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157. As was the case with the material presented in text Chapter 14, the cost variances
covered in Chapter 15 are directed at what might be called
short-term financial control.
These
variances are calculated on the basis of standard costs and the use of flexible budgets. Periodic
reports containing these variances are but a part of a larger and more comprehensive
management accounting and control system.
Required:
Explain some of the inherent limitations of short-term financial performance measures (such as
standard cost variances) and how such measures might be supplemented to better meet the
planning and control needs of management.
158. Redtop Co. uses a standard cost system and flexible budgets. The following flexible
budget was prepared at the 80% operating level for the year:
Standard direct labor hours (DLHs) 28,800
Budgeted variable factory overhead cost $149,760
Total factory overhead rate per DLH $18.70
However, for purposes of calculating the fixed overhead application rate, the company defined
the denominator volume as the 90% capacity level. The standard calls for four DLHs per unit
manufactured. During the year, Redtop worked 33,600 DLHs to manufacture 8,500 units. The
actual factory overhead cost incurred was $12,000 greater than the flexible-budget amount for
the units produced, of which $5,000 was due to fixed factory overhead.
Required:
Calculate (and provide supporting details for) each of the following variances:
1. The standard variable overhead application rate.
2. The variable overhead efficiency variance.
3. The total factory overhead spending variance.
4. The factory overhead production volume variance.
5. The variable overhead spending variance.
6. Provide a description for each of the variances you calculated in requirements 1 through 5.
159. Carl Jones Company's master budget for the year just completed was based on 100%
capacity and included 50,000 machine hours and $300,000 total factory overhead. (That is, the
denominator volume, for purposes of calculating the fixed overhead application rate, is defined as
100% capacity.) Budgeted fixed overhead at 70% factory capacity is $200,000 (and 35,000
machine hours). The company operated at 80% capacity for the year, and incurred $275,000 total
factory overhead.
Required:
1. Determine the factory overhead flexible-budget variance for the year just completed. Show
calculations.
2. Calculate the factory overhead production volume variance for the year just completed. Show
calculations.
3. Provide a short discussion of the calculation of each of the two variances in requirements 1
and 2.
160. ABN Corp. has the following information about its standards and production activity in
May:
Total factory overhead costs incurred:
Variable overhead $55,000
Fixed overhead 40,000
Standard factory overhead rate:
Variable overhead $4.00 per unit
Fixed overhead 3.40 per unit
Denominator activity level (in units) 13,700
Actual units produced 14,000
Required:
Calculate and show underlying calculations for each of the following variances:
1. Variable overhead flexible-budget (FB) variance.
2. Fixed overhead spending variance.
3. Fixed overhead production volume variance.
4. Provide an explanation of the determination of each of the variances in requirements 1
through 3.
161. You are provided with the following summary of overhead-related costs for the most
recent accounting period:
1. Actual variable OH costs incurred during the month:
a. Utilities = $30,000 (incurred, but not yet paid)
b. Indirect materials = $10,630 (previously entered in Indirect Materials Inventory)
2. Standard variable OH cost for units produced during the period = $46,800
3. Actual fixed OH costs incurred during the month:
a. Supervisory salaries = $30,650 (earned, but not yet paid)
b. Depreciation—Plant equipment = $100,000
4. Standard FOH cost applied to production during the period = $93,600
5. Total standard cost of units completed during the period = $140,400
6. Standard cost variances for the month:
a. Production volume variance = $6,170 favorable
b. Total overhead flexible-budget variance = $37,050 unfavorable
7. End-of-period overhead variance disposition—assume that after the variances are recorded
into separate variance accounts (via the entry associated with (6) above), they are then closed
entirely to Cost of Goods Sold.
Required:
Prepare the appropriate journal entries for each of the above events. Assume that the company
uses a single account, Manufacturing Overhead.
162. You are provided with the following summary of overhead-related costs for the most
recent accounting period for a company that uses a single overhead account, Factory Overhead,
into which it records both actual and standard overhead costs during the period:
1. Overhead standard cost variances for the period:
a. Fixed overhead (FOH) spending variance = $1,600U
b. Production volume variance = $200F
c. Variable overhead (VOH) efficiency variance = $1,050U
d. Variable overhead (VOH) spending variance = $150U
2. Actual fixed overhead cost incurred (depreciation) = $15,800; actual variable overhead cost incurred
(paid in cash) = $4,800
3. Standard overhead cost applied to production (i.e., WIP inventory) during the period = $18,000
4. Standard overhead cost of units transferred to Finished Goods Inventory = $20,000
5. Before closing its accounts at the end of the period, the (standard cost) amounts affecting the inventory
and CGS accounts are as follows:
Account Debit (total) Credit (total)
WIP Inventory $153,000 $134,640
Finished Goods Inventory $134,640 $111,690
Cost of Goods Sold (CGS) $111,690
Required:
Prepare the proper journal entry for each of the following events:
1. Incurrence of actual fixed overhead (FOH) costs for the period.
2. Incurrence of actual variable overhead (VOH) costs for the period.
3. Application of standard overhead costs to production (i.e., to WIP inventory).
4. Recording of standard overhead costs for units completed during the period.
5. Recording of the four standard cost variances for the period.
6. Closing the standard cost variances under the assumption that the company closes these
variances entirely to Cost of Goods Sold (CGS).
7. Closing the standard cost variances under the assumption that the company prorates the
variances to the CGS and inventory accounts.
