Ch11 Solns Manual Mowen 3Ce PDF

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Copyright © 2018 by Nelson Education Ltd. 11-CHAPTER 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 performance reporting, it is necessary to compare t...

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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). 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.

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.

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 is more important. 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.

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

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11-1

CORNERSTONE EXERCISES Cornerstone Exercise 11–1 1.

Budgeted for 5,000 units Direct materials ($0.75 × 2 × 5,000) Direct labour ($21 × 0.8 × 5,000) Variable overhead ($2.45 × 0.8 × 5,000) Fixed overhead: Materials handling Depreciation Total

2.

$ 7,500 84,000 9,800 $6,800 3,200

10,000 $111,300

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

Budgeted

Variance*

4,200

5,000

800 U

$ 6,900 81,300 9,500

$ 7,500 84,000 9,800

$ (600) F (2,700) F (300) F

7,100 3,200 $108,000

6,800 3,200 $111,300

300 U — $(3,300) 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 11–2

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

11-2

3,500 units

4,000 units

4,500 units

$ 5,250 58,800 6,860

$ 6,000 67,200 7,840

$ 6,750 75,600 8,820

6,800 3,200 $80,910

6,800 3,200 $91,040

6,800 3,200 $101,170

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Cornerstone Exercise 11–3 Performance Report Actual Units produced Direct materials Direct labour Variable overhead Fixed overhead: Materials handling Depreciation Total

Budgeted

Variance*

4,400

4,400

—

$ 6,550 74,100 8,722

$ 6,600 73,920 8,624

$ (50) F 180 U 98 U

6,890 3,200 $99,462

6,800 3,200 $99,144

90 U — $318 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 11–4 1. Actual variable overhead rate (AVOR) =

Actual variable overhead Actual direct labour hours

= $206,816/56,200 = $3.68 per direct labour hour 2. Applied variable overhead = Actual units × SH × SVOR = 14,000 × 4 × $3.70 = $207,200 3. Actual variable overhead Applied variable overhead Total variable overhead variance

$206,816 207,200 $ (384) F

Note: The total variable overhead variance can also be calculated using the formula: Total variable overhead variance = (AH × AVOR) – (Actual units × SH × SVOR) = (56,200 x $3.68) – (14,000 × 4 × $3.70) = $(384) F

Copyright © 2018 by Nelson Education Ltd.

11-3

Cornerstone Exercise 11–5 1. Columnar approach: 1. AH × AVOR 56,200 × $3.68

2. AH × SVOR 56,200 × $3.70

$206,816

3. SH × SVOR 56,000 × $3.70

$207,940 $1,124 F Spending

$207,200 $740 U Efficiency

2. Variable overhead spending variance = (AVOR – SVOR) AH = ($3.68 – $3.70)56,200 = $(1,124) F 3. Variable overhead efficiency variance = (AH – SH) SVOR = (56,200 – 56,000)$3.70 = $740 U 4. Variable overhead spending variance Variable overhead efficiency variance Total variable overhead variance

$(1,124) F 740 U $ (384) F

Cornerstone Exercise 11–6 Overhead Cost Item

Cost Formula

Actual Cost

Inspection Power Total

$2.00 1.70 $3.70

$ 112,300 94,516 $206,816

11-4

Budget for Budget for Actual Spending At Standard Efficiency Hours Variance Hours Variance $ 112,400 95,540 $207,940

$ (100) F (1,024) F $(1,124) F

$ 112,000 95,200 $207,200

$400 U 340 U $740 U

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Cornerstone Exercise 11–7 1. Standard hours for actual units = SH per unit × Actual units produced = 4 x 14,000 = 56,000 2. Applied fixed overhead = Standard hours for actual units × SFOR = 56,000 × $5 = $280,000 3. Actual fixed overhead Applied fixed overhead Total fixed overhead variance

$282,686 280,000 $ (2,686) U

Cornerstone Exercise 11–8 1. Columnar approach: 1. AH × AFOR 56,200 × $5.03

2. AH × SFOR 56,200 × $5.00

$282,686

3. SH × SFOR 56,000 × $5.00

$281,000 $1,686 U Spending

$280,000 $1,000 U Volume

2. Fixed overhead spending variance = (AFOR – SFOR)AH = ($5.03 – $5.00)56,200 = $1,686 U 3. Fixed overhead volume variance

4. Fixed overhead spending variance Fixed overhead volume variance Total fixed overhead variance

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= (AH – SH)SFOR = (56,200 – 56,000)$5.00 = $1,000 U $1,686 U 1,000 U $2,686 U

11-5

Cornerstone Exercise 11–9 Salaries (6 inspectors × $32,000) Supplies (170,000 × $0.70) Workbenches, computers depreciation Factory space, utilities Total inspection cost

$192,000 119,000 18,300 12,600 $341,900

Cornerstone Exercise 11–10

Maintenance Machining Subtotal Setting up

Purchasing Total

Fixed $50,000 25,000 $75,000

Variable $1.80 3.00 $4.80

Fixed —

Variable $2,100

Fixed $75,000

Variable $7.00

Required for 40,000 units 60,000 units 60,000 mhrs. 90,000 mhrs. $158,000 $212,000 205,000 295,000 363,000 507,000 50 setups 105,000

70 setups 147,000

Purchase Orders 12,000 159,000 $627,000

Purchase Orders 18,000 201,000 $855,000

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

Budgeted

40,000

40,000

$158,300 205,400 106,700 158,800 $629,200

$158,000 205,000 105,000 159,000 $627,000

Variance* — $ 300 400 1,700 (200) $2,200

U U U F 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).

11-6

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EXERCISES Exercise 11–12 1.

Performance Report Actual Units produced

Budgeted

5,200

Direct materials cost Direct labour cost Total

5,400 $259,200a 109,350b $368,550

$258,800 108,500 $367,300

Variance (200) U $ (400) F (850) F $(1,250) F

a4 b

metal plates × $12 per plate × 5,400 units 0.75 direct labour hour × $27 × 5,400 units

2. The performance report compares costs at two different levels of activity—5,200 units actually produced and 5,400 units budgeted—and so cannot be used to assess efficiency.

Exercise 11–13 1.

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

Cost Formula

3,500 units

4,000 units

4,500 units

$14.00 27.00 1.80 6,800

$ 49,000 94,500 6,300 6,800 $156,600

$ 56,000 108,000 7,200 6,800 $178,000

$ 63,000 121,500 8,100 6,800 $199,400

2. Unit cost at 3,500 units = $156,600/3,500 = $44.74 Unit cost at 4,000 units = $178,000/4,000 = $44.50 Unit cost at 4,500 units = $199,400/4,500 = $44.31 The cost per unit goes down as the number of units produced increases because fixed cost is spread over a greater number of units.

Copyright © 2018 by Nelson Education Ltd.

11-7

Exercise 11–14 1.

Hajiey Inc. Overhead Budget For the Coming Year Activity Level 90,000 Hours

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

$0.20 0.45 2.10

$ 18,000 40,500 189,000 247,500 86,000 140,000 35,000 261,000 $508,500

2. Direct labour hours for 15% higher production = 90,000 + 0.15(90,000) = 103,500 Direct labour hours for 15% lower production = 90,000 – 0.15(90,000) = 76,500

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

11-8

$0.20 0.45 2.10

Activity Level 103,500 Hours 76,500 Hours $ 20,700 46,575 217,350 284,625

$ 15,300 34,425 160,650 210,375

86,000 140,000 35,000 261,000 $545,625

86,000 140,000 35,000 261,000 $471,375

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Exercise 11–15 1.

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

Budgeted

93,000

93,000

$107,000 41,200 336,000 35,000 $519,200

$104,600 41,850 335,300 35,000 $516,750

Variance — $2,400 (650) 700 — $2,450

U F U U

Exercise 11–16 1. Standard direct labour hours required = Actual reservations × Standard direct labour hours = 6,700 × 1.4 = 9,380 direct labour hours 2. Variable overhead analysis: Actual VOH

Budgeted VOH $9.80 × 9,800 hrs. $96,040

$103,640 $7,600 U Spending

Applied VOH $9.80 × 9,380 hrs. $91,924 $4,116 U Efficiency

Exercise 11–17 1. Standard fixed overhead rate (SFOR) =

Budgeted fixed overhead Practical capacity

= $198,000/11,000 = $18.00

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11-9

Exercise 11–17 (Continued) 2. Fixed overhead analysis: Actual FOH

Budgeted FOH $18.00 × 11,000 $198,000

$199,600 $1,600 U Spending

Applied FOH $18.00 × 9,380 $168,840 $29,160 U Volume

Exercise 11–18 1. Variable overhead analysis: Actual VOH

Budgeted VOH $0.70 × 158,900 $111,230

$112,400 $1,170 U Spending

Applied VOH $0.70 × 159,200* $111,440 $210 F Efficiency

*Standard hours = 2 hours × 79,600 units = 159,200 hours 2. Fixed overhead analysis: Actual FOH

Budgeted FOH $5.20 × 160,000 $832,000

$831,000 $1,000 F Spending

Applied FOH $5.20 × 159,200 $827,840 $4,160 U Volume

Note: Practical volume in hours = 2 × 80,000 = 160,000 hours.

Exercise 11–19 1. Fixed overhead rate = $832,500/450,000 = $1.85 per DLH *Budgeted hours = 600,000 units × 0.75 direct labour hours = 450,000 SH = 594,000 units × 0.75 direct labour hours = 445,500 Applied FOH = $1.85 × 445,500 = $824,175

11-10

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Exercise 11–19 (Concluded) 2. Fixed overhead analysis: Actual FOH

Budgeted FOH $1.85 × 450,000 $832,500

$835,000 $2,500 U Spending

Applied FOH $1.85 × 445,500 $824,175 $8,325 U Volume

3. Variable OH rate = ($1,777,500 – $832,500)/450,000 hours = $2.10 per DLH 4. Variable overhead analysis: Actual VOH

Budgeted VOH $2.10 × 446,000 $936,600

$928,000 $8,600 F Spending

Applied VOH $2.10 × 445,500 $935,550 $1,050 U Efficiency

Exercise 11–20 1. VOH spending variance = (AVOR – SVOR) × AH = ($621,000/270,000 – $2.25) × 270,000 = $13,500 U Standard fixed overhead = $3.50 × 150,000 = $525,000 Standard variable overhead = $1,200,000 – $525,000 = $675,000 Standard hours = 2 hours per unit × 150,000 units = 300,000 SVOR: $675,000/300,000 = $2.25 VOH efficiency variance = (AH – SH) × SVOR = (270,000 – (142,000 × 2)) × $2.25 = $31,500 F

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11-11

Exercise 11–20

(Continued)

2. FOH spending variance = Actual FOH – Budgeted FOH = $490,000 – $525,000 = $35,000 F FOH volume variance

= Budgeted FOH – Applied FOH = $525,000 – (142,000 × $3.50) = $28,000 U

Exercise 11–21 1. Total applied fixed overhead = (standard hours per unit x actual units) x SFOR = (0.9 x 143,000) x $11 = $1,415,700 2. Budgeted fixed overhead = (budgeted units x standard hours per unit) x SFOR = (140,000 x 0.9) x $11 = $1,386,000 3. Actual fixed overhead = budgeted fixed overhead + unfavourable overhead spending variance = $1,386,000 + $24,000 = $1,410,000 4. Total applied variable overhead = (standard hours per unit x actual units) x SVOR = (0.9 x 143,000) x $6.36 = $818,532 5. Budgeted variable overhead based on actual hours = applied variable overhead + unfavourable variable overhead efficiency variance =$818,532 + $1,272 = $819,804 Actual direct labour hours = $819,804/$6.36 = 128,900 6. Actual variable overhead = budgeted variable overhead + unfavourable variable overhead spending variance = $819,804 + $9,196 = $829,000

11-12

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Exercise 11–22 1. Standard hours for budgeted production = Budgeted units × Standard hours per unit = 320,000 × 1.2 = 384,000 standard hours Fixed overhead rate = =

Budgeted fixed overhead Budgeted standard hours $1,420,800 = $3.70 per DLH 384,000

2. Applied FOH = Fixed overhead rate × Standard hours for actual production = $3.70 × (328,000 units × 1.2 direct labour hours) = $1,456,320 3. Fixed overhead analysis: Actual FOH $1,395,000

Budgeted FOH $1,420,800 $25,800 F Spending

Applied FOH $1,456,320 $35,520 F Volume

Budgeted variable overhead Budgeted standard hours $921,600 = 320,000×1.2 = $2.40 per DLH

4. Variable OH rate =

5. Variable overhead analysis: Actual VOH

Budgeted VOH

$926,000

Applied VOH $2.40 × 393,600* $944,640

$921,600 $4,400 U Spending

$23,040 F Efficiency

*Actual units × Standard hours per unit = 328,000 × 1.2

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11-13

Exercise 11–23 1. Variable overhead spending variance = (AVOR – SVOR)AH = ($15.15 – $14.00) x 252 = $289.80 U Variable overhead efficiency variance = (AH – SH)SVOR = (252 – 279) x $14.00 = $378 F 2. The variable overhead spending variance could have been caused by higher costs of food, shampoo, and other miscellaneous variable items per guest day than expected. The variable overhead efficiency variance indicates that Animal Days consumed less indirect resources than expected. For instance, the animals housed during March could have eaten less food than originally planned. 3. Fixed overhead spending variance = Actual fixed overhead – Budgeted fixed overhead = ($22.95 x 252) – ($21.00 x 279) = $(75.60) F Fixed overhead volume variance = Budgeted fixed overhead – Applied fixed overhead = ($21.00 x 279) – ($21.00 x 252) = $567 U 4. Not all costs classified as fixed costs are actually fixed. For example, Animal Days includes indirect labour as a fixed expense. As a result, some of these costs may have been lower than anticipated, resulting in a favourable fixed overhead spending variance. The fixed overhead volume variance is the result of applying fixed costs on the basis of guest days. Since the actual number of guest days in March was lower than anticipated, there was an unfavourable variance.

11-14

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Exercise 11–24 Performance Report For the Year Ended December 31

Cost

Cost Formulaa

Actual Costs

$22.00 3.20 $25.20

$50,000 6,500 $56,500

Labour Supplies Total

Budget for Actual Spending Hoursb Variancec $48,840 7,104 $55,944

$1,160 U (604) F $956 U

Budget for Standard Hoursd

Efficiency Variancee

$49,500 7,200 $56,700

$(660) F (96) F $(756) F

a

Per direct labour hour Computed using the cost formula and 2,220 ac...