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Managerial Accounting 13e...

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Chapter 11 Flexible Budgets and Ov Overhead erhead Analysis

Solutions to Questions 11-1 A static budget is a budget prepared for a single level of activity. The static budget is not adjusted even if the activity level subsequently changes. 11-2 A flexible budget can be adjusted to reflect any level of activity. By contrast, a static budget is prepared for a single level of activity and is not subsequently adjusted. 11-3 Criteria for choosing an activity base: 1. The activity base and overhead cost should be causally related. 2. The activity base should not be expressed in dollars. 3. The activity base should be simple and easy to understand. 11-4 If the flexible budget is based on actual hours worked, only a spending variance will be produced on the performance report. Both a spending and an efficiency variance will be produced if the flexible budget is based on both actual hours and standard hours. 11-5 Standard hours allowed means the time that should have been taken to complete the actual output of the period. 11-6 The materials price variance is entirely caused by any difference between the standard price of a material and the price actually paid. The variable overhead spending variance consists of two elements. One element is like a price variance and results from differences between actual and standard prices for variable overhead inputs. The other element is like a quantity variance and results from differences between the amount of variable overhead inputs that should have been used and the amounts that were actually used. Ordinarily these two elements are not separated.

11-7 The overhead efficiency variance does not really measure efficiency in the use of overhead. It actually measures efficiency in the use of the base underlying the flexible budget. This base could be direct labor-hours, machinehours, or some other measure of activity. 11-8 The denominator level of activity is the denominator in the predetermined overhead rate. 11-9 A normal costing system was used in Chapter 3, whereas in Chapter 11 a standard cost system is used. Standard costing ensures that the same amount of overhead is applied to a product regardless of the actual amount of the application base (such as machine-hours or direct labor-hours) that is used during a period. 11-10 In a standard cost system both a budget variance and a volume variance are computed for fixed manufacturing overhead cost. 11-11 The fixed overhead budget variance is the difference between total budgeted fixed overhead cost and the total amount of fixed overhead cost incurred. If actual costs exceed budgeted costs, the variance is labeled unfavorable. 11-12 The volume variance is favorable when the activity level for a period, at standard, is greater than the denominator activity level. Conversely, if the activity level, at standard, is less than the denominator level of activity, the volume variance is unfavorable. The variance does not measure deviations in spending. It measures deviations in actual activity from the denominator level of activity. 11-13 If fixed costs are expressed on a per unit basis, managers may be misled into

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thinking that they are really variable. This can lead to faulty predictions concerning cost behavior and to bad decisions and erroneous performance evaluations.

and efficiency variances and the fixed overhead budget and volume variances. 11-15 The total of the overhead variances is favorable when overhead is overapplied.

11-14 Underapplied or overapplied overhead can be factored into variable overhead spending

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Ex Exer er erccis ise e1 1111-1 1 (15 minutes) Swan Company Flexible Budget

Overhead Costs Variable: Supplies.............................. Indirect labor...................... Utilities............................... Maintenance....................... Total variable overhead cost. . . Fixed: Indirect labor...................... Maintenance....................... Depreciation....................... Total fixed overhead cost........ Total overhead cost................

Cost Formula per MH

Machine-Hours 8,000 9,000 10,000

$0.20 0.25 0.15 0.10 $0.70

$ 1,600 $ 1,800 $ 2,000 2,000 2,250 2,500 1,200 1,350 1,500 800 900 1,000 5,600 6,300 7,000 10,000 7,000 8,000 25,000

10,000 7,000 8,000 25,000

10,000 7,000 8,000 25,000

$30,600 $31,300 $32,000

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Ex Exer er erccis ise e1 1111-2 2 (15 minutes) 1. Canyonland Boat Charter Service Flexible Budget Performance Report For the Month Ended August 31

Cost Formula (per charter)

Actual Costs Incurred for 140 Charters

Flexible Budget Based on 140 Charters

$ 72.50 56.25 15.75 $144.50

$10,360 7,630 2,210 20,200

$10,150 7,875 2,205 20,230

$ 210 245 5 30

U F U F

Fixed overhead costs: Salaries and wages............... Depreciation......................... Utilities................................ Moorage............................... Total fixed overhead cost...........

7,855 14,450 735 3,950 26,990

7,860 13,400 720 3,670 25,650

5 1,050 15 280 1,340

F U U U U

Total overhead cost...................

$47,190

$45,880

Variable overhead costs: Cleaning............................... Maintenance......................... Park usage fees.................... Total variable overhead cost......

Variance

$1,310 U

2. The addition of a new boat to the charter fleet apparently increased depreciation and moorage charges for the month above what had been anticipated. (A new boat adds to depreciation charges and a new boat needs to be moored, hence the higher moorage charges.) These two items are responsible for most of the $1,310 unfavorable total variance for the month. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 594

Managerial Accounting, 12th Edition

Exerc Exercise ise 11-3 (15 minutes) Jessel Corporation Variable Overhead Performance Report For the Year Ended December 31 Budgeted direct labor-hours............................... Actual direct labor-hours.................................... Standard direct labor-hours allowed....................

Overhead Costs Indirect labor.............. Supplies...................... Electricity.................... Total variable overhead cost.........................

Cost Formula (per DLH) $0.90 0.15 0.05 $1.10

42,000 44,000 45,000

Actual Costs Flexible BudIncurred get Based on 44,000 DLHs 44,000 DLHs (AH × AR) $42,000 6,900 1,800

(AH × SR) $39,600 6,600 2,200

Spending Variance $2,400 U 300 U 400 F

$50,700

$48,400

$2,300 U

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Exerc Exercise ise 11-4 (20 minutes) Jessel Corporation Variable Overhead Performance Report For the Year Ended December 31 Budgeted direct labor-hours........................... Actual direct labor-hours................................ Standard direct labor-hours allowed...............

Cost Formula Overhead Costs (per DLH) Indirect labor.............. $0.90 Supplies..................... 0.15 Electricity................... 0.05 Total variable overhead cost................. $1.10

42,000 44,000 45,000

(1) (2) (3) Actual Flexible Flexible Costs InBudget Budget (4) curred Based on Based on Total 44,000 44,000 45,000 Variance Spending Efficiency DLHs DLHs DLHs Variance Variance (AH × AR) (AH × SR) (SH × SR) (1)-(3) (1)-(2) (2)-(3) $42,000 $39,600 $40,500 $1,500 U $2,400 U $ 900 F 6,900 6,600 6,750 150 U 300 U 150 F 1,800 2,200 2,250 450 F 400 F 50 F $50,700

$48,400

$49,500 $1,200 U $2,300 U

$1,100 F

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Managerial Accounting, 12th Edition

Exerc Exercise ise 11-5 (15 minutes) 1. The flexible budget amount for overhead at the denominator level of activity must be determined before the predetermined overhead rate can be computed. Total fixed overhead cost per year.................................. $600,000 Total variable overhead cost at the denominator level of activity ($3.50 per DLH × 80,000 DLHs)....................... 280,000 Total overhead cost at the denominator level of activity... $880,000 Predetermined = Overhead at the denominator level of activity overhead rate Denominator level of activity $880,000 = =$11.00 per DLH 80,000 DLHs 2. Standard direct labor-hours allowed for the actual output (a)........................... Predetermined overhead rate (b)............ Overhead applied (a) × (b)....................

82,000 DLHs $11.00 per DLH $902,000

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Exerc Exercise ise 11-6 (15 minutes) 1.

2.

Fixed overhead Fixed portion of the = predetermined overhead rate Denominator level of activity $400,000 = 50,000 DLHs = $8.00 per DLH Budget = Actual fixed - Budgeted fixed variance overhead cost overhead cost = $394,000 - $400,000 = $6,000 F Fixed portion of Volume = the predetermined× Denominator - Standard hours variance hours allowed overhead rate

(

)

= $8.00 per DLH (50,000 DLHs - 48,000 DLHs) = $16,000 U

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Managerial Accounting, 12th Edition

Exerc Exercise ise 11-7 (15 minutes) AutoPutz, Gmbh Flexible Budget

Cost Formula (per car)

Overhead Costs Variable overhead costs: Cleaning supplies................... € 0.75 Electricity ............................. 0.60 Maintenance.......................... 0.15 Total variable overhead cost...... € 1.50 Fixed overhead costs: Operator wages..................... Depreciation.......................... Rent..................................... Total fixed overhead cost.......... Total overhead cost..................

7,000

Activity (cars) 8,000 9,000

€ 5,250 € 6,000 € 6,750 4,200 4,800 5,400 1,050 1,200 1,350 10,500 12,000 13,500 10,000 20,000 8,000 38,000

10,000 20,000 8,000 38,000

10,000 20,000 8,000 38,000

€ 48,500 € 50,000 € 51,500

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Exerc Exercise ise 11-8 (10 minutes) AutoPutz, Gmbh Static Budget For the Month Ended August 31 Budgeted number of cars....................

8,200

Budgeted variable overhead costs: Cleaning supplies (@ € 0.75 per car). Electricity (@ € 0.60 per car)............ Maintenance (@ € 0.15 per car)........ Total variable overhead cost................

€ 6,150 4,920 1,230 12,300

Budgeted fixed overhead costs: Operator wages............................... Depreciation.................................... Rent................................................ Total fixed overhead cost.....................

10,000 20,000 8,000 38,000

Total budgeted overhead cost..............

€ 50,300

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Exerc Exercise ise 11-9 (15 minutes) AutoPutz, Gmbh Flexible Budget Performance Report For the Month Ended August 31 Budgeted number of cars.............. 8,200 Actual number of cars................... 8,300

Overhead Costs Variable overhead costs: Cleaning supplies................ Electricity............................ Maintenance....................... Total variable overhead cost. . .

Actual Flexible Costs Budget Cost Incurred Based on Formula for 8,300 8,300 (per car) Cars Cars Variance € 0.75 0.60 0.15 € 1.50

€ 6,350 4,865 1,600 12,815

Fixed overhead costs: Operator wages................... Depreciation........................ Rent................................... Total fixed overhead cost........

10,050 20,200 8,000 38,250

Total overhead cost................

€ 51,065

€ 6,225 € 125 U 4,980 115 F 1,245 355 U 12,450 365 U 10,000 20,000 8,000 38,000

50 U 200 U 250 U

€ 50,450 € 615 U

Students may question the variances for fixed costs. Operator wages can differ from what was budgeted for a variety of reasons including an unanticipated increase in the wage rate; changes in the mix of workers between those earning lower and higher wages; changes in the number of operators on duty; and overtime. Depreciation may have increased because of the acquisition of new equipment or because of a loss on equipment that must be scrapped—perhaps due to poor maintenance. (This assumes that the loss flows through the depreciation account on the performance report.)

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Ex Exer er erccis ise e1 1111-10 10 (20 minutes) 1.

Whaley Company Variable Manufacturing Overhead Performance Report Budgeted machine-hours............ 18,000 Actual machine-hours worked..... 16,000

Variable overhead costs: Utilities................................. Supplies................................ Maintenance......................... Rework time......................... Total variable overhead cost...

Actual 16,000 hours

Flexible Budget 16,000 hours

Spending Variance

$20,000 4,700 35,100 12,300 $72,100

$19,200 4,800 38,400 9,600 $72,000

$ 800 U 100 F 3,300 F 2,700 U $ 100 U

2. Favorable variances can be as much a matter of managerial concern as unfavorable variances. In this case, the favorable maintenance variance undoubtedly would require investigation. Efforts should be made to determine if maintenance is not being carried out. In terms of percentage deviation from budgeted allowances, the rework time variance is even more significant (equal to 28% of the budget allowance). It may be that this unfavorable variance in rework time is a result of poor maintenance of machines. Some may say that if the two variances are related, then the trade-off is a good one, since the savings in maintenance cost is greater than the added cost of rework time. But this is shortsighted reasoning. Poor maintenance can reduce the life of equipment, as well as decrease overall output. These long-run costs may swamp any short-run savings.

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Managerial Accounting, 12th Edition

Ex Exer er erccis ise e1 1111-11 11 (20 minutes) 1.

Overall rate:

$33,200 =$4.15 per MH 8,000 MHs

Variable rate:

$8,400 =$1.05 per MH 8,000 MHs

Fixed rate:

$24,800 =$3.10 per MH 8,000 MHs

2. The standard hours per unit of product are: 8,000 MHs ÷ 3,200 units = 2.5 MHs per unit The standard hours allowed for the actual production would be: 3,500 units × 2.5 MHs per unit = 8,750 MHs 3. Variable overhead spending variance = = = =

(AH × AR) – (AH × SR) ($9,860) – (8,500 MHs × $1.05 per MH) ($9,860) – ($8,925) $935 U

Variable overhead efficiency variance = SR (AH – SH) = $1.05 per MH (8,500 MHs – 8,750 MHs) = $262.50 F

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Ex Exer er erccis ise e1 1111-11 11 (continued) Fixed overhead budget and volume variances: Actual Fixed Overhead Cost $25,100



Fixed Overhead Cost Applied to Work in Process 8,750 standard MHs × $3.10 per MH = $27,125  Volume Variance, $2,325 F

Budgeted Fixed Overhead Cost $24,800*

Budget Variance, $300 U



Total Variance, $2,025 F *8,000 denominator MHs × $3.10 per MH = $24,800. Alternative approach to the budget variance: Budget = Actual Fixed - Budgeted Fixed Variance Overhead Cost Overhead Cost = $25,100 - $24,800 = $300 U Alternative approach to the volume variance: Fixed Portion of Volume = the Predetermined Denominator - Standard Hours Variance Hours Allowed Overhead Rate

(

)

= $3.10 per MH (8,000 MHs - 8,750 MHs) = $2,325 F

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Ex Exer er erccis ise e1 1111-12 12 (15 minutes) 1. 10,000 units × 0.8 DLH per unit = 8,000 DLHs. 2. and 3. Actual Fixed Overhead Cost $45,600*



Budgeted Fixed Overhead Cost $45,000



Budget Variance, $600 U

Fixed Overhead Cost Applied to Work in Process 8,000 standard DLHs × $6 per DLH* = $48,000

Volume Variance, $3,000 F*



*Given. 4.

Fixed cost element of the = Budgeted fixed overhead cost predetermined overhead rate Denominator activity =

$45,000 =$6 per DLH Denominator activity

Therefore, the denominator activity was 7,500 direct labor-hours.

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Exerc Exercise ise 11-13 (15 minutes) San Juan Bank Check-Clearing Office Variable Overhead Performance Report For the Month Ended October 31 Budgeted labor-hours.................................................................................. Actual labor-hours....................................................................................... Standard labor-hours allowed for the actual number of checks processed.......

Overhead costs Variable overhead costs: Office supplies............ Staff coffee lounge...... Indirect labor.............. Total variable overhead cost.................

865 860 880

(1) (2) (3) Actual Flexible Flexible Cost Costs InBudget Budget Formula curred for Based on Based on (per 860 Labor- 860 Labor- 880 Labor- Total laborHours Hours Hours Variance hour) (AH × AR) (AH × SR) (SH × SR) (1) – (3)

Breakdown of the Total Variance Spending Efficiency Variance Variance (1) – (2) (2) – (3)

$0.15 0.05 3.25

$ 146 124 2,790

$ 129 43 2,795

$ 132 44 2,860

$14 U 80 U 70 F

$17 U 81 U 5F

$3 F 1 F 65 F

$3.45

$3,060

$2,967

$3,036

$24 U

$93 U

$69 F

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Ex Exer er erccis ise e1 1111-14 14 (15 minutes) 1. Actual fixed overhead costs incurred................... Add favorable budget variance........................... Budgeted fixed overhead cost............................

$79,000 1,000 $80,000

Budgeted fixed overhead cost $80,000 = =$4 per MH Denominator hours 20,000 MHs 2. 9,500 units × 2 MHs per unit = 19,000 MHs 3.

Fixed Portion of Volume = the Predetermined Denominator - Standard Hours Variance Hours Allowed Overhead Rate

(

)

= $4 per MH (20,000 MHs - 19,000 MHs) = 4,000 U Alternative solutions to parts 1-3: Actual Fixed Overhead Cost $79,000*



Budg...