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Problem 23-6BA (Continued)
Part 3 Overhead Variances
(a) Variable overhead
Preliminary computations
Actual variable overhead (given):
Indirect materials ........................................................
$10,000
Indirect labor ..............................................................
16,000
Power .........................................................................
4,500
Maintenance ...............................................................
3,000
Total ...........................................................................
$33,500
Actual hours:
37,600
(given)
Standard hours:
36,000
(from part 2)
Variable overhead cost variances
Variable overhead cost incurred [given] ................................
$33,500
Variable overhead cost applied [36,000 hrs. @ $1.00] .................
36,000
Variable overhead cost variance....................................................
$ 2,500 F
Variable Overhead Spending and Efficiency Variances
Actual Overhead
AH x AVR
AH x SVR
Applied Overhead
SH x SVR
37,600 x $1.00
36,000 x $1.00
hours per hr.
hours per hr.
$33,500
$37,600
$36,000
$4,100 F
(Spending variance)
$1,600 U
(Efficiency variance)
Budgeted direct labor hours
32,000 hours
Problem 23-6BA (Continued)
(b) Fixed overhead
Preliminary computations
Actual fixed overhead (given):
Rent of factory building ...............................................
$12,000
Depreciation, machinery ..............................................
19,200
Taxes and insurance ....................................................
3,000
Supervisory salaries ....................................................
14,000
Total .............................................................................
$48,200
Budgeted fixed overhead:
$48,000
(given)
Fixed overhead cost variances
Fixed overhead cost incurred [given] ................................
$48,200
Fixed overhead cost applied [36,000 hrs. @ $1.50] ......................
54,000
Fixed overhead cost variance ........................................................
$ 5,800 F
Fixed Overhead Spending and Volume Variances
Actual Overhead
Budgeted Overhead
Fixed Overhead
Applied
36,000 x $1.50
hours per hr.
$48,200
$48,000
$54,000
$200 U
(Spending variance)
$6,000 F
(Volume variance)
Budgeted direct labor hours
32,000 hours
Problem 23-6BA (Concluded)
Part 4
GUADELUPE COMPANY
Overhead Variance Report
For Month Ended March 31
Volume Variance
Expected production level ..........................................
80% of capacity
Production level achieved ..........................................
90% of capacity
Volume variance ..........................................................
$6,000 (favorable)
Flexible
Actual
Controllable Variance
Budget
Results
Variances*
Variable overhead costs
Indirect materials ...........................
$11,250
$10,000
$1,250
F
Indirect labor ................................
18,000
16,000
2,000
F
Power ..............................................
4,500
4,500
0
Maintenance ................................
2,250
3,000
750
U
Total variable costs .......................
36,000
33,500
2,500
F
Fixed overhead costs
Rent of factory building ................
12,000
12,000
0
Depreciation—Machinery ..............
20,000
19,200
800
F
Taxes and insurance .....................
2,400
3,000
600
U
Supervisory salaries ......................
13,600
14,000
400
U
Total fixed costs.............................
48,000
48,200
200
U
Total overhead costs .......................
$84,000
$81,700
$2,300
F
* F = Favorable variance; and U = Unfavorable variance.
Problem 23-7BA (45 minutes)
Part 1
June 30*
Goods in Process Inventory ................................
130,000
Direct Materials Quantity Variance ................................
5,000
Direct Materials Price Variance ................................
1,500
Raw Materials Inventory ................................
123,500
To record materials costs, including
the favorable quantity and
favorable price variances.
June 30
Goods in Process Inventory ................................
67,500
Direct Labor Rate Variance ................................
500
Direct Labor Efficiency Variance ................................
3,000
Factory Payroll ................................................................
65,000
To record direct labor costs, including
the favorable efficiency variance and
unfavorable rate variance.
June 30
Goods in Process Inventory ................................
230,000
Controllable Variance ..............................................................
8,000
Volume Variance ................................................................
12,000
Factory Overhead ...........................................................
250,000
To record overhead costs, including
the unfavorable volume and unfavorable
controllable variances.
* Alternatively, some companies compute and record the price variance
when materials are purchased. This would yield two separate entries:
(1) Purchase of materials
Raw Materials Inventory................................
125,000
Direct Materials Price Variance ................................
1,500
Accounts Payable ................................................................
123,500
(2) Issuance of materials into production
Goods in Process Inventory ................................
130,000
Direct Materials Quantity Variance ................................
5,000
Raw Materials Inventory ................................
125,000
Problem 23-7BA (Concluded)
Part 2
Under management by exception, the manager would first identify the largest
variances, attempt to uncover their causes, and then implement actions aimed
at correcting them. The smaller variances would be tackled after the major
problems were dealt with, if at all.
The largest variance amounts occur for the materials quantity variance, the
materials price variance, the direct labor efficiency variance, and the volume
Fundamental Accounting Principles, 21st Edition
1408
SERIAL PROBLEM — SP 23
Serial Problem, Success Systems (30 minutes)
Success Systems
Flexible Budget Performance Report
For Quarter Ended June 30
Flexible
Actual
Budget
Results
Variances
Desk sales (150 units) ...............................
$187,500
$186,000
$1,500
U
Chair sales (80 units) ................................
Variable expenses ................................
40,000
132,500
41,200
132,880
1,200
380
F
U
Contribution margin ................................
95,000
94,320
680
U
Fixed expenses ..........................................
30,000
31,000
1,000
U
Income from operations ............................
$ 65,000
$ 63,320
$1,680
U
Supporting computations
Total budgeted desk sales ..........................................................
$180,000
Total units budgeted ................................................................
144
Budgeted selling price ................................................................
$1,250 per unit
Flexible budget units ................................................................
150
Flexible budget sales ................................................................
$187,500
Total budgeted chair sales..........................................................
$ 36,000
Total units budgeted ................................................................
72
Budgeted selling price ................................................................
$500 per unit
Flexible budget units ................................................................
80
Flexible budget sales ................................................................
$ 40,000
Total budgeted variable costs for desks ................................
$108,000
Total units budgeted ................................................................
144
Budgeted variable expenses per desk ................................
$750
Flexible budget units ................................................................
150
Flexible budget variable expenses for desks ...........................
$112,500
Serial Problem, Success Systems (concluded)
Total budgeted variable costs for chairs ................................
$18,000
Total units budgeted ................................................................
72
Budgeted variable expenses per chair ................................
$250
Flexible budget units ................................................................
80
Flexible budget variable expenses for chairs ...........................
$20,000
Total budgeted variable expenses* ................................
$132,500
*($112,500 + $20,000), from calculation above
Total actual expenses ................................................................
$163,880
Actual fixed expenses ................................................................
31,000
Actual variable expenses ............................................................
$132,880
Fundamental Accounting Principles, 21st Edition
1410
Reporting in Action — BTN 23-1
1. Polaris reports the annual adjustment (remeasurement adjustment or
consolidated balance sheet.
2. As reported in its footnote, the assets and liabilities of foreign subsidiaries
(e.g. cash and property, plant and equipment) are translated at exchange
rates in effect at the balance sheet date and revenues and expenses are
(expense), net” on Polaris’s consolidated statements of income.
Comparative Analysis — BTN 23-2
1. Polaris and Arctic Cat sales figures for the most recent 3 years—data
available from Appendix A—are shown below ($ thousands):
Two Years
Prior
One Year
Prior
Current
Year
One
Year
Ahead
Two
Years
Ahead
Polaris
$1,565,887
$ 1,991,139
$2,656,949
_______
_______
27% incr.
33% incr.
Arctic Cat
$563,613
$450,728
$464,651
_______
_______
20% decr.
3% incr.
2. Predictions will vary among students. Generally, predictions should
reflect both the trend in the company’s sales data and current industry
and economy-wide conditions. Polaris’s sales increased in each of the
Ethics Challenge — BTN 23-3
A typical answer might include four individuals selected from the following
specialty areas (answers will vary among students):
Specialty
Information Input and Explanation
Engineer ................................
Scientific support for quantity standard.
Production manager ..............
Actual amount or quantity used in production.
Supplier ................................
Identify reasonable price of inputs.
Purchasing manager .............
Identify reasonable price of inputs.
Market research analyst ........
Market research to support quantity and price
standards.
Communicating in Practice — BTN 23-4
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
Variance
Cost of Goods Sold
Gross Margin
Part 1.
Favorable
Decrease
Increase
Part 2.
Unfavorable
Increase
Decrease
Part 3. A favorable (unfavorable) variance means that actual costs are
lower (higher) than the budgeted or expected amounts. It also
helps to point out the link between a favorable (unfavorable)
variance and an increase (decrease) in gross margin and net
income.
Fundamental Accounting Principles, 21st Edition
1412
Taking It to the Net — BTN 23-5
1. Benchmarking is a method whereby organizations try to look to other
organizations to identify “best practices” so as to improve and attain
2. Given that a benchmark can be considered as a standard, companies
Teamwork in Action — BTN 23-6
Answers will vary depending on the two industries selected. Two examples
are identified and briefly described below:
i. Overnight delivery services: 10 a.m. delivery, late-day drop-off, pick-up
service, tracking systems, fast-moving workforce.
Entrepreneurial Decision — BTN 23-7
To: Mike McCabe, President
Folsom Custom Skis
Re: Management Accounting Quote Interpretations
Quote 1: “Variances are not explanations”
Quote 2: “Management’s goal is not to minimize variances.”
Fundamental Accounting Principles, 21st Edition
1414
Hitting The Road — BTN 23-8
1. A typical cheese pizza has three main raw materials: dough, sauce, and
cheese.
2. Observe that the national chain probably follows specific measurement
3. These observations reflect an important issue for pizza businesses and for
smaller, local businesses in particular. Excess raw materials applied to
Global Decision — BTN 23-9
1. Piaggio’s sales figures for the most recent 2 years — data available from its
Website — are shown below (€ thousands)
Sales
One Year
Prior
Current
Year
One Year
Ahead
Two Years
Ahead
Piaggio ..........................
€1,485,351
€1,516,463
_______
_______
2.1% increase
from prior year
2. Predictions will vary among students. Generally, predictions should reflect
both the trend in the company’s sales data and current industry and
