Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-24 (Continued-1)
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-24 (Continued-2)
(3) Graphical representation of monthly factory overhead cost:
Note: An Excel spreadsheet solution file for this assignment is embedded below. You can
open this “object” by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select “worksheet object” and then select “Open.”
3. To return to the Word document, select “File” and then “Close and return to…”
while you are in the spreadsheet mode. The screen should then return you to
this Word document.
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Education.
Ex. 15-24.xlsx
(B)
(A)
(C)
(D)
(E) (F)
Area (G)
Area (H) Area (I)
Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-25 Graphical Analysis—Variable Overhead Cost Variances (20–25 minutes)
Solution:
(A) = Variable Overhead Costs per Machine Hour (label)
(B) = Machine Hours (i.e., the activity measure used to apply variable overhead costs)
(label)
(C) = Actual variable overhead cost per machine hour = AP
Sum of areas (G), (H), and (I) = actual variable overhead cost for the period = AP × AQ
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-26 Graphical Analysis—Fixed Overhead Cost Variances (30–40 minutes)
Solution:
(A) = Fixed Overhead Cost (label)
(B) = Machine Hours = Activity Measure for Applying Fixed Overhead Cost (label)
(C) = Applied Fixed Overhead Cost
(D) = Standard Fixed Overhead Application Rate (per Machine Hour)
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-27 Fixed Overhead Rate, Denominator Level, and 2-Variance Analysis of Fixed
Overhead Variance (25 minutes)
1. Standard fixed factory overhead rate = budgeted total overhead cost per machine
2. Denominator activity level (used to set the standard fixed overhead allocation rate) =
Budgeted Fixed Overhead Fixed Overhead Allocation Rate per MH = $7,125
3. Two-Way Analysis (Breakdown) of Total Overhead Variance
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Flexible Budget and Variances for Depreciation (20 minutes)
1. Flexible-budget amount—equipment depreciation, September:
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Education.
Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
3. Production Volume Variance—Portion Pertaining to Depreciation:
Budgeted depreciation for the month $30,000
Total standard depreciation expense applied:
Total chargeable hours for the month = 9,000
Standard depreciation per chargeable hour:
Total budgeted depreciation Total budgeted
4. Reasons for the favorable spending variance regarding equipment depreciation
expense include:
The company disposed of some of its equipment during the period
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Education.
Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-29 Variable Factory Overhead Variances; Journal Entries (40 minutes)
1. Standard variable overhead rate per direct labor hour (DLH):
= Budgeted Total Variable Overhead ÷ Budgeted Total Direct Labor Hours
Variable Overhead Variance Analysis
FB Based on FB Based on
Actual Cost Inputs Output
(AQ × AP) (AQ × SP) (SQ x SP)
2,700 hrs. × $5.7777/hr. 2,700 × $6.00/hr. (4,800 × 0.5) × $6.00/hr.
= $15,600 = $16,200 = $14,400
Spending variance Efficiency variance
= $600 F = $1,800 U
or, = AQ × (AP − SP) or, = (AH − SH) × SR
= 2,700 × ($5.7777 − $6.00) = (2,700 − 2,400) × $6.00/hr.
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-29 (Continued)
2. To Record Favorable Variable Overhead Spending Variance:
Dr. Factory Overhead (or, Variable Factory
Overhead) 600
Cr. Variable Overhead Spending Variance 600
3. The factory had a favorable variable overhead spending variance. This could be a
result of conscientious efforts of workers and the manager of the factory in conserving
uses of variable factory items. Alternatively, it could have been due, at least in part, to
the use of an inappropriate activity measure (direct labor hours) for assigning variable
factory overhead costs.
level of output. As long as DLHs worked is related to variable overhead costs incurred,
then the efficiency variance indicates the cost to the company (in terms of variable
overhead) of using 300 extra DLHs this period.
a valid conclusion provided that DLHs is a reasonably good activity measure for the
consumption of variable factory overhead cost.
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-30 Fixed Overhead Variances; Journal Entries (40 minutes)
1. Standard fixed factory overhead application rate per direct labor hour (DLH):
= Budgeted Fixed Factory Overhead ÷ Total Direct Labor Hours, Practical Capacity
Standard direct-labor hours (DLH) per unit:
Fixed Overhead Variance Analysis
Applied
Actual Cost Budget (SQ × SP)
4,800 units × 0.5 hrs. × $36/hr.
$92,000 $90,000 = $86,400
Spending variance Production volume variance
= $92,000 − $90,000 = $90,000 − $86,400
= $2,000U = $3,600U
2. Fixed factory overhead (FOH) flexible-budget variance
3. To Record Unfavorable Fixed Overhead Spending Variance:
Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-30 (Continued)
To Record Unfavorable Production Volume Variance:
Dr. Production Volume Variance 3,600
Cr. Factory Overhead (or, Fixed Factory Overhead) 3,600
4. The $2,000 unfavorable fixed factory overhead spending variance could be a result of
unexpected fluctuations, overspending, or budgeting errors in one or more fixed
overhead items. However, since the amount is small (2.22% of the budget amount), it
is unlikely that the management needs to spend any time or resources to investigate
this variance.
activities or events in the factory such as equipment failure, inefficient workers, or high
defective rates. However, the factory is doing its job if the lower production is a result
of the decreased demand for its product. As indicated in the text, this variance
generally has shared responsibility (with marketing, purchasing, etc.).
Note that when the denominator activity level is set at practical capacity, then resulting
production volume variances can be interpreted as the cost of unused capacity. The
disclosure of this information over time can help managers make better decisions
regarding capacity-related spending.
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