1. This problem has two major purposes: (a) to give experience with data allocated on a total
overhead basis instead of on separate variable and fixed bases and (b) to reinforce distinctions
between actual hours of input, budgeted (standard) hours allowed for actual output, and
denominator level.
An analysis of direct manufacturing labor will provide the data for actual hours of input
Let D = denominator level in input units
Budgeted fixed
overhead rate
per input unit
= Budgeted fixed overhead costs
Denominator level in input units
8-23
1. In the columnar presentation of variable overhead variance analysis, all numbers shown in
bold are calculated from the given information, in the order (a) – (e).
VARIABLE MANUFACTURING OVERHEAD
Flexible Budget:
Budgeted Input
Actual Costs
Incurred
Actual Input Quantity
Budgeted Rate
Quantity Allowed Budgeted
for Actual Output
Rate
(b)
(a)
(c)
15,000
$6.00
14,850
$6.00
mach. hrs.
per mach. hr.
mach. hrs.
per mach. hr.
$89,625
$90,000
$89,100
$375 F $900 U (d)
Spending variance Efficiency variance
$525 U (e)
Flexible-budget variance
a. 15,000 machine-hours
$6 per machine-hour = $90,000
b. Actual VMOH = $90,000 – $375F (VOH spending variance) = $89,625
c. 14,850 machine-hours
$6 per machine-hour = $89,100
d. VOH efficiency variance = $90,000 – $89,100 = $900 U
e. VOH flexible budget variance = $900U – $375F = $525 U
Allocated variable overhead will be the same as the flexible budget variable overhead of
$89,100. The actual variable overhead cost is $89,625. Therefore, variable overhead is
underallocated by $525.
8-24
2. In the columnar presentation of fixed overhead variance analysis, all numbers shown in
bold are calculated from the given information, in the order (a) – (e).
FIXED MANUFACTURING OVERHEAD
Flexible Budget:
Allocated:
Actual Costs
Static Budget Lump Sum
Regardless of Output
Budgeted Input
Quantity Allowed
Budgeted
Incurred
Level
for Actual Output
Rate
(a)
(b)
14,850
$1.60* (c)
mach. hrs.
per mach. hr.
$30,375
$28,800
$23,760
$1,575 U $5,040 U (d)
Spending variance Production-volume variance
$1,575 U (e)
Flexible-budget variance
a. Actual FOH costs = $120,000 total overhead costs – $89,625 VOH costs = $30,375
b. Static budget FOH lump sum = $30,375 – $1,575 spending variance = $28,800
c. *FOH allocation rate = $28,800 FOH static-budget lump sum
18,000 static-budget machine-hours
= $1.60 per machine-hour
Allocated FOH = 14,850 machine-hours
$1.60 per machine-hour = $23,760
d. PVV = $28,800 – $23,760 = $5,040 U
e. FOH flexible budget variance = FOH spending variance = $1,575 U
Allocated fixed overhead is $23,760. The actual fixed overhead cost is $30,375. Therefore, fixed
overhead is underallocated by $6,615.
8-27 (15 min.) Identifying favorable and unfavorable variances.
Scenario
VOH
Spending
Variance
VOH
Efficiency
Variance
FOH
Spending
Variance
FOH
Production-
Volume Variance
Production output is
4% less than budgeted,
and actual fixed
manufacturing
overhead costs are 5%
more than budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Cannot be
determined: no
information on
actual versus
flexible-budget
machine-hours
Unfavorable:
actual fixed
costs are more
than budgeted
fixed costs
Unfavorable:
output is less than
budgeted causing
FOH costs to be
underallocated
Production output is
12% less than
budgeted; actual
machine-hours are 7%
more than budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Unfavorable: actual
machine-hours
more than flexible-
budget machine-
hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Unfavorable:
output is less than
budgeted causing
FOH costs to be
underallocated
Production output is
9% more than
budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Cannot be
determined: no
information on
actual machine-
hours versus
flexible-budget
machine-hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Favorable: output
more than
budgeted will
cause FOH costs to
be overallocated
Actual machine-hours
are 20% less than
flexible-budget
machine-hours
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Favorable: less
machine-hours used
relative to flexible
budget
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Cannot be
determined: no
information on
flexible-budget
machine-hours
relative to static-
budget machine-
hours
Relative to the flexible
budget, actual
machine-hours are 12%
less, and actual
variable manufacturing
overhead costs are 20%
greater
Unfavorable:
actual VOH rate
greater than
budgeted VOH
rate
Favorable: actual
machine-hours less
than flexible-
budget machine-
hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Cannot be
determined: no
information on
actual output
relative to
budgeted output
8-26
1. Solution Exhibit 8-28 contains a columnar presentation of the variances for Doorknob Design
Company (DDC) for April 2012.
SOLUTION EXHIBIT 8-28
Actual Costs
Incurred:
Actual Input Quantity
Actual Input Quantity
Budgeted Price
Flexible Budget:
Budgeted Input
Quantity Allowed
for Actual Output
× Actual Rate
Purchases
Usage
× Budgeted Price
Direct
Materials
(12,000 $11)
$132,000
(12,000 $10)
$120,000
(10,450 $10)
$104,500
(10,500 $10)
$105,000
$12,000 U $500 F
a. Price variance b. Efficiency variance
Direct
Manufacturing
Labor
$808,500
(38,500 $20)
$770,000
(42,000 $20)
$840,000
$38,500 U $70,000 F
c. Price variance d. Efficiency variance
Actual Costs
Incurred
Actual Input Quantity
Budgeted Rate
Flexible Budget:
Budgeted Input
Quantity Allowed
for Actual Output
Budgeted Rate
Allocated:
(Budgeted Input
Quantity Allowed
for Actual Output
Budgeted Rate)
Variable
Manufacturing
Overhead
$64,150
(10,450 $6)
$62,700
(10,500 $6)
$63,000
(10,500 $6)
$63,000
$1,450U $300 F
e. Spending variance f. Efficiency variance Never a variance
Fixed
Manufacturing
Overhead
$152,000
$150,000*
$150,000
(10,500 $15)
$157,500
$2,000 U $7,500 F
h. Spending variance Never a variance g. Production volume variance
*Denominator level (Annual) in pounds of material: 400,000 .3 = 120,000 pounds
Annual Budgeted Fixed Overhead: 120,000 $15/lb = $1,800,000
Monthly budgeted FOH: $1,800,000 / 12 = $150,000
8-27
2. The direct materials price variance indicates that DDC paid more for brass than they had
planned. If this is because they purchased a higher quality of brass, it may explain why they
used less brass than expected (leading to a favorable material efficiency variance). In turn, since
8-28
8-29 (30 min.) Comprehensive variance analysis.
1. Budgeted number of machine-hours planned can be calculated by multiplying the number
2. Budgeted fixed MOH costs per machine-hour can be computed by dividing the flexible
3. Budgeted variable MOH costs per machine-hour are calculated as budgeted variable
4. Budgeted number of machine-hours allowed for actual output achieved can be calculated
5. The actual number of output units is the budgeted number of machine-hours allowed for
6. The actual number of machine-hours used per output unit is the actual number of
8-29
8-30 (60 min.) Journal entries (continuation of 8-29).
Actual
Results
Flexible-Budget
Amount
Static-Budget
Amount
1. Output units (food processors)
960
960
888
2. Machine-hours
1,824
1,920
1,776
3. Machine-hours per output unit
1.90
2.00
2.00
4. Variable MOH costs
$ 76,608
$ 76,800
$ 71,040
5. Variable MOH costs per machine-
hour (Row 4 ÷ Row 2)
$ 42.00
$ 40.00
$ 40.00
6. Variable MOH costs per unit
(Row 4 ÷ Row 1)
$ 79.80
$ 80.00
$ 80.00
7. Fixed MOH costs
$350,208
$348,096
$348,096
8. Fixed MOH costs per machine-
hour (Row 7 ÷ Row 2)
$ 192.00
$ 181.30
$ 196.00
9. Fixed MOH costs per unit (7 ÷ 1)
$ 364.80
$ 362.60
$ 392.00
Solution Exhibit 8-30 shows the computation of the variances.
Journal entries for variable MOH, year ended December 31, 2012:
Variable MOH Control
76,608
Accounts Payable Control and Other Accounts
76,608
Work-in-Process Control
76,800
Variable MOH Allocated
76,800
Variable MOH Allocated
76,800
Variable MOH Spending Variance
3,648
Variable MOH Control
76,608
Variable MOH Efficiency Variance
3,840
Journal entries for fixed MOH, year ended December 31, 2012:
Fixed MOH Control
350,208
Wages Payable, Accumulated Depreciation, etc.
350,208
Work-in-Process Control
376,320
Fixed MOH Allocated
376,320
Fixed MOH Allocated
376,320
Fixed MOH Spending Variance
2,112
Fixed MOH Control
350,208
Fixed MOH Production-Volume Variance
28,224
2. Adjustment of COGS
Variable MOH Efficiency Variance
3,840
Fixed MOH Production-Volume Variance
28,224
Variable MOH Spending Variance
3,648
Fixed MOH Spending Variance
2,112
Cost of Goods Sold
26,304
SOLUTION EXHIBIT 8-30
Variable Manufacturing Overhead
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)
(1,824 $42)
$76,608
(1,824 $40)
$72,960
(1,920 $40)
$76,800
(1,920 $40)
$76,800
Allocated:
Budgeted Input
(1,920 × $196)
$3,648 U
$3,840 F