8-11
Fixed Manufacturing Costs and Variances
a. Fixed Manufacturing Overhead Control
20,550
Salaries Payable, Acc. Depreciation, various other accounts
20,550
To record actual fixed manufacturing overhead costs incurred.
b. Work–in–Process Control
20,736
Fixed Manufacturing Overhead Allocated
20,736
To record fixed manufacturing overhead allocated.
c. Fixed Manufacturing Overhead Allocated
20,736
Fixed Manufacturing Overhead Spending Variance
1,350
Fixed Manufacturing Overhead Production-Volume Variance
1,536
Fixed Manufacturing Overhead Control
20,550
To isolate variances for the accounting period.
d. Fixed Manufacturing Overhead Production-Volume Variance
1,536
Fixed Manufacturing Overhead Spending Variance
1,350
Cost of Goods Sold
186
To write off fixed manufacturing overhead variances to cost of goods sold.
3. Planning and control of variable manufacturing overhead costs has both a long-run and a
short-run focus. It involves Solutions planning to undertake only value-added overhead activities
Variable
Fixed
1. Spending variance
2. Efficiency variance
3. Production-volume variance
4. Flexible-budget variance
5. Underallocated (overallocated) MOH
$200 U
2,200 F
NEVER
2,000 F
2,000 F
$4,600 U
NEVER
1,200 F
4,600 U
3,400 U
These relationships could be presented in the same way as in Exhibit 8-4.
Actual Costs
Incurred
(1)
Actual Input
Quantity
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input
Quantity Allowed
for Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
Quantity Allowed
for Actual Output
× Budgeted Rate
(4)
Variable
MOH
$31,000
$30,800
$33,000
$33,000
MOH
$13,400
$200 U
Spending variance
$2,200 F
Efficiency variance
Never a variance
8-13
An overview of the 4 overhead variances is:
4-Variance
Analysis
Spending
Variance
Efficiency
Variance
Production–
Volume
Variance
Variable
Overhead
$200 U
$2,200 F
Never a variance
Fixed
Overhead
$4,600 U
Never a variance
$1,200 F
8-22 (20–30 min.) Straightforward 4-variance overhead analysis.
1. The budget for fixed manufacturing overhead is 4,000 units × 6 machine-hours × $15
machine-hours/unit = $360,000.
An overview of the 4-variance analysis is:
4-Variance
Analysis
Spending
Variance
Efficiency
Variance
Production–
Volume Variance
Variable
Manufacturing
Overhead
$17,800 U
$16,000 U
Never a Variance
Fixed
Manufacturing
Overhead
$13,000 U
Never a Variance
$36,000 F
Solution Exhibit 8-22 has details of these variances.
A detailed comparison of actual and flexible budgeted amounts is:
Actual
Flexible Budget
Output units (auto parts)
4,400
4,400
Allocation base (machine-hours)
28,400
26,400a
Allocation base per output unit
6.45b
6.00
Variable MOH
$245,000
$211,200c
Variable MOH per hour
$8.63d
$8.00
Fixed MOH
$373,000
$360,000e
Fixed MOH per hour
$13.13f
–
a4,400 units × 6.00 machine-hours/unit = 26,400 machine-hours
b28,400 ÷ 4,400 = 6.45 machine-hours per unit
c 4,400 units × 6.00 machine-hours per unit × $8.00 per machine-hour = $211,200
d $245,000 ÷ 28,400 = $8.63
e 4,000 units × 6.00 machine-hours per unit × $15 per machine-hour = $360,000
f $373,000 ÷ 28,400 = $13.13
8-14
2. Variable Manufacturing Overhead Control 245,000
Accounts Payable Control and other accounts 245,000
Work-in-Process Control 211,200
Variable Manufacturing Overhead Allocated 211,200
3. Individual fixed manufacturing overhead items are not usually affected very much by
day-to–day control. Instead, they are controlled periodically through planning decisions and
4. The fixed overhead spending variance is caused by the actual realization of fixed costs
differing from the budgeted amounts. Some fixed costs are known because they are
contractually specified, such as rent or insurance, although if the rental or insurance contract
expires during the year, the fixed amount can change. Other fixed costs are estimated, such as
SOLUTION EXHIBIT 8-22
Actual Costs
Incurred
(1)
Actual Input
Quantity
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input
Quantity Allowed
for Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
Quantity Allowed
for Actual Output
× Budgeted Rate
(4)
Variable
MOH
$245,000
(28,400 × $8)
$227,200
(4,400 × 6 × $8)
$211,200
(4,400 × 6 × $8)
$211,200
$17,800 U
Spending variance
$16,000 U
Efficiency variance
Never a variance
1. Solution Exhibit 8-23 shows the computations. Summary details are:
Actual
Flexible Budget
Output units
65,500
65,500
Allocation base (machine-hours)
76,400
78,600a
Allocation base per output unit
1.17b
1.2
Variable MOH
$618,840
$628,800c
Variable MOH per hour
$8.92d
$8.00
Fixed MOH
$145,790
$144,000
Fixed MOH per hour
$1.91e
–
a 65,500 × 1.2 = 78,600 d $618,840 ÷ 76,400 = $8.10
b 76,400 ÷ 65,500 = 1.17 e $145,790 ÷ 76,400 = $1.91
c 65,500 × 1.2 × $8 = $628,800
8-17
2. Variable Manufacturing Overhead Control 618,840
Accounts Payable Control and other accounts 618,840
Work-in–Process Control 628,800
Variable Manufacturing Overhead Allocated 628,800
3. The control of variable manufacturing overhead requires the identification of the cost
drivers for such items as energy, supplies, and repairs. Control often entails monitoring
4. The variable overhead spending variance is unfavorable. This means the actual rate
applied to the manufacturing costs is higher than the budgeted rate. Since variable overhead
consists of several different costs, this could be for a variety of reasons, such as the utility rates
SOLUTION EXHIBIT 8-23
Actual Costs
Incurred
(1)
Actual Input
Quantity
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input
Quantity Allowed
for Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
Quantity Allowed
for Actual Output
× Budgeted Rate
(4)
Variable
Manufacturing
Overhead
$618,840
(76,400 × $8)
$611,200
(78,600 × $8)
$628,800
(78,600 × $8)
$628,800
$7,640 U
Spending variance
$17,600 F
Efficiency variance
Never a variance
1.
Meals on Wheels
(May 2012)
Actual
Results
Flexible
Budget
Static
Budget
Output units (number of deliveries)
8,800
8,800
10,000
Hours per delivery
0.65a
0.70
0.70
Hours of delivery time
5,720
6,160b
7,000b
Variable overhead costs per delivery hour
$1.80c
$1.50
$1.50
Variable overhead (VOH) costs
$10,296
$9,240d
$10,500d
Fixed overhead costs
$38,600
$35,000
$35,000
Fixed overhead cost per hour
$5.00e
a 5,720 hours
0.70 hours/unit = 7,000 hours;
Fixed overhead rate = Fixed overhead costs
Static budget delivery hours = $35,000
7,000 hours = $5 per hour
VARIABLE OVERHEAD
Actual Costs
Incurred
Actual Input Quantity
Budgeted Rate
Flexible Budget:
Budgeted Input
Quantity Allowed for
Actual Output
Budgeted Rate
5,720 hrs
$1.50 per hr.
6,160 hrs
$1.50 per hr.
$10,296
$8,580
$9,240
$1,716 U $660 F
Spending variance Efficiency variance
2.
FIXED OVERHEAD
Actual Costs
Incurred
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of Output
Level
Allocated:
Budgeted Input
Quantity Allowed for
Actual Output
Budgeted Rate
8,800 units
0.70 hrs./unit
$5/hr.
6,160 hrs.
$5/hr.
$38,600
$35,000
$30,800
$3,600 U $4,200 U
Spending variance Production-volume variance
8-20
3. The spending variances for variable and fixed overhead are both unfavorable. This means
that MOW had increases over budget in either or both the cost of individual items (such as
0.65 hours versus a budgeted 0.70 hours.
MOW can best manage its fixed overhead costs by long-term planning of capacity rather
than day-to–day decisions. This involves planning to undertake only value-added fixed-overhead