Chapter 11 – Flexible Budgeting and Analysis of Overhead Costs
85. The sales-volume variance equals:
Use the following information to answer Questions 86 and 87.
The Step Company has the following information for the year just ended:
Budget
Actual
Sales in units
15,000
14,000
Sales
$150,000
$147,000
Less: Variable Expenses
90,000
82,600
Contribution Margin
$60,000
$64,400
Less: Fixed Expenses
35,000
40,000
Operating Income
$25,000
$24,400
86. The Step Company’s sales-volume variance is:
11–42
87. The Step Company’s sales-price variance is:
Essay Questions
88. Prevlar’s budget for variable overhead and fixed overhead revealed the following
information for an anticipated 40,000 hours of activity: variable overhead, $348,000; fixed
overhead, $600,000.
The company actually worked 43,000 hours and actual overhead incurred was: variable,
$365,500; fixed, $608,000.
Required:
A. Compute the company’s total cost variance for variable overhead and fixed overhead if the
firm uses a static budget to help assess performance.
B. Repeat part “A” assuming the use of a flexible budget.
C. Which of the two budgets (static or flexible) is preferred for performance evaluations?
Why?
Solution:
Chapter 11 – Flexible Budgeting and Analysis of Overhead Costs
11–43
89. The City Symphony Orchestra presents a series of concerts throughout the year. Budgeted
fixed costs total $300,000 for the concert season; variable costs are expected to average $5 per
patron. The orchestra uses flexible budgeting.
Required:
A. Prepare a flexible budget that shows the expected costs of 8,000, 8,500, and 9,000 patrons.
B. Construct the orchestra’s flexible budget formula.
C. Assume that 8,700 patrons attended concerts during the year just ended, and actual costs
were: variable, $42,000; fixed, $307,500. Evaluate the orchestra’s financial performance by
computing variances for variable costs and fixed costs.
Solution:
11–44
90. Super Fast Insurance uses budgets to forecast and monitor overhead throughout the
organization. The following budget formula relates to the processing of applications for
automobile policies in any given month:
Total overhead = $6.80APH + $13,500
where APH = application processing hours
The typical automobile insurance policy has an estimated processing time of 1.5 hours.
During June, management originally anticipated that 320 applications would be processed.
Activity was lower than expected, with only 280 applications completed by month-end, and
the following costs were incurred: variable overhead, $2,950; fixed overhead, $13,700.
Required:
A. What volume level of applications and processing hours would have been used if Super
Fast had constructed a static budget?
B. Construct a flexible budget that shows the expected monthly variable and fixed overhead
costs of processing 270, 300, and 330 applications.
C. From a cost perspective, did the company perform better or worse than anticipated in June?
Show calculations to support your answer.
Solution:
11–45
91. The International Students Club at Eastern University recently held an end-of-year dinner
and swim party, which the treasurer declared to be a financial success. “Attendance was an
all-time high, 60 members, and the results were much better than expected.” The treasurer
presented the following performance report at the executive board’s June meeting:
Budget
Actual
Variance
Revenue
$1,575
$2,205
$630F
Food
$675
$870
$195U
Beverages
315
480
165U
Disc jockey
150
175
25U
Facility rental
200
200
—
Total costs
$1,340
$1,725
$385U
Profit
$235
$480
$245F
The budget was based on the assumptions that follow.
· Forty-five members would attend at a fixed ticket price of $35.
· Food and beverage costs were anticipated to be $15 and $7 per attendee, respectively.
· A disc jockey was hired via a written contract at $50 per hour.
Required:
A. Briefly evaluate the meaningfulness of the treasurer’s performance report.
B. Prepare a performance report by using flexible budgeting and determine whether the end-
of-year party was as successful as originally reported.
C. Based on your answer in requirement “B,” present a possible explanation for the variances
in revenue, food costs, beverage costs, and the disc jockey.
$13,500]
Variance, unfavorable
11–47
92. Practical Products plans to manufacture 8,000 units over the next month at the following
costs: direct materials, $480,000; direct labor, $60,000; variable manufacturing overhead,
$150,000; straight-line depreciation, $24,000, and other fixed manufacturing overhead,
$272,000. The result is total budgeted cost of $990,000.
Shortly after the conclusion of the month, Practical Products reported the following costs:
Direct materials used
$490,500
Direct labor
69,600
Variable manufacturing overhead
132,000
Depreciation
24,000
Other fixed manufacturing overhead
272,000
Total
$988,100
Supervisor, Calvin Moore and his crews turned out 7,200 units—a remarkable feat given that
the company’s manufacturing plant was closed for several days because of blizzards and
impassable roads. Moore was especially pleased with the fact that total actual costs were less
than budget. He was thus very surprised when Practical’s general manager expressed
unhappiness about the plant’s financial performance.
Required:
A. Prepare a performance report that fairly compares budgeted and actual costs for the period
just ended—namely, the report that the general manager likely used when assessing
performance.
B. Should Moore be praised for “having met the budget” or is the general manager’s
unhappiness justified? Explain, citing any apparent problems for the firm.
93. Advanced University operates a motor pool for the convenience of its faculty and staff.
The following budget was prepared for an upcoming period:
Gasoline and oil
$40,000
Minor repairs
6,000
Insurance
20,000
Office help
24,000
Depreciation
30,000
Total
$120,000
The budget was based on the assumptions of 20 vehicles, with each vehicle being driven
8,000 miles. Advanced acquired two additional vehicles early in the period under study.
Actual miles driven during the period totaled 180,000.
Discussions with the motor pool manager revealed that pool costs are variable and fixed
in nature. The manager believed that miles driven was the most appropriate cost driver
for studying gasoline and oil expense. In contrast, the number of vehicles in the pool was
the best base to use when studying minor repairs, insurance, and depreciation. Office
help is a fixed cost.
Required:
A. Contrast a static budget with a flexible budget.
B. Suppose that the university’s budget officer desired to prepare a report that compared
budgeted and actual costs. Should the report be based on a static budget or a flexible
budget? Why?
C. On the basis of the information presented, determine the budgeted amounts for the
five preceding costs that would be used in a flexible budget.
Solution:
94. Pizzazz Pizza Inc.’s activity based flexible budget is as follows:
Pizzazz Pizza, Inc.
Monthly Flexible Overhead Budget
Budgeted Cost
Level of Activity
Cost Pool I (cost driver: process
hours)
6,000
7,500
9,000
Indirect material:
Nonstick cooking spray
$ 12,000
$ 15,000
$ 18,000
Foil
2,000
2,500
3,000
Other paper products.
2,000
2,500
3,000
Miscellaneous supplies
6,000
7,500
9,000
Indirect labor: maintenance
4,000
5,000
6,000
Utilities:
Electricity
3,000
3,750
4,500
Natural gas
1,000
1,250
1,500
Total of cost pool I
$ 30,000
$ 37,500
$ 45,000
Cost Pool II (cost driver:
production runs)
8
12
16
Indirect labor:
Inspection
$ 2,200
$ 3,300
$ 4,400
Setup
3,000
4,500
6,000
Total of cost pool II
$ 5,200
$ 7,800
$ 10,400
Cost Pool III (cost driver: new
Pizzas tested)
20
30
40
Test kitchen
$ 1,200
$ 1,800
$ 2,400
Total of cost pool III
$ 1,200
$ 1,800
$ 2,400
Cost Pool IV (cost driver: pounds
of material handled)
20,000
30,000
40,000
Material handling
$ 2,000
$ 3,000
$ 4,000
Total of cost pool IV
$ 2,000
$ 3,000
$ 4,000
Cost Pool V (facility level costs)
Indirect labor: production
supervisors
$ 6,000
$ 6,000
$ 6,000
Depreciation: plant and equipment
500
500
500
Insurance and property taxes
100
100
100
Total of cost pool V
$ 6,600
$ 6,600
$ 6,600
Total overhead cost
$45,000
$56,700
$68,400
Pizzazz’s activity for September is as follows:
Process Hours
7,500
Production Runs
16
New Pizza combinations tested
30
Direct material handled (in pounds)
40,000
Required:
1. Determine the flexible budgeted cost for each of the following:
a. Indirect material
b. Utilities
c. Inspection
d. Test kitchen
e. Material handling
f. Total overhead cost
2. Compute the variance for setup cost during the month, assuming that the actual setup cost
was $3,000: Using the activity-based flexible budget.
Chapter 11 – Flexible Budgeting and Analysis of Overhead Costs
Solution:
95. Briefly describe the procedures that are used to apply manufacturing overhead to
production for companies that use (1) normal costing systems and (2) those that use standard
costing systems.
Solution:
96. Knee-Jerk Industries operates a delivery service for local restaurants, delivering call-in,
to-go meals for restaurant customers. Variable overhead costs are applied at the budgeted rate
of $3 per driving hour. The typical roundtrip takes a driver 45 minutes to complete. Actual
results for March follow.
Number of roundtrips run: 1,560
Hours of delivery time: 1,250
Variable overhead cost incurred: $3,450
Knee-Jerk uses flexible budgets and variance analysis to monitor performance.
Required:
A. Prepare a flexible-budget performance report that shows (1) actual variable overhead, (2)
the amount of variable overhead that should have been incurred for the number of roundtrips
taken, and (3) the variance between these amounts.
B. Compute the company’s variable-overhead spending and efficiency variances.
C. Compare the variances that you computed in requirements “A” and “B,” and comment on
your findings.
Solution: