,G65 (ixed #J5,%%% "otal #$6$,G65 :perating ;rofit #7&,888 Dross ;rofit M :perating ;rofit M
14-! 9ontinued*$
$7.&&M 7.$JM
;ractical #$,$5%,%%% #G75,8)J #)6,7%& #G&8,67) #$&$,&5&
!ormal 'udgeted #$,$5%,%%% #$,$5%,%%% #GJG,J88 #G8),$%7 #&,%%% #&,6G6 #G&J,J88 #G&5,8$) #$&),)$) #$&7,$88
#5J,G65 #J5,%%% #$6$,G65 #7G,8)6
#5J,G65 #J5,%%% #$6$,G65 #5$,)88
#5J,G65 #J5,%%% #$6$,G65 #56,6J)
$7.G7M 7.66M
$5.%&M 7.7&M
$5.$5M 7.57M
9alculation of 9ost of Doods Cold Q Ctandard @anufacturing 9ost/ "heoretical 'eginning 1nventory #% ;lus/ 9ost of Doods @anufactured/ ?ariable @fg. 9osts$ #JG6,8&5 6 +pplied (ixed :? #685,8)) Doods +vailable for Cale #G&8,&%8 =ess/ Ending 1nventory #J6,J88 9DC Q Ctandard 9ost #G$J,%6$
;ractical #% #JG6,8&5 #)$&,5G) #$,%$%,7J8 #J7,J)6 #G75,8)J
!ormal #%
'udgeted #%
#JG6,8&5 #JG6,8&5 #)7),%%% #)5&,6G6 #$,%)5,8&5 #$,%5%,$J& #JJ,$88 #J&,%J) #GJG,J88 #G8),$%7
N*9: 1 #J%.65Bunit given 2 Cee part $ 7 "he primary point of the preceding analysis is that once it is maintained that products should be costed at full absorption cost, there is a need to “uniti2e budgeted fixed overhead manufacturing support costs. "o do this, the accountant must assume a level of activity over which the budgeted fixed costs can be spread. Kifferences in assumed activity level, as the example above shows, lead to differences in per*unit manufacturing costs and, in turn, in the amount of the production volume variance over* or under*applied budgeted fixed overhead. "he situation is further clouded by two factors/ a costs are allocated to products for different purposes e.g., planning and control, motivation, to meet financial reporting re-uirements and depending on the purpose, different denominator activity levels might be appropriate0 and b there are different end*of*year treatments for the disposal of the production volume variance that occurred during the year. 9hoice of the denominator activity level and some latitude in terms of how resulting volume variances are disposed of imply that short*term profit reporting can, at least to some extent, be “managed, just as shown in the example above. +s a general rule, as stated in the text, we favor the use of “practical capacity as the denominator volume used to set the standard fixed overhead allocation rate. (inally, we note that if either the allocation method or what is called rate*adjustment method where the cost of all jobs and units produced during the period is readjusted based on the actual manufacturing support cost per unit of activity the ability to manage earnings is somewhat decreased since the inventory and 9DC accounts after rate*readjustment approximate, if not e-ual, actual costs.
