Chapter 11 – Flexible Budgets and Overhead Analysis
146. 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.
Variable overhead rate
Fixed overhead rate
Total overhead rate
B.
A.
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
B.
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
Chapter 11 – Flexible Budgets and Overhead Analysis
147. The following standard overhead costs were developed for one of the products of Mildey Company:
Variable overhead:
5 hours × $4.00 per hour
20.00
Fixed overhead:
5 hours × $15.00 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.
A.
$437,500 − (115,000 × $4.00)
B.
[115,000 − (20,000 units × 5 hours )] × $4.00
C.
$1,320,000 − $1,350,000
D.
$1,350,000 − (20,000 units × 5 hours × $15.00)
148. 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
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.
Fixed overhead volume variance:
(BFOH − SH) × SFOR
= $40,000 − (27,000 hours × $1.60)
= $3,200 F
Chapter 11 – Flexible Budgets and Overhead Analysis
A.
Actual FOH
Budgeted FOH
Applied FOH
$8,000 U
$32,000 U
B.
VOH Spending variance
= AVOH − (SVOR × AH)
= $218,000 − ($0.75 × 290,000)
= $500 U
VOH efficiency variance
= (AH − SH) × SVOR
= (290,000 − 280,000) × $0.75
= $7,500 U
149. 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.
A.
Fixed overhead rate (SFOR) = $1,980,000 / (0.375 × 3,200,000) = $1.65 per DLH
Applied FOH = $1.65 × 1,327,500 = $2,190,375
B.
FOH spending variance
= AFOH − BFOH
= $1,920,000 − $1,980,000
= $60,000 F
FOH volume variance
= BFOH − (SFOR × SH)
= $1,980,000 − $2,190,375
= $210,375 F
C.
SVOR = ($4,050,000 − $1,980,000) / 1,200,000 = $1.725 per DLH
Applied VOH
= $1.725 × 1,327,500
= $2,289,938 (rounded)
D.
VOH spending variance
= AVOH − (SVOR × AH)
= $2,150,000 − ($1.725 × 1,190,000)
= $97,250 U
Chapter 11 – Flexible Budgets and Overhead Analysis
150. 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 rate = $210,000 / 120,000 = $1.75
B.
Fixed overhead applied to production = $1.75 × 110,000 = $192,500
C.
Fixed overhead spending variance = $208,000 − $210,000 = $2,000 F
D.
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
151. The following costs were developed for one of the products of Larry Corporation:
Variable overhead: 8 hours × $8.00 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.
A.
$84,000 U
$756,000 − (84,000 × $8.00)
B.
$32,000 F
(84,000 × $8.00) − (11,000 × 8 × $8.00)
C.
$40,000 U
($1,000,000 − $960,000)
D.
$96,000 F
$960,000 − (11,000 × 8 × $12.00)
VOH efficiency variance
= (AH − SH) × SVOR
= (1,190,000 − 1,327,500) × $1.725
= $237,188 F (rounded)
Chapter 11 – Flexible Budgets and Overhead Analysis
152. 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
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.
1.
Variable overhead
2.
Fixed overhead rate
3.
Total overhead rate
B.
1.
Variable overhead spending variance
2.
Variable overhead efficiency variance
3.
Fixed overhead spending variance
4.
Fixed overhead volume variance
A.
1.
SVOR:
$2.75/DLH
($1.00 + $1.25 + $0.50)
2.
SFOR:
$2.00/DLH
($10,000 + $40,000) / 25,000
3.
Total mfg. oh. rate:
$4.75/DLH
($2.75 + $2.00)
B.
1.
Variable overhead spending variance
($20,000 + $30,000 + $12,000) − (24,000 × $2.75) = $4,000 F
Chapter 11 – Flexible Budgets and Overhead Analysis
Fixed overhead spending variance
($51,000* − $50,000) = $1,000 U
Fixed overhead volume variance
$50,000 − (27,000 × $2.00) = $4,000 F
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.
153. 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.
Resource
Salaries
$216,000
$216,000
Lease
36,000
36,000
Boxes*
240,000
Fuel**
21,600
Total
$252,000
$513,600
**$1.80 / 20
154. 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.
A.
Resource
Salaries
Lease
Boxes
Fuel
Total
B.
Chapter 11 – Flexible Budgets and Overhead Analysis
155. 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.
Maintenance
Power
Setting up
Total
156. 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.
Performance Report
Resource
Salaries
Lease
Boxes
Fuel
Total
Capacity is determined by drivers: 6 × 160 × 5 × 50 = 240,000 miles. 90% = 216,000 miles
Chapter 11 – Flexible Budgets and Overhead Analysis
157. Define static budget and flexible budget. What is each type used for?
You decide
158. Describe flexible budgeting, including the two types of flexible budgets.
159. 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.”
160. 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.”
Chapter 11 – Flexible Budgets and Overhead Analysis
161. What is the fixed overhead volume variance? Suppose that the fixed overhead volume variance is unfavorable; what
does that mean?
162. How does activity flexible budgeting differ from traditional-based flexible budgeting?
163. Discuss why activity flexible budgeting provides a more accurate prediction of costs than a traditional flexible
budget.
Match the following terms with the items below:
a.
(Actual hours − Standard hours)SVOR
b.
Prediction of what activity costs will be as activity output changes
c.
A measure of capacity utilization
d.
Actual variable overhead − (SVOR × Actual hours)
e.
Difference between the actual amount and the flexible budget amount
f.
A budget that specifies costs for a range of activity
g.
A budget for a particular level of activity
h.
Estimating activity output and then assessing the cost of resources to produce this output
i.
A report that compares actual with planned costs
j.
Difference between actual and budgeted fixed overhead
164. Performance report
165. Static budget
166. Flexible budget
in a fixed overhead spending variance.
Chapter 11 – Flexible Budgets and Overhead Analysis
167. Activity-based budgeting
168. Fixed overhead spending variance
169. Activity flexible budget
170. Fixed overhead volume variance
171. Variable overhead efficiency variance
172. Variable overhead spending variance
173. Flexible budget variance