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Solutions Manual, Chapter 11 591
Chapter 11
Flexible Budgets and Overhead 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:
- The activity base and overhead cost should be causally related.
- The activity base should not be expressed in dollars.
- 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 pro- duced 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 con- sists of two elements. One element is like a price variance and results from differences be- tween 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 over- head. It actually measures efficiency in the use of the base underlying the flexible budget. This base could be direct labor-hours, machine- hours, 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 di- rect 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 unfavor- able. 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 think-
592 Managerial Accounting, 12th Edition
ing that they are really variable. This can lead to faulty predictions concerning cost behavior and to bad decisions and erroneous performance evaluations.
11-14 Underapplied or overapplied overhead can be factored into variable overhead spending
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.
594 Managerial Accounting, 12th Edition
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 Variance Variable overhead costs: Cleaning .............................. $ 72.50 $10,360 $10,150 $ 210 U Maintenance ........................ 56.25 7,630 7,875 245 F Park usage fees.................... 15.75 2,210 2,205 5 U Total variable overhead cost...... $144.50 20,200 20,230 30 F Fixed overhead costs: Salaries and wages............... 7,855 7,860 5 F Depreciation ........................ 14,450 13,400 1,050 U Utilities ................................ 735 720 15 U Moorage .............................. 3,950 3,670 280 U Total fixed overhead cost .......... 26,990 25,650 1,340 U Total overhead cost .................. $47,190 $45,880 $1,310 U
- 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 re- sponsible for most of the $1,310 unfavorable total variance for the month.
Solutions Manual, Chapter 11 595
Jessel Corporation Variable Overhead Performance Report For the Year Ended December 31
Budgeted direct labor-hours ............................... 42, Actual direct labor-hours .................................... 44, Standard direct labor-hours allowed .................... 45,
Overhead Costs
Cost Formula (per DLH)
Actual Costs Incurred 44,000 DLHs (AH × AR)
Flexible Budget Based on 44,000 DLHs (AH × SR)
Spending Variance Indirect labor .............. $0.90 $42,000 $39,600 $2,400 U Supplies ..................... 0.15 6,900 6,600 300 U Electricity ................... 0.05 1,800 2,200 400 F Total variable over- head cost................. $1.10 $50,700 $48,400 $2,300 U
Solutions Manual, Chapter 11 597
- The flexible budget amount for overhead at the denominator level of ac- tivity must be determined before the predetermined overhead rate can be computed. Total fixed overhead cost per year ................................. $600, Total variable overhead cost at the denominator level of activity ($3.50 per DLH × 80,000 DLHs) ...................... 280, Total overhead cost at the denominator level of activity .. $880,
Predetermined^ Overhead at the denominator level of activity
overhead rate (^) Denominator level of activity $880, = =$11.00 per DLH 80,000 DLHs
- Standard direct labor-hours allowed for the actual output (a) ........................... 82,000 DLHs Predetermined overhead rate (b) ........... $11.00 per DLH Overhead applied (a) × (b) .................... $902,
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- (^) Fixed overhead Fixed portion of the (^) = predetermined overhead rate (^) Denominator level of activity $400, = 50,000 DLHs = $8.00 per DLH
- (^) Budget Actual fixed Budgeted fixed = - variance overhead cost overhead cost
= $394,000 - $400,
= $6,000 F
Fixed portion of Volume (^) = the predetermined× Denominator (^) - Standard hours variance (^) overhead rate hours allowed
= $8.00 per DLH (50,000 DLHs - 48,000 DLHs)
= $16,000 U
600 Managerial Accounting, 12th Edition
AutoPutz, Gmbh Static Budget For the Month Ended August 31
Budgeted number of cars .................... 8,
Budgeted variable overhead costs: Cleaning supplies (@ € 0.75 per car). € 6, Electricity (@ € 0.60 per car) ............ 4, Maintenance (@ € 0.15 per car) ........ 1, Total variable overhead cost ................ 12,
Budgeted fixed overhead costs: Operator wages ............................... 10, Depreciation .................................... 20, Rent...................... .......................... 8, Total fixed overhead cost .................... 38,
Total budgeted overhead cost ............. € 50,
Solutions Manual, Chapter 11 601
AutoPutz, Gmbh Flexible Budget Performance Report For the Month Ended August 31
Budgeted number of cars ............. 8, Actual number of cars .................. 8,
Overhead Costs
Cost Formula (per car)
Actual Costs Incurred for 8, Cars
Flexible Budget Based on 8, Cars Variance Variable overhead costs: Cleaning supplies ................ € 0.75 € 6,350 € 6,225 € 125 U Electricity ............................ 0.60 4,865 4,980 115 F Maintenance ....................... 0.15 1,600 1,245 355 U Total variable overhead cost ... € 1.50 12,815 12,450 365 U
Fixed overhead costs: Operator wages .................. 10,050 10,000 50 U Depreciation ....................... 20,200 20,000 200 U Rent...................... ............. 8,000 8,000 - Total fixed overhead cost ....... 38,250 38,000 250 U
Total overhead cost ............... € 51,065 € 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 unan- ticipated 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.)
Solutions Manual, Chapter 11 603
Overall rate: =$4.15 per MH 8,000 MHs
$8, Variable rate: =$1.05 per MH 8,000 MHs
$24, Fixed rate: =$3.10 per MH 8,000 MHs
- 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
- 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 ef- ficiency variance = SR (AH – SH) = $1.05 per MH (8,500 MHs – 8,750 MHs) = $262.50 F
604 Managerial Accounting, 12th Edition
Exercise 11-11 (continued)
Fixed overhead budget and volume variances:
Actual Fixed Overhead Cost
Budgeted Fixed Overhead Cost
Fixed Overhead Cost Applied to Work in Process $25,100 $24,800* 8,750 standard MHs × $3.10 per MH = $27, ↑ ↑ ↑ Budget Variance, $300 U
Volume Variance, $2,325 F
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 (^) Overhead Rate Hours Allowed
= $3.10 per MH (8,000 MHs - 8,750 MHs) = $2,325 F
606 Managerial Accounting, 12th Edition
San Juan Bank Check-Clearing Office Variable Overhead Performance Report For the Month Ended October 31
Budgeted labor-hours.................................................................................. 865 Actual labor-hours....................................................................................... 860 Standard labor-hours allowed for the actual number of checks processed ...... 880
Overhead costs
Cost Formula (per labor- hour)
(1) Actual Costs In- curred for 860 Labor- Hours (AH × AR)
(2) Flexible Budget Based on 860 Labor- Hours (AH × SR)
(3) Flexible Budget Based on 880 Labor- Hours (SH × SR)
Total Var- iance (1) – (3)
Breakdown of the Total Variance Spending Variance (1) – (2)
Efficiency Variance (2) – (3) Variable overhead costs: Office supplies ........... $0.15 $ 146 $ 129 $ 132 $14 U $17 U $ 3 F Staff coffee lounge ..... 0.05 124 43 44 80 U 81 U 1 F Indirect labor ............. 3.25 2,790 2,795 2,860 70 F 5 F 65 F Total variable over- head cost ................ $3.45 $3,060 $2,967 $3,036 $24 U $93 U $69 F
Solutions Manual, Chapter 11 607
- Actual fixed overhead costs incurred .................. $79, Add favorable budget variance ........................... 1, Budgeted fixed overhead cost ............................ $80,
Budgeted fixed overhead cost $80, = =$4 per MH Denominator hours 20,000 MHs
9,500 units × 2 MHs per unit = 19,000 MHs
Fixed Portion of Volume (^) = the Predetermined Denominator (^) - Standard Hours Variance (^) Overhead Rate Hours Allowed
= $4 per MH (20,000 MHs - 19,000 MHs) = 4,000 U
Alternative solutions to parts 1-3:
Actual Fixed Overhead Cost
Budgeted Fixed Overhead Cost
Fixed Overhead Cost Applied to Work in Process $79,000* $80,000 a^ 19,000 MHsb^ × $4 per MHc = $76, ↑ ↑ ↑ Budget Variance, $1,000 F*
Volume Variance, $4,000 U
*Given. a$79,000 + $1,000 = $80,000.
b (^) 9,500 units × 2 MHs per unit = 19,000 MHs
c (^) $80,000 ÷ 20,000 denominator MHs = $4 per MH.
Solutions Manual, Chapter 11 609
Company X: This company has an unfavorable volume variance since the standard direct labor-hours allowed for the actual output are less than the denominator activity.
Company Y: This company has an unfavorable volume variance since the standard direct labor-hours allowed for the actual output are less than the denominator activity.
Company Z: This company has a favorable volume variance since the standard direct labor-hours allowed for the actual output are greater than the denominator activity.
610 Managerial Accounting, 12th Edition
Problem 11-17 (30 minutes)
- The reports as presently prepared are of little use to the company. The problem is that the company is using a static budget approach, and is comparing budgeted performance at one level of activity to actual per- formance at another level of activity. Although the reports do a good job of showing whether or not the budgeted level of activity was attained, they do not tell whether costs were controlled for the period.
- The company should use a flexible budget approach to evaluate control over costs. Under the flexible budget approach, the actual costs incurred during the quarter in working 25,000 hours should be compared to budgeted costs at that activity level.
- Shipley Company Overhead Performance Report—Milling Department For the Quarter Ended June 30 Budgeted machine-hours ....... 30,000 MHs Actual machine-hours ............ 25,000 MHs
Overhead Costs
Cost Formula (per MH)
Actual 25, hours
Flexible Budget 25, hours
Spending or Budget Variance Variable overhead costs: Indirect labor ............. $0.75 $ 20,000 $ 18,750 $1,250 U Supplies..................... 0.20 5,400 5,000 400 U Utilities ...................... 1.00 27,000 25,000 2,000 U Rework ...................... 0.50 14,000 12,500 1,500 U Total variable overhead cost ........................... $2.45 66,400 61,250 5,150 U
Fixed overhead costs: Maintenance .............. 61,900 60,000 1,900 U Inspection ................. 90,000 90,000 0 Total fixed overhead cost ........................... 151,900 150,000 1,900 U
Total overhead cost....... $218,300 $211,250 $7,050 U
