Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
Chapter 8 Flexible Budgets, Variances, and Management Control: II
8.1 Assign MOH fixed costs, then calculate and analyze flexible-budget variances.
1) Capacity refers to the quantity of outputs that can be produced from long-term resources available to
the company.
2) Capacity cost is a variable overhead cost.
3) Capacity decisions are considered operating decisions because they involve the long-term acquisition
of assets by purchase or lease.
4) Fixed overhead costs are a lump sum that does not change in total despite changes in the cost driver.
5) The budgeted fixed overhead rate per output unit is computed by dividing budgeted fixed overhead
costs by the level of input units.
6) The (production) denominator level is the quantity of the allocation base used to allocate fixed
overhead costs to a cost object in developing a budgeted fixed overhead rate.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
7) The fixed overhead flexible budget variance is the same as the fixed overhead static budget variance.
8) The difference between budgeted fixed overhead and fixed overhead allocated for actual output units
achieved, is the production-volume variance.
9) The production -volume overhead variance is favourable when actual outputs exceed the denominator
level.
10) The production-volume variance arises because the actual output level differs from the output level
used as the denominator to calculate the budgeted fixed overhead rate.
11) The fixed manufacturing overhead efficiency variance is used to analyze overhead costs.
12) An unfavourable fixed setup overhead rate variance could be due to higher lease costs of new setup
equipment or higher salaries paid to engineers and supervisors.
13) A favourable production-volume variance arises when manufacturing capacity planned for is not
used.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
14) In the journal entry that records overhead variances, the manufacturing overhead allocated accounts
are closed.
15) Managers should use unitized fixed manufacturing overhead costs for planning and control.
16) Fixed Manufacturing Overhead Variances that are material should only be written off to Cost of
Goods Sold.
17) Human capital refers to the intangible skills provided by people and is an inventoriable cost under
GAAP.
18) Which decisions are most likely to have been made by the start of the accounting period?
A) decisions affecting value-added costs
B) decisions affecting non-value-added costs
C) decisions affecting variable overhead costs
D) decisions affecting both fixed and variable overhead costs
E) decisions affecting fixed overhead costs
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
19) Decisions about capacity are considered to be
A) operating decisions.
B) best done by plant supervisors.
C) best done during production.
D) more relevant for variable costs.
E) strategic decisions.
20) Randy’s Production Company uses a single cost pool for fixed manufacturing overhead. The amount
for May 2012 was budgeted at $250,000; however, the actual amount was $350,000. Actual production for
May was 12,500 units, and actual machine hours were 10,000. Budgeted production included 17,750 units
and 12,375 machine hours.
What is the budgeted fixed overhead rate per input unit?
A) $25.00 per unit
B) $35.00 per unit
C) $20.00 per unit
D) $14.09 per unit
E) $14.08 per unit
21) Actual overhead is $700,000, while budgeted overhead is $598,000. What is the fixed overhead static–
budget variance if 250,000 units are produced and 225,000 are budgeted?
A) $80,000 favourable
B) $100,000 unfavourable
C) $100,000 favourable
D) $102,000 unfavourable
E) $102,000 favourable
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
22) In flexible budgets, costs that remain the same regardless of the output levels within the relevant
range are
A) allocated costs.
B) budgeted costs.
C) fixed costs.
D) variable costs.
E) estimated costs.
23) Davis Company produced 20,000 cases of beer. Machinery usage is 1.5 hours per case. Budget outputs
are 22,000 cases. What are the required static budget machine hour inputs and flexible budget machine
hour inputs, respectively?
A) 30,000 Machine hours, 33,000 Machine hours
B) 33,000 Machine hours, 30,000 Machine hours
C) 39,000 Machine hours, 34,000 Machine hours
D) 34,000 Machine hours, 39,000 Machine hours
E) 39,000 Machine hours, 33,000 Machine hours
24) Regal Company uses a single cost pool for fixed manufacturing overhead. The amount for June 2012
was budgeted at $500,000; however, the actual amount was $700,000. Actual production for June was
12,500 units, and actual machine hours were 10,000. Budgeted production included 17,750 units and
12,375 machine hours.
What is the budgeted fixed overhead rate per output unit?
A) $28.17 per unit
B) $39.44 per unit
C) $40.40 per unit
D) $56.56 per unit
E) $65.17 per unit
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
25) Regal Company uses a single cost pool for fixed manufacturing overhead. The amount for June 2012
was budgeted at $500,000; however, the actual amount was $700,000. Actual production for June was
12,500 units, and actual machine hours were 10,000. Budgeted production included 17,750 units and
12,375 machine hours.
What is the budgeted fixed overhead rate per machine hour?
A) $28.17 per machine hour
B) $39.44 per machine hour
C) $40.40 per machine hour
D) $56.56 per machine hour
E) $65.17 per machine hour
26) Which of the following statements is true?
A) The fixed manufacturing sales-volume variance is rarely zero.
B) The difference between the allocated and the budgeted overhead is the production-volume variance.
C) The production-volume variance arises for both fixed and variable costs.
D) The fixed manufacturing overhead sales-volume variance can be written-off to cost of goods sold.
E) The production-volume variance arises only for variable costs.
27) Leek Company predicted that the fixed overhead would be $200,000 in April 20X1. Production
amounted to 60,000 actual and 50,000 budgeted decks of cards. Each deck takes approximately 0.20
machine hours to produce. The actual overhead costs per machine hour are $25. What is the production–
volume overhead variance?
A) $40,000 unfavourable
B) $40,000 favourable
C) $150,000 unfavourable
D) $150,000 favourable
E) $0
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
28) Budgeted output for DuCane Small Engines Inc. was 20,000 engines during February 2012. Budgeted
fixed overhead per output unit was $2.50, and 30,000 engines were actually produced. Actual fixed
overhead was allocated at $3.00 per engine. What is the production-volume overhead variance?
A) $33,500 favourable
B) $25,000 unfavourable
C) $30,000 favourable
D) $30,000 unfavourable
E) $25,000 favourable
29) In variance analysis, fixed manufacturing overhead will have
A) an efficiency variance.
B) a flexible-budget variance.
C) a rate variance.
D) a static-budget variance.
E) no variance, because it is fixed.
30) The difference between budgeted fixed manufacturing overhead and the fixed manufacturing
overhead allocated to actual output units achieved is called
A) an efficiency variance.
B) a flexible–budget variance.
C) a manufacturing overhead flexible-budget variance.
D) a production-volume overhead variance.
E) an unallocated variable cost.
31) The production-volume variance
A) only pertains to variable overhead costs.
B) only pertains to fixed overhead costs.
C) is not applicable in analysis of inventory costs.
D) pertains to both fixed and variable overhead costs.
E) equals the rate variance minus the efficiency variance.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
32) Capacity cost is
A) only an inventoriable cost.
B) only a period cost.
C) never amortized.
D) a variable manufacturing overhead cost.
E) a fixed manufacturing overhead cost.
33) In order to properly record a fixed manufacturing overhead rate variance of $30,000 unfavourable and
a production-volume overhead variance of $20,000 favourable, what would the appropriate journal entry
be if actual fixed overhead is $500,000?
A)
Fixed Overhead Allocated
500,000
Various Payable Accounts
500,000
B)
Work in Process Control
500,000
Fixed Overhead Production-Vol Variance
20,000
Fixed Overhead Rate Variance
30,000
Fixed Overhead Allocated
490,000
C)
Fixed Overhead Allocated
500,000
Fixed Overhead Production-Vol Variance
20,000
Fixed Overhead Rate Variance
30,000
Fixed Overhead Control
490,000
D)
Fixed Overhead Allocated
490,000
Fixed Overhead Rate Variance
30,000
Fixed Overhead Production-Volume Variance
20,000
Fixed Overhead Control
500,000
E)
Fixed Overhead Rate Variance
30,000
Fixed Overhead Production-Volume Variance
20,000
Various Payable Accounts
10,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
Answer the following question(s) using the information below.
Jenny’s Corporation manufactured 25,000 grooming kits for horses during March. The fixed-overhead
cost allocation rate is $20.00 per machine-hour. The following fixed overhead data pertain to March:
Actual
Static Budget
Production
25,000 units
24,000 units
Machine-hours
6,100 hours
6,000 hours
Fixed overhead costs for March
$123,000
$120,000
34) What is the flexible-budget amount for fixed-overhead?
A) $120,000
B) $122,000
C) $123,000
D) $125,000
E) $120,983
35) What is the amount of fixed overhead allocated to production?
A) $120,000
B) $122,000
C) $123,000
D) $125,000
E) $130,000
36) What is the fixed overhead rate variance?
A) $1,000 unfavourable
B) $2,000 favourable
C) $3,000 unfavourable
D) $5,000 favourable
E) $983 unfavourable
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
37) What is the fixed overhead production-volume variance?
A) $2,000 unfavourable
B) $3,000 favourable
C) $4,000 unfavourable
D) $5,000 favourable
E) $10,000 favourable
38) The production-volume variance may also be referred to as the
A) flexible-budget variance.
B) static-budget variance.
C) rate variance.
D) efficiency variance.
E) denominator-level variance.
39) A favourable production-volume variance indicates that the company
A) has good management.
B) produced more than it has sold.
C) has a total economic gain from using excess capacity.
D) should increase capacity.
E) has allocated more fixed overhead costs than budgeted.
40) When machine-hours are used as a cost allocation base, the item MOST likely to contribute to a
favourable production-volume variance is
A) an increase in the selling price of the product.
B) the purchase of a new manufacturing machine costing considerably less than expected.
C) a decline in the cost of energy.
D) strengthened demand for the product.
E) a competitor lowering the price of a similar product.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
41) When machine-hours are used as a cost allocation base, the item MOST likely to contribute to an
unfavourable production-volume variance is
A) a new competitor gaining market share.
B) a new manufacturing machine costing considerably more than expected.
C) an increase in the cost of energy.
D) strengthened demand for the product.
E) an increase in the number of direct-labour hours.
42) All Clean of Alberta manufactures individual shampoos for hotel/motel clientele. The fixed
manufacturing overhead costs for 2012 will total $576,000. The company uses good units finished for
fixed overhead allocation and anticipates 300,000 units of production. Good units finished average 92
percent of total units produced. During January, 20,000 units were produced. Actual fixed overhead cost
per good unit averaged $2.82 in January.
Required:
a. Determine the fixed overhead rate for 2012.
b. Determine the fixed overhead static-budget variance for January.
c. Determine the fixed overhead production-volume variance for January.
d. Determine the fixed overhead rate variance for January.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
43) Johnston Equipment develops food processing equipment. The budgeted fixed overhead costs for
2012 total $768,000. The company uses direct labour-hours for fixed overhead allocation and anticipates
480,000 hours during the year for 960,000 units. An equal number of units are budgeted for each month.
During April 84,000 packages (units) were produced and $66,000 was spent on fixed overhead.
Required:
a. Determine the fixed overhead rate for 2012 based on direct labour-hours.
b. Determine the fixed overhead static-budget variance for April.
c. Determine the production-volume overhead variance for April.
44) Everjoice Company makes clocks. The budgeted fixed overhead costs for 2012 total $720,000. The
company uses direct labour-hours for fixed overhead allocation and anticipates 240,000 hours during the
year for 480,000 units. An equal number of units are budgeted for each month.
During June, 42,000 clocks were produced and $63,000 were spent on fixed overhead.
Required:
a. Determine the fixed overhead rate for 2012 based on units of input.
b. Determine the fixed overhead static-budget variance for June.
c. Determine the production-volume overhead variance for June.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
45) Calculate the fixed manufacturing overhead rate variance based on the following data:
Fixed manufacturing overhead allocated $65,000 debit
Fixed manufacturing production-volume variance $20,000 debit
Variable manufacturing overhead rate variance $4,000 Unfavourable
Fixed manufacturing overhead control $135,000 credit
46) Mostly Miniatures has just implemented a new cost accounting system that provides two variances
for fixed manufacturing overhead. While the company’s managers are familiar with the concept of static–
budget variance, they are unclear as to how to interpret the production-volume overhead variances.
Currently the company has a production capacity of 54,000 miniatures a month although it generally
produces only 46,000 cases. However, in any given month the actual production is probably something
other than 46,000.
Required:
a. Does the production-volume overhead variance measure the difference between the 54,000 and
46,000, or the difference between the 46,000 and the actual monthly production? Explain.
b. What advice can you provide the managers that will help them interpret the production-volume
overhead variances?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
47) What are the arguments for prorating a production-volume variance that has been deemed to be
material among work–in-process, finished goods, and cost of goods sold, as opposed to writing it all off to
cost of goods sold?
48) Explain two concerns when interpreting the production-volume variance as a measure of the
economic cost of unused capacity.
49) Brown Company makes watches. The budgeted fixed overhead costs for 2012 total $324,000. The
company uses direct labour-hours for fixed overhead allocation and anticipates 10,800 hours during the
year for 540,000 units. An equal number of units are budgeted for each month.
During October, 48,000 watches were produced and $28,000 was spent on fixed overhead.
Required:
a. Determine the fixed overhead rate for 2012 based on the units of input.
b. Determine the fixed overhead static-budget variance for October.
c. Determine the production-volume overhead variance for October.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
50) Explain why there is no efficiency variance for fixed manufacturing overhead costs.
51) How is a budgeted fixed overhead cost rate calculated?
52) Explain the meaning of a favourable production-volume variance.
8.2 Establish variable overhead cost allocation rates; calculate and analyze flexible-
budget variances.
1) Using a standard costing system makes it possible to use a simple recording system.
2) Variable overhead rate variance is the difference between the actual amount of variable overhead
incurred and the budgeted amount allowed for the actual quantity of the variable overhead allocation
base used for the actual output units achieved.
3) Even where separate variable and fixed manufacturing overhead control accounts are used for job
costing, it is not necessary to have separate overhead allocated accounts.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
4) If a manager views the proration approach as not being cost-effective, then the adjusted allocation rate
approach would be used.
5) An unfavourable variable overhead rate variance can be the result of paying lower prices than
budgeted for variable overhead items such as energy.
6) The variable overhead efficiency variance is computed in a different way than the efficiency variance
for direct-cost items.
7) The variable overhead flexible-budget variance measures the difference between standard variable
overhead costs and flexible-budget variable overhead costs.
8) The variable overhead efficiency variance measures the efficiency with which the cost-allocation base is
used.
9) The variable overhead efficiency variance can be interpreted the same way as the efficiency variance
for direct-cost items.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
10) Effective planning of variable overhead costs means that a company performs those variable
overhead costs that primarily add value
A) for the current shareholders.
B) for the customer using the products or services.
C) for plant employees.
D) for major suppliers of component parts.
E) for management.
11) Two of the primary ways to manage variable-overhead costs include
A) eliminating non-value-added costs and reducing the consumption of cost drivers.
B) eliminating non-value-added costs and increasing fixed overhead expenses.
C) reducing the consumption of cost drivers and increasing variable costs.
D) using more energy-efficient equipment and planning for appropriate capacity levels.
E) increasing variable costs and eliminating non-value added costs.
12) The first step in developing variable overhead rates is
A) consider the potential effect of variances.
B) select homogeneous inputs for variable cost-allocation base(s).
C) analyze and select homogeneous variable cost pools.
D) compute the variable overhead cost-allocation rate(s).
E) choose the budget period.
13) If budgeted machine-hours allowed per actual output unit equals 1.0 hour, and budgeted variable
manufacturing overhead per machine-hour is $200, what is the budgeted variable manufacturing
overhead rate per output unit?
A) $100
B) $200
C) $300
D) $400
E) $500
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
14) What is the variable manufacturing overhead static-budget variance given the following information?
Actual output units produced
28,000 units
Actual machine-hours used
10,000 hours
Actual variable manufacturing overhead costs
$300,000
Budgeted variable manufacturing overhead costs
$250,000
Budgeted output units
25,000 units
A) $20,000 favourable
B) $20,000 unfavourable
C) $50,000 unfavourable
D) $50,000 favourable
E) $55,000 favourable
Use the information below to answer the following question(s).
Moeller Electric manufactures light fixtures. The following information pertains to the company’s
manufacturing overhead data.
30,000 fixtures
10,000 hours
$80,625
44,000 fixtures
10,000 hours
$121,000
15) What is Moeller Electric’s variable manufacturing overhead static-budget variance?
A) $2,750 favourable
B) $2,750 unfavourable
C) $40,375 favourable
D) $40,375 unfavourable
E) $44,000 unfavourable
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
16) What is Moeller Electric’s variable manufacturing overhead sales-volume variance?
A) $2,750 favourable
B) $37,625 favourable
C) $37,625 unfavourable
D) $40,375 favourable
E) $40,375 unfavourable
17) What is the variable manufacturing overhead flexible-budget variance?
A) $387 favourable
B) $2,363 unfavourable
C) $2,363 favourable
D) $2,750 favourable
E) $2,750 unfavourable
18) Assume that variable manufacturing overhead is allocated according to machine-hours. Aladdin
Company expects to produce 400 cases of Product A using 400 machine-hours. Each machine hour is
expected to take 10 KWH of electricity, which costs $6 per KWH. What is the maximum amount the
company would be willing to pay for the new machine based solely on rate and efficiency variances if a
new energy-efficient machine only used 8 KWH per machine-hour?
A) $120
B) $4,680
C) $4,920
D) $4,800
E) $4,120
Cost Accounting: A Managerial Emphasis, 6e
Chapter 8 – Flexible Budgets, Variances, and Management Control: II
19) Cady Machine Shop used 15,000 machine hours during January. It takes 0.90 machine-hours to
produce one unit; 15,000 units were produced during the month. Budgeted production included 12,000
units, using 10,800 machine hours. Budgeted variable manufacturing overhead costs per machine–hour is
$22.50. What is the variable overhead efficiency variance for Cady?
A) $67,500 unfavourable
B) $67,500 favourable
C) $37,000 favourable
D) $33,750 favourable
E) $33,750 unfavourable
20) A favourable variable manufacturing overhead efficiency variance may be interpreted as meaning
which of the following?
A) Employees used too much electricity during production.
B) Less maintenance was required than expected.
C) Excess supplies were used.
D) Too much of the cost driver was used.
E) The cost driver is inappropriate.
21) If Ferg Company has a $12,000 unfavourable variable-overhead efficiency variance, which of the
following statements would be true?
A) Ferg would credit the Cost of Goods Sold account to write-off the variance.
B) Ferg used the variable overhead components more effectively than expected.
C) Ferg made efficient use of the cost driver.
D) Ferg used the variable overhead components and cost driver as expected.
E) Ferg did not use the cost driver efficiently.