112. Figure 9-8.
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 five-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.
Refer to Figure 9-8. 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.
113. Figure 9-8.
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 five-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.
Refer to Figure 9-8. Assume that the company uses only 90 percent of the activity capacity. The actual costs
incurred at this level were:
Salaries
$252,000
Lease
36,000
Crates
200,000
Fuel
20,400
A. What is the budget for this level of activity?
B. Prepare a performance report.
Resource
Formula
Activity level
Fixed
Variable
216,000 miles
Salaries
$216,000
–
$216,000
Lease
36,000
–
36,000
Boxes
–
$1.00
216,000
Fuel
–
0.09
19,440
Total
$252,000
$1.09
$487,440
114. Figure 9-8.
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 five-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.
Refer to Figure 9-8. Suppose that Booth relocates its plant so that the distance for deliveries is reduced by
75%. Assume that the trucks are in the second year of the lease.
Prepare the budget for this new level of activity.
115. Vallo Pharmacy operates a home delivery service with more than 2,000 home-bound 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 hour per delivery.
Compute the variable overhead spending variance and the variable overhead efficiency variance.
Variable overhead analysis:
116. 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
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
117. The following standard overhead costs were developed for one of the products of Mildey Company:
Variable overhead: 5 hours ´ $3 per hour
15.00
Fixed overhead: 5 hours ´ $15 per hour
75.00
Total standard overhead cost per unit
$90.00
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
$337,500
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.
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. $7,500 F
$337,500 – (115,000 ´ $3)
B. $45,000 U
[(115,000) – (20,000 units ´ 5 hours )] ´ $3
C. $30,000 F
$1,320,000 – $1,350,000
D. $150,000 F
$1,350,000 – (20,000 units ´ 5 hours ´ $15)
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
118. 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 volume, 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
$1,180,000
Variable overhead
$218,000
A. Compute the fixed overhead spending and volume variances.
B. Compute the variable overhead spending and efficiency variances.
$28,000 U
$32,000 U
FOH Spending
FOH Volume
= $218,000 – $0.75 ´ 290,000
= $500 U
= (290,000 – 280,000)$0.75
= $7,500 U
119. 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
$1,890,000
Actual variable overhead
2,150,000
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.
FOH spending variance
= AFOH – BFOH
= $1,890,000 – $1,980,000
= $90,000 F
FOH volume variance
= BFOH – SFOR ´ SH
= $1,980,000 – $2,190,375
Applied VOH
= $1.725 ´ 1,327,500
= $2,289,938 (rounded)
VOH spending variance
= AVOH – SVOR ´ AH
= $2,150,000 – $1.725 ´ 1,190,000
= $97,250 U
VOH efficiency variance
= (AH – SH)SVOR
= (1,190,000 – 1,327,500)$1.725
= $237,188 F (rounded)
120. 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.
121. 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.
122. Define static budget and flexible budget. What is each type used for?
123. 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.”
124. How does activity flexible budgeting differ from functional-based flexible budgeting?
125. What is the fixed overhead volume variance? Suppose that the fixed overhead volume variance is
unfavorable; what does that mean?
126. 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.”
127. Discuss why activity-based flexible budgeting provide a more accurate prediction of costs than a
traditional flexible budget.