15 Ch11 Mowen 1e Solutions PDF

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CCooppyyrriigghhtt ©© 22001122 bbyy NNeellssoonn EEdduuccaattiioonn LLttdd.. 1111 - - 11CHAPTER 11FLEXIBLE BUDGETS AND OVERHEAD ANALYSISDISCUSSION QUESTIONS A static budget is for a particular level of activity. A flexible budget is one that can be established for any level of activity. For performa...

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CHAPTER 11 FLEXIBLE BUDGETS AND OVERHEAD ANALYSIS DISCUSSION QUESTIONS 1. A static budget is for a particular level of activity. A flexible budget is one that can be established for any level of activity. 2. For performance reporting, it is necessary to compare the actual costs for the actual level of activity with the budgeted costs for the actual level of activity. A flexible budget provides the means to compute the budgeted costs for the actual level of activity, after the fact. 3. A flexible budget is based on a simple formula: Total costs (Y) = F + VX, where F = fixed costs and V = variable cost per unit; this requires knowledge of both fixed and variable components (see Cornerstone 11–2).

10.

Agree. This variance, assuming that variable overhead costs increase as labour usage increases, is caused by the efficiency or inefficiency of labour usage.

11.

The variable overhead efficiency variance values the difference between the actual hours and the hours allowed using the standard variable overhead rate, while the labour efficiency variance values the difference using the standard labour rate.

12.

Fixed overhead costs are either committed or discretionary. The committed costs will not differ by their very nature. Discretionary can vary, but the level the company wants to spend on these items is decided at the beginning and usually will be met unless there is a conscious decision to change the predetermined levels.

13.

The volume variance is caused by the actual volume differing from the expected volume used to compute the predetermined standard fixed overhead rate. An unfavourable volume variance occurs whenever the actual volume is less than the expected volume. Thus, an unfavourable volume variance means that actual volume is less than the expected volume.

4. A before-the-fact flexible budget allows managers to engage in sensitivity analysis by looking at the financial outcomes possible for a number of different plausible scenarios. 5. An after-the-fact flexible budget facilitates performance evaluation by allowing the calculation of what spending should have been for the actual level of activity. 6. An activity-based budget requires three steps: (1) identification of activities, (2) estimation of activity output demands, and (3) estimation of the costs of resources needed to provide the activity output demanded. 7. Functional-based flexible budgeting relies on unit-based drivers to build cost formulas for various cost items. Activity flexible budgeting uses activity drivers to build a cost formula for the costs of each activity. 8. An activity-based report compares the actual costs for the actual level of activity with the budgeted level for the actual level—but it does so for multiple activities and drivers. The increased accuracy results from the usage of drivers that have a causal relationship to predict what the costs should be for the actual level of activity.

14. If the actual volume is different from the expected, then the company has either lost or earned contribution margin. The volume variance signals this outcome, and if the variance is large, then the loss or gain is large since the volume variance understates the effect. 15.

The spending variance. This variance is computed by comparing actual expenditures with budgeted expenditures. The volume variance simply tells whether the actual volume is different from the expected volume.

9. Part of a variable overhead spending variance can be caused by inefficient use of overhead resources.

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11- 1

MULTIPLE-CHOICE EXERCISES 11–1

a

11–2

c

11–3

d

11–4

c

11–5

e

11–6

b

11–7

e

11–8

a

11–9

c

11–10

d

11–11

d

11–12

b

11–13

a

11–14

c

11–15

d

11–16

a

11–17

d

11–18

c

11-2

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CORNERSTONE EXERCISES Cornerstone Exercise 11–19 1.

Budgeted for 3,000 units Direct materials ($0.80 × 3 × 3,000) Direct labour ($12 × 0.5 × 3,000) Variable overhead ($1.50 × 0.5 × 3,000) Fixed overhead: Materials handling Depreciation Total

2.

$ 7,200 18,000 2,250 $6,200 2,600

8,800 $36,250

Performance Report Actual Units produced Direct materials Direct labour Variable overhead Fixed overhead: Materials handling Depreciation Total

Budgeted

Variance*

2,900

3,000

100 U

$ 6,900 17,340 2,200

$ 7,200 18,000 2,250

$(300) F (660) F (50) F

6,300 2,600 $35,340

6,200 2,600 $36,250

100 U — $(910) F

*Variances equal actual amounts less budgeted amounts. If actual cost is less than budgeted cost, the variance is F (favourable). If actual cost is more than budgeted cost, the variance is U (unfavourable).

Cornerstone Exercise 11–20

Direct materials Direct labour Variable overhead Fixed overhead: Materials handling Depreciation Total

2,500 units

3,000 units

3,500 units

$ 6,000 15,000 1,875

$ 7,200 18,000 2,250

$ 8,400 21,000 2,625

6,200 2,600 $31,675

6,200 2,600 $36,250

6,200 2,600 $40,825

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11-3

Cornerstone Exercise 11–21 Performance Report Actual Units produced Direct materials Direct labour Variable overhead Fixed overhead: Materials handling Depreciation Total

Budgeted

Variance*

2,900

2,900

—

$ 6,900 17,340 2,200

$ 6,960 17,400 2,175

$ (60) F (60) F 25 U

6,300 2,600 $35,340

6,200 2,600 $35,335

100 U — $ 5 U

*Variances equal actual amounts less budgeted amounts. If actual cost is less than budgeted cost, the variance is F (favourable). If actual cost is more than budgeted cost, the variance is U (unfavourable).

Cornerstone Exercise 11–22 1. Actual variable overhead rate (AVOR) =

=

Actual variable overhead Actual direct labour hours $163,172 36,100

= $4.52 per direct labour hour 2. Applied variable overhead = Actual units × SH × SVOR = 12,000 × 3 × $4.50 = $162,000 3. Actual variable overhead Applied variable overhead Total variable overhead variance

$163,172 162,000 $ 1,172 U

Note: The total variable overhead variance can also be calculated using the formula: Total variable overhead variance = (AH × AVOR) – (Actual units × SH × SVOR) = (36,100 × $4.52) – (12,000 × 3 × $4.50) = $1,172 U

11-4

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Cornerstone Exercise 11–23 1. Columnar approach: 1. AH × AVOR 36,100 × $4.52

2. AH × SVOR 36,100 × $4.50

$163,172

3. SH × SVOR 36,000 × $4.50

$162,450 $722 U Spending

$162,000 $450 U Efficiency

2. Variable overhead spending variance = (AVOR – SVOR) AH = ($4.52 – $4.50)36,100 = $722 U 3. Variable overhead efficiency variance = (AH – SH) SVOR = (36,100 – 36,000)$4.50 = $450 U 4. Variable overhead spending variance Variable overhead efficiency variance Total variable overhead variance

$ 722 U 450 U $1,172 U

Cornerstone Exercise 11–24 Overhead Cost Item

Cost Formula

Inspection Power Total

$1.80 2.70 $4.50

Actual Cost

Budget for Budget for Actual Spending At Standard Efficiency Hours Variance Hours Variance

$ 66,722 $ 64,980 96,450 97,470 $163,172 $162,450

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$ 1,742 U (1,020) F $ 722 U

$ 64,800 97,200 $162,000

$180 U 270 U $450 U

11-5

Cornerstone Exercise 11–25 1. Standard hours for actual units = SH per unit × Actual units produced = 3 × 12,000 = 36,000 2. Applied fixed overhead = Standard hours for actual units × SFOR = 36,000 × $7 = $252,000 3. Actual fixed overhead Applied fixed overhead Total fixed overhead variance

$250,895 252,000 $ (1,105) F

Cornerstone Exercise 11–26 1. Columnar approach: 1. AH × AFOR 36,100 × $6.95

2. AH × SFOR 36,100 × $7.00

$250,895

3. SH × SFOR 36,000 × $7.00

$252,700 $1,805 F Spending

$252,000 $700 U Volume

2. Fixed overhead spending variance = (AFOR – SFOR)AH = ($6.95 – $7.00)36,100 = $1,805 F 3. Fixed overhead efficiency variance = (AH – SH)SFOR = (36,100 – 36,000)$7.00 = $700 U 4. Fixed overhead spending variance Fixed overhead efficiency variance Total fixed overhead variance

11-6

$1,805 F 700 U $1,105 F

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Cornerstone Exercise 11–27 Salaries (7 inspectors × $35,000) Supplies (130,000 × $0.60) Workbenches, computer depreciation Factory space, utilities Total inspection cost

$245,000 78,000 16,700 13,400 $353,100

Cornerstone Exercise 11–28

Maintenance Machining Subtotal

Setting up

Purchasing Total

Fixed $40,000 25,000 $65,000

Variable $2.50 3.00 $5.50

Fixed —

Variable $2,250

Fixed $75,000

Variable $6.00

Required for 40,000 units 60,000 units 60,000 mhrs 90,000 mhrs $190,000 $265,000 205,000 295,000 $395,000 $560,000 50 setups $112,500

70 setups $157,500

Purchase Orders 10,000 $135,000 $642,500

Purchase Orders 16,000 $171,000 $888,500

Cornerstone Exercise 11–29 Performance Report Actual Units produced Maintenance Machining Setting up Purchasing Total

Budgeted

32,000

32,000

$187,300 204,000 114,000 135,300 $640,600

$190,000 205,000 112,500 135,000 $642,500

Variance* — $(2,700) (1,000) 1,500 300 $(1,900)

F F U U F

*Variances equal actual amounts less budgeted amounts. If actual cost is less than budgeted cost, the variance is F (favourable). If actual cost is more than budgeted cost, the variance is U (unfavourable).

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11-7

EXERCISES Exercise 11–30 1.

Performance Report Actual Units produced

2,600

Direct materials cost Direct labour cost Total a b

Budgeted 2,500

100 F a

$15,250 16,000 $31,250

Variance

$15,000 15,000b $30,000

$ 250 U 1,000 U $1,250 U

2 leather strips × $3 per strip × 2,500 units 0.5 direct labour hour × $12 × 2,500 units

2. The performance report compares costs at two different levels of activity—2,600 units actually produced and 2,500 units budgeted—and so cannot be used to assess efficiency.

Exercise 11–31 1.

Flexible Budget for Direct materials Direct labour Variable overhead Fixed overhead Total

Cost Formula

2,000 units

3,000 units

4,000 units

$ 6.00 6.00 0.50 4,500

$12,000 12,000 1,000 4,500 $29,500

$18,000 18,000 1,500 4,500 $42,000

$24,000 24,000 2,000 4,500 $54,500

2. Unit cost at 2,000 units =

$29,500 = $14.75 2,000

Unit cost at 3,000 units =

$42,000 = $14.00 3,000

Unit cost at 4,000 units =

$54,500 = $13.625 4,000

The cost per unit goes down as the number of units produced increases because fixed cost is spread over a greater number of units.

11-8

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Exercise 11–32 1.

CHC Inc. Overhead Budget For the Coming Year Activity Level 150,000 Hours

Formula Variable costs: Maintenance Power Indirect labour Total variable costs Fixed costs: Maintenance Indirect labour Rent Total fixed costs Total overhead costs

$0.30 0.40 1.80

$ 45,000 60,000 270,000 $375,000 $165,000 126,500 28,000 $319,500 $694,500

2. Direct labour hours for 15% higher production = 150,000 + 0.15(150,000) = 172,500 Direct labour hours for 15% lower production = 150,000 – 0.15(150,000) = 127,500

Formula Variable costs: Maintenance Power Indirect labour Total variable costs Fixed costs: Maintenance Indirect labour Rent Total fixed costs Total overhead costs

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$0.30 0.40 1.80

Activity Level 172,500 Hours 127,500 Hours $ 51,750 69,000 310,500 $431,250

$ 38,250 51,000 229,500 $318,750

$165,000 126,500 28,000 $319,500 $750,750

$165,000 126,500 28,000 $319,500 $638,250

11-9

Exercise 11–33 1.

Performance Report Direct labour hours based on actual Variable overhead: Maintenance Power Indirect labour Rent Total overhead

Actual

Budgeted

Variance

156,000

156,000

—

$207,800 63,000 435,000 28,000 $733,800

$211,800 62,400 407,300 28,000 $709,500

$ (4,000) 600 27,700 — $24,300

F U U U

Exercise 11–34 1. Standard direct labour hrs required= Actual deliveries × Standard direct labour hrs = 42,000 × 0.75 = 31,500 direct labour hours 2. Variable overhead analysis: Actual VOH

Budgeted VOH $4.05 × 30,000 hrs $121,500

$138,000 $16,500 U Spending

Applied VOH $4.05 × 31,500 hrs $127,575 $6,075 F Efficiency

Exercise 11–35 1. Standard fixed overhead rate (SFOR) = =

Budgeted fixed overhead Practical capacity $405,000 33,750 direct labour hours

= $12

11-10

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Exercise 11–35 (Concluded) 2. Fixed overhead analysis: Actual FOH

Budgeted FOH $12 × 33,750 $405,000

$420,000 $15,000 U Spending

Applied FOH $12 × 31,500 $378,000 $27,000 U Volume

Exercise 11–36 1. Variable overhead analysis: Actual VOH

Budgeted VOH $1.50 × 290,000 $435,000

$436,000 $1,000 U Spending

Applied VOH $1.50 × 280,000 $420,000 $15,000 U Efficiency

2. Fixed overhead analysis: Actual FOH

Budgeted FOH $4 × 288,000 $1,152,000

$1,160,000 $8,000 U Spending

Applied FOH $4 × 280,000 $1,120,000 $32,000 U Volume

Note: Practical volume in hours = 2 × 144,000 = 288,000 hours.

Exercise 11–37 1. Fixed overhead rate =

$1,320,000 = $1.10 per DLH 1,200,000 *

*Budgeted hours = 2,400,000 units × 0.5 direct labour hours = 1,200,000 SH = 2,360,000 units × 0.5 direct labour hours = 1,180,000 Applied FOH = $1.10 × 1,180,000 = $1,298,000

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11-11

Exercise 11–37 (Concluded) 2. Fixed overhead analysis: Actual FOH

Budgeted FOH $1.10 × 1,200,000 $1,320,000

$1,260,000 $60,000 F Spending 3. Variable OH rate =

Applied FOH $1.10 × 1,180,000 $1,298,000 $22,000 U Volume

$2,700,000 - $1,320,000 1,200,000

= $1.15 per DLH 4. Variable overhead analysis: Actual VOH

Budgeted VOH $1.15 × 1,190,000 $1,368,500

$1,410,000 $41,500 U Spending

Applied VOH $1.15 × 1,180,000 $1,357,000 $11,500 U Efficiency

Exercise 11–38 1. Standard hours for budgeted production = Budgeted units × Standard hours per unit = 280,000 × 0.90 = 252,000 standard hours Fixed overhead rate = =

Budgeted fixed overhead Budgeted standard hours $1,386,000 = $5.50 per DLH 252,000

2. Applied FOH = Fixed overhead rate × Standard hours for actual production = $5.50 × (291,000 units × 0.90 direct labour hour) = $1,440,450

11-12

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Exercise 11–38 (Concluded) 3. Fixed overhead analysis: Actual FOH $1,410,000

Budgeted FOH $1,386,000 $24,000 U Spending

Applied FOH $1,440,450 $54,450 F Volume

Budgeted variable overhead Budgeted standard hours $801,360 = 280,000 × 0.90 = $3.18 per DLH

4. Variable OH rate =

5. Variable overhead analysis: Actual VOH

Budgeted VOH

$829,000

$801,360 $27,640 U Spending

Applied VOH $3.18 × 261,900* $832,842 $31,482 F Efficiency

*Actual units × Standard hours per unit = 291,000 × 0.90

Exercise 11–39 Performance Report For the Year Ended December 31

Cost Labour Supplies Total

Cost Formulaa

Actual Costs

$15.00 1.00 $16.00

$29,800 2,200 $32,000

Budget for Actual Spending Hoursb Variancec $31,200 2,080 $33,280

$(1,400) F 120 U $(1,280) F

Budget for Standard Hoursd $30,000 2,000 $32,000

Efficiency Variancee $1,200 U 80 U $1,280 U

a

Per direct labour hour. Computed using the cost formula and 2,080 actual hours. c Spending variance = Actual costs – Budget for actual hours. d Computed using the cost formula and 2,000 standard hours for actual production. e Efficiency variance = Budget for actual hours – Budget for standard hours.

b

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11-13

Exercise 11–40 1. Salaries (4 workers × $30,000) Supplies (130,000 × $0.50) Workbenches, computers depreciation Factory space, utilities Total receiving cost 2. Cost per receiving order =

$120,000 65,000 5,800 10,400 $201,200

$201,200 = $1.55 per receiving order 130,000

Exercise 11–41

Engineering

Fixed $50,000

Variable $5.50

Required for 40,000 units 50,000 units 500 eng. hrs 750 eng. hrs $52,750 $54,125

Machining

Fixed $25,000

Variable $2.00

60,000 mhrs $145,000

75,000 mhrs $175,000

Purchase Orders 12,000 $110,200 $307,950

Purchase Orders 16,000 $132,600 $361,725

Receiving Total

Fixed $43,000

Variable $5.60

Exercise 11–42 Performance Report Actual Units produced Maintenance Machining Setting up Purchasing Total

11-14

Budgeted

572,000

572,000

$ 365,300 290,500 209,500 137,750 $1,003,050

$ 360,000 289,800 210,000 140,600 $1,000,400

Variance — $ 5,300 700 (500) (2,850) $ 2,650

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U U F F U

PROBLEMS Problem 11–43 1. Direct labour hours= (100,000 bags × 0.25 hours) + (100,000 bags × 0.30 hours) = 25,000 + 30,000 = 55,000 direct labour hours 2.

Pet-Care Company Overhead Budget For the Coming Year Formula Variable costs: Maintenance Power Indirect labour Total variable costs Fixed costs: Maintenance Indirect labour Rent Total fixed costs Total overhead costs

$0.40 0.50 1.60

Activity Level 55,000 Hours* $22,000 27,500 88,000 $137,500 $17,000 26,500 18,000 61,500 $199,000

*Based on Requirement 1

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