2. Refer to Figure 11-7. Assume that Kipling actually produced 240,000 gallons of Icey and 200,000 of
Tasty. The actual overhead costs incurred were:
Maintenance
$192,000
Power
181,700
Indirect labor
649,500
Rent
54,000
Required:
A.
Prepare a performance report for the period.
B.
Based on the report, would you judge any of the variances to be significant? Discuss
some possible reasons for the variances.
A.
181,700
180,000
1,700 U
649,500
655,500
Total fixed costs
Total overhead costs
*110,000 DLH 110% = 121,000
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs
*110,000 DLH 90% = 99,000
3. Favor Company budgeted the following amounts:
Variable costs of production:
Direct materials
6 pounds @ $1.25 per pound
Direct labor
0.75 hours @ $16.00 per hour
Variable overhead
0.75 hours @ $2.65 per hour
Fixed overhead:
Materials handling
$9,000
Depreciation
$2,300
Required: Prepare a flexible budget for 1,500 units, 1,800 units and 2,100 units.
4. Vallo Pharmacy operates a home delivery service with more than 2,000 housebound clients. Vallo has
a fleet of vehicles and has invested in a sophisticated computerized communications system to
coordinate its deliveries. Vallo has gathered the following data on last year’s operations:
Deliveries made:
21,000
Direct labor:
15,000 delivery hours at $8
Actual variable overhead:
$145,000
Vallo uses a standard costing system. During the year, the following variable overhead rate was used:
$8.10 per delivery hour. The labor standard requires 0.75 hours per delivery.
Compute the variable overhead spending variance and the variable overhead efficiency variance.
= AVOH − (SVOR AH)
= $145,000 − ($8.10 15,000)
= $145,000 − $121,500
= $23,500 U
= (AH − SH)SVOR
= (15,000 − 15,750)$8.10
5. A company had the following information for the year:
Standard variable overhead rate (SVOR) per direct labor hour
$6.75
Standard hours (SH) allowed per unit
4
Actual production
17,400
Actual variable overhead costs
$478,000
Actual direct labor hours
69,800
Required:
A. Calculate the actual variable overhead rate (AVOR).
B. Calculate the applied variable overhead.
C. Calculate the total variable overhead variance.
6. Gallant Company uses standard costing. Overhead is applied to products on the basis of standard direct
labor hours for actual production. Data for Gallant follows:
Standard direct labor hours allowed for actual output
110,000
Actual direct labor hours
115,000
Direct labor hours budgeted in the master budget
120,000
Budgeted total variable overhead cost
$360,000
Actual variable overhead cost
$328,000
A.
Calculate the variable overhead rate.
B.
Calculate the total variable overhead applied to production.
C.
Calculate the variable overhead spending variance.
D.
Calculate the variable overhead efficiency variance.
E.
Calculate the total variable overhead variance.
A.
Variable overhead rate = $360,000/120,000 = $3.00 per direct labor hour
Variable overhead applied to production = $3 110,000 = $330,000
Variable overhead spending variance = $328,000 − ($3 115,000) = $17,000 F
AVOR = Actual variable overhead
Actual direct labor hours
478,000 = $6.85
69,800
Applied variable overhead = actual units x SH x SVOR
17,400 x 4 x $6.75 = $469,800
Actual variable overhead
Applied variable overhead
7. A company provided the following data:
Standard fixed overhead rate (SFOR)
$13 per direct labor hour
Actual fixed overhead costs
$385,800
Standard hours allowed per unit
2
Actual production
15,000 units
Required:
A. Calculate the standard hours allowed for actual production.
B. Calculate the applied fixed overhead
C. Calculate the total fixed overhead variance
Standard hours for actual units = SH per unit x actual units produced
2 x 15,000 = 30,000
B.
Applied fixed overhead = Standard hours for actual units x SFOR
30,000 x $13 = $390,000
8. Littleton Company uses a standard costing system. The following monthly cost functions apply to its
manufacturing overhead items:
Overhead Item
Cost Function
Indirect materials
$0.80 per DLH
Indirect labor
$1.00 per DLH
Utilities
$0.40 per DLH
Insurance
$8,000
Depreciation
$32,000
Information for the month of October is as follows:
Actual overhead costs incurred:
Indirect materials
$20,800
Indirect labor
24,000
Utilities
9,600
Insurance
8,800
Depreciation
32,000
Total
$95,200
Actual direct labor hours worked
24,000
Standard direct labor hours allowed for production achieved
27,000
Littleton uses expected capacity to calculate standard overhead rates. The monthly expected capacity is
25,000 hours.
A.
Calculate the following standard overhead rates based upon expected capacity:
Variable overhead rate
Fixed overhead rate
Total overhead rate
B.
Calculate the following variances:
Variable overhead spending variance
Variable overhead efficiency variance
Fixed overhead spending variance
Fixed overhead volume variance
9. The following standard overhead costs were developed for one of the products of Mildey Company:
Variable overhead rate = $0.80 + $1.00 + $0.40 = $2.20 per DLH
Fixed overhead rate = ($8,000 + $32,000)/25,000 = $1.60 per DLH
Total overhead rate = $2.20 + $1.60 = $3.80 per DLH
Variable overhead spending variance:
AVOH − SVOR AH
= ($20,800 + $24,000 + $9,600) −
(24,000 hours $2.20)
= $54,400 − $52,800
= $1,600 U
Variable overhead efficiency variance:
(AH − SH)SVOR
= (24,000 − 27,000)$2.20
= $6,600 F
Fixed overhead spending variance:
AFOH − BFOH
= ($40,800 − $40,000)
= $800 U
Fixed overhead volume variance:
BFOH − SH SFOR
= [$40,000 − (27,000 hours $1.60)]
= $3,200 F
Variable overhead:
5 hours $4 per hour
20.00
Fixed overhead:
5 hours $15 per hour
75.00
Total standard overhead cost per unit
$95.00
The following information is available regarding the company’s operations for the period:
Units produced
20,000
Direct labor
115,000 hours
Overhead incurred:
Variable
$437,500
Fixed
$1,320,000
Budgeted fixed overhead for the period is $1,350,000, and the standard fixed overhead rate is based on
expected capacity of 90,000 direct labor hours.
Required:
A.
Calculate the variable overhead spending variance and indicate whether it is favorable
or unfavorable.
B.
Calculate the variable overhead efficiency variance and indicate whether it is favorable
or unfavorable.
C.
Calculate the fixed overhead spending variance and indicate whether it is favorable or
unfavorable.
D.
Calculate the fixed overhead volume variance and indicate whether it is favorable or
unfavorable.
10. At the beginning of the year, Folsom Company had the following standard cost sheet for one of its
food products:
Direct materials (10 lb @ 3.20)
$32.00
Direct labor (4 hr @ $9.00)
36.00
Fixed overhead (4 hr @ $4.00)
16.00
Variable overhead (4 hr @ $0.75)
3.00
Standard cost per unit
$87.00
Folsom computes its overhead rates using practical capacity, which is 72,000 units. The actual results
for the year are:
Units produced
70,000
Direct labor hours
290,000
Actual wage per hour
$9.05
$1,320,000 − $1,350,000
$150,000 F
$1,350,000 − (20,000 units 5 hours $15)
Fixed overhead
$1,160,000
Variable overhead
$ 218,000
A.
Compute the fixed overhead spending and volume variances.
B.
Compute the variable overhead spending and efficiency variances.
11. Bushman Company is planning to produce 3,200,000 carburetors for the coming year. Each carburetor
requires 0.375 standard hours of labor for completion. The company uses direct labor hours to assign
overhead to products. The total fixed overhead budgeted for the coming year is $1,980,000. Total
budgeted overhead is $4,050,000. Predetermined overhead rates are calculated using expected
production, measured in direct labor hours. Actual results for the year follow:
Actual production (units)
3,540,000
Actual direct labor hours
1,190,000
Actual fixed overhead
$1,920,000
Actual variable overhead
$2,150,000
Required:
A.
Compute the applied fixed overhead.
B.
Compute the fixed overhead spending and volume variances.
C.
Compute the applied variable overhead.
D.
Compute the variable overhead spending and efficiency variances. Carry per hour
computations out to 3 decimals.
Fixed overhead rate (SFOR) = $1,980,000/(0.375 3,200,000) = $1.65 per DLH
SH = 0.375 3,540,000 = 1,327,500
Applied FOH = $1.65 1,327,500 = $2,190,375
= AFOH − BFOH
= $1,920,000 − $1,980,000
= $60,000 F
Actual FOH
Budgeted FOH
Applied FOH
$8,000 U
$32,000 U
FOH Spending
FOH Volume
= AVOH − SVOR AH
= $218,000 − ($0.75 290,000)
= $500 U
= (AH − SH)SVOR
= (290,000 − 280,000)$0.75
= $7,500 U
12. Gallant Company uses standard costing. Overhead is applied to products on the basis of standard direct
labor hours for actual production. Data for Gallant follows:
Standard direct labor hours allowed for actual output
110,000
Actual direct labor hours
115,000
Direct labor hours budgeted in the master budget
120,000
Budgeted total fixed overhead cost
$210,000
Actual fixed overhead cost
$208,000
A.
Calculate the fixed overhead rate.
B.
Calculate the total fixed overhead applied to production.
C.
Calculate the fixed overhead spending variance.
D.
Calculate the fixed overhead volume variance.
E.
Calculate the total fixed overhead variance.
A.
Fixed overhead applied to production = $1.75 110,000 = $192,500
Fixed overhead spending variance = $208,000 − $210,000 = $2,000 F
Fixed overhead volume variance = $210,000 − $192,500 = $17,500 U
E.
Total fixed overhead variance = $2,000 F + $17,500 U = $15,500 U
13. The following costs were developed for one of the products of Larry Corporation:
= BFOH − SFOR SH
= $1,980,000 − $2,190,375
= $210,375 F
SVOR = ($4,050,000 − $1,980,000)/1,200,000 = $1.725 per DLH
= $1.725 1,327,500
= AVOH − SVOR AH
= $2,150,000 − ($1.725 1,190,000)
= $97,250 U
= (AH − SH)SVOR
= (1,190,000 − 1,327,500)$1.725
= $237,188 F (rounded)
Variable overhead: 8 hours $8 per hour
64.00
Fixed overhead: 8 hours $12 per hour
96.00
The following information is available regarding the company’s operations for the period:
Units produced:
11,000
Direct labor:
84,000 hours costing $840,000
Overhead incurred:
Variable
$756,000
Fixed
$1,000,000
Budgeted fixed overhead for the period is $960,000, and the standard fixed overhead rate is based on
expected capacity of 80,000 direct labor hours.
Required:
A.
Calculate the variable overhead spending variance.
B.
Calculate the variable overhead efficiency variance.
C.
Calculate the fixed overhead spending variance.
D.
Calculate the fixed overhead volume variance.
14. Mills Company uses standard costing for direct materials and direct labor. Management would like to
use standard costing for variable and fixed overhead.
The following monthly cost functions were developed for overhead items:
Overhead Item
Cost Function
Indirect materials
$1.00 per DLH
Indirect labor
$1.25 per DLH
Utilities
$0.50 per DLH
Insurance
$10,000
Depreciation
$40,000
The cost functions are considered reliable within a relevant range of 20,000 to 40,000 direct labor
hours. The company expects to operate at 25,000 direct labor hours per month.
Information for the month of June is as follows:
Actual overhead costs incurred:
Indirect materials
$ 20,000
Indirect labor
30,000
$756,000 − (84,000 $8)
(84,000 $8) − (11,000 8 $8)
($1,000,000 − $960,000)
$960,000 − (11,000 8 $12)
Utilities
12,000
Insurance
11,000
Depreciation
40,000
Total
$113,000
Actual direct labor hours worked:
24,000
Standard direct labor hours allowed for production achieved:
27,000
Required:
A.
Calculate the following overhead rates based upon expected capacity:
1.
Variable overhead
2.
Fixed overhead rate
3.
Total overhead rate
B.
Calculate the following variances:
1.
Variable overhead spending variance
2.
Variable overhead efficiency variance
3.
Fixed overhead spending variance
4.
Fixed overhead volume variance
ANS:
Figure 11-8.
Booth Inc. uses three delivery trucks to transport finished parts from its plant to the plants of its
customers. The delivery trucks are obtained through a 5-year operating lease that costs $12,000 per
year per truck. Booth employs 6 drivers who receive an average salary of $36,000 per year, including
benefits. Parts are placed in boxes and placed in the trucks. Each truck holds 20 boxes. The average
round-trip distance for a delivery is 40 miles. The boxes are retained by the customers. Each box costs
$2.00. Fuel for the trucks costs $1.80 per gallon. A gallon of gas is used every 20 miles. A driver can
travel 160 miles in an eight-hour shift. Each driver works 40 hours per week and 50 weeks per year.
A.
SVOR:
$2.75/DLH
($1.00 + $1.25 + $0.50)
SFOR:
$2.00/DLH
($10,000 + $40,000)/25,000
Total mfg. oh. rate:
$4.75/DLH
($2.75 + $2.00)
B.
Variable overhead spending variance
($20,000 + $30,000 + $12,000) − (24,000 $2.75) = $4,000 F
Variable overhead efficiency variance
(24,000 $2.75) − (27,000 $2.75) = $8,250 F
Fixed overhead spending variance
($51,000 − $50,000) = $1,000 U
Fixed overhead volume variance
[$50,000 − (27,000 $2.00)] = $4,000 F
15. Refer to Figure 11-8. Prepare an annual budget for the activity, assuming that all of the capacity of the
activity is used (use miles as the activity driver). Identify which resources you would treat as fixed
costs and which would be viewed as variable costs.
16. Refer to Figure 11-8. Assume that the company uses only 90% of the activity capacity. The actual
costs incurred at this level were:
Salaries
$252,000
Lease
36,000
Boxes
200,000
Fuel
20,400
A.
What is the budget for this level of activity?
B.
Prepare a performance report.
Resource
Total
$252,000
Resource
Salaries
$252,000
$216,000
Lease
36,000
36,000
Boxes
Fuel
Total
$508,400
$487,440
Resource
Total
$252,000
17. McCordy Company provided information on the following three overhead activities:
Activity
Driver
Fixed Cost
Variable Rate
Maintenance
Machine hours
$75,000
$1.50
Power
Machine hours
20,000
$2.05
Setting up
Setups
–
$1,500
McCordy has found that the following driver levels are associated with two different levels of
production:
Driver
30,000 units
70,000 units
Machine hours
50,000
95,000
Setups
25
65
Required:
Prepare an activity-based flexible budget.
50,000 mhrs.
Maintenance
$1.50
Power
$2.05
$3.55
Fixed Cost
Setting up
$1,500
18. Allen Company produced 44,000 units last year. The information on the actual costs and budgeted
costs at actual production of three activities is provided below.
Activity
Actual Cost
Budgeted Cost for
Actual Production
Machining
$215,000
$225,000
Maintenance
$178,000
$178,300
Purchasing
$122,000
$118,000
Required:
Prepare an activity-based performance report for the three activities for the past year.
Units produced
44,000
Machining
F
Maintenance
F
Purchasing
U
ESSAY
1. Define static budget and flexible budget. What is each type used for?
You decide
2. Describe flexible budgeting, including the two types of flexible budgets.
3. Discuss the following statement: “As long as the total variable overhead variance is small, the
managers can be assured that actual activity is proceeding as planned. No further action is necessary.”
4. Discuss the following statement: “Since fixed overhead is, by definition, not related to changes in
activity level, then the fixed overhead spending variance is zero.”
5. What is the fixed overhead volume variance? Suppose that the fixed overhead volume variance is
unfavorable; what does that mean?
6. How does activity flexible budgeting differ from traditional-based flexible budgeting?
7. Discuss why activity flexible budgeting provides a more accurate prediction of costs than a traditional
flexible budget.