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SOLUTION
(30 min.) Fixed manufacturing overhead variance analysis (continuation of 8-23).
1. Budgeted standard direct manufacturing labor used = 0.02 per baguette
Budgeted output = 3,100,000 baguettes
Budgeted standard direct manufacturing labor-hours
Budgeted fixed manufacturing overhead costs
Fixed Manufacturing Overhead Variance Analysis for Sourdough Bread Company for 2017
Actual Costs
Incurred
(1)
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(3)
Allocated:
Budgeted Input Qty.
Allowed for
Actual Output
× Budgeted Rate
(4)
(2,600,000 × 0.02 × $3)
2. The fixed manufacturing overhead is underallocated by $138,000.
3. The production-volume variance of $30,000 U captures the difference between the budgeted
3,100,0000 baguettes and the lower actual 2,600,000 baguettes produced—the fixed cost
capacity not used. The spending variance of $108,000 unfavorable means that the actual
aggregate spending on fixed costs ($294,000) exceeds the budgeted amount ($186,000).
8-5
Spending variance Never a variance
Production-volume
variance
$108,000 U
Flexible-budget variance
$30,000 U
Production-volume
variance
8-25 Manufacturing overhead, variance analysis. The Rotations Corporation is a
manufacturer of centrifuges. Fixed and variable manufacturing overheads are allocated to each
centrifuge using budgeted assembly-hours. Budgeted assembly time is 2 hours per unit. The
following table shows the budgeted amounts and actual results related to overhead for June 2017.
Required:
1. Prepare an analysis of all variable manufacturing overhead and fixed manufacturing
overhead variances using the columnar approach in Exhibit 8-4 (page 304).
2. Prepare journal entries for Rotations’ June 2017 variable and fixed manufacturing overhead
costs and variances; write off these variances to Cost of Goods Sold for the quarter ending
June 30, 2017.
3. How does the planning and control of variable manufacturing overhead costs differ from the
planning and control of fixed manufacturing overhead costs?
SOLUTION
(30–40 min.) Manufacturing overhead, variance analysis.
1. The summary information is:
The Rotations Corporation (June 2017) Actual
Flexible
Budget
Static
Budget
Outputs units (number of assembled units) 220 220 150
Hours of assembly time 396 440c 300a
a 150 units
´
2 assembly hours per unit = 300 hours
8-5
b 396 hours
¸
220 units = 1.80 assembly hours per unit
c 220 units
´
2 assembly hours per unit = 440 hours
¸
Flexible Budget: Allocated:
Actual Costs
Actual Input Qty.
´
Budgeted Input
Qty. Allowed Budgeted
Budgeted Input
Qty. Allowed
Incurred Budgeted Rate
for Actual Output
´
Rate for Actual Output
Variable 396
´
$31.00 440
´
$31.00 440
Manufacturin
$417 U $1,364 F
$947 F
$947 F
Overallocated variable overhead
Flexible Budget: Allocated:
Actual Costs Static Budget Lump Sum Static Budget Lump Sum
Budgeted Input
Allowed
Incurred Regardless of Output Level Regardless of Output Level
for Actual Output
Fixed 440
Manufacturin
gassy. hrs.
8-5
$5,170 F
Overallocated fixed overhead
The summary analysis is:
Spending
Variance
Efficiency
Variance
Production-Volume
Variance
Variable
Overhead
Fixed Manufacturing
2. Variable Manufacturing Costs and Variances
12,
To record actual variable manufacturing overhead costs
incurred.
To record variable manufacturing overhead allocated.
To isolate variances for the accounting period.
To write off variable manufacturing overhead variances to cost of goods sold.
Fixed Manufacturing Costs and Variances
8-5
To record actual fixed manufacturing overhead costs incurred.
To record fixed manufacturing overhead allocated.
c. Fixed Manufacturing Overhead Allocated 20,680
To isolate variances for the accounting period.
d. Fixed Manufacturing Overhead Production-Volume Variance 6,580
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 Rotations planning to undertake only value-added overhead activities
(a long-run view) and then managing the cost drivers of those activities in the most efficient way
(a short-run view). Planning and control of fixed manufacturing overhead costs at Rotations have
8-26 4-variance analysis, fill in the blanks. ProChem, Inc., produces chemicals for large
biotech companies. It has the following data for manufacturing overhead costs during August
2017:
Variable Fixed
Actual costs incurred $35,000 $16,500
Costs allocated to products 36,000 15,200
Flexible budget –––––– 16,000
Actual input × budgeted rate 31,500 ––––––
Fill in the blanks. Use F for favorable and U for unfavorable:
Variable Fixed
(1) Spending variance $ $
(2) Efficiency variance
(3) Production-volume variance
(4) Flexible-budget variance
8-5
Variable Fixed
(5) Underallocated (overallocated) manufacturing
overhead
SOLUTION
(1015 min.) 4-variance analysis, fill in the blanks.
Variable Fixed
1. Spending variance
2. Efficiency variance
$3,500 U
4,500 F
$ 500 U
NEVER
These relationships could be presented in the same way as in Exhibit 8-4.
Actual Costs
Incurred
(1)
Actual Input Qty.
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input Qty.
Allowed for
Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input Qty.
Allowed for
Actual Output
× Budgeted Rate
(4)
Variable
MOH
$35,000 $31,500 $36,000 $36,000
$3,500 U
$4,500 F
An overview of the 4 overhead variances is:
4-Variance
Analysis
Spending
Variance
Efficiency
Variance
Production-Volume
Variance
Variable
8-27 Straightforward 4-variance overhead analysis. The Lopez Company uses standard
costing in its manufacturing plant for auto parts. The standard cost of a particular auto part, based
on a denominator level of 4,000 output units per year, included 6 machine-hours of variable
manufacturing overhead at $8 per hour and 6 machine-hours of fixed manufacturing overhead at
$15 per hour. Actual output produced was 4,400 units. Variable manufacturing overhead incurred
was $245,000. Fixed manufacturing overhead incurred was $373,000. Actual machine-hours
were 28,400.
Required:
1. Prepare an analysis of all variable manufacturing overhead and fixed manufacturing
overhead variances, using the 4-variance analysis in Exhibit 8-4 (page 304).
2. Prepare journal entries using the 4-variance analysis.
3. Describe how individual fixed manufacturing overhead items are controlled from day to day.
4. Discuss possible causes of the fixed manufacturing overhead variances.
SOLUTION
(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
8-5
$500 U
Flexible-budget variance
$800 U
Production-volume variance
$1,300 U
Underallocated fixed overhead
(Total fixed overhead variance)
Fixed
Overhead
Solution Exhibit 8-27 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
a 4,400 units × 6.00 machine-hours/unit = 26,400 machine-hours
b 28,400 ÷ 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
2. Variable Manufacturing Overhead Control 245,000
Accounts Payable Control and other accounts 245,000
Fixed Manufacturing Overhead Allocated 396,000
Fixed Manufacturing Overhead Spending Variance 13,000
8-5
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
the cost of managerial salaries which may depend on bonuses and other payments not known at
the beginning of the period. In this example, the spending variance is unfavorable, so actual
FOH is greater than the budgeted amount of FOH.
SOLUTION EXHIBIT 8-27
Actual Costs
Incurred
(1)
Actual Input
× Budgeted Rate
(2)
Flexible Budget:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(3)
Allocated:
Budgeted Input
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
Actual Costs
Incurred
(1)
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(2)
Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget)
Regardless of
Output Level
(3)
Allocated:
Budgeted Input
Allowed for
Actual Output
× Budgeted Rate
(4)
8-5
$17,800 U
Spending variance
$16,000 U
Efficiency variance Never a variance
$33,800 U
Flexible-budget variance
Never a variance
$33,800 U
Underallocated variable overhead
(Total variable overhead variance)
Fixed
(4,000 × 6 × $15)
(4,000 × 6 × $15)
(4,400 × 6 × $15)
8-28 Straightforward coverage of manufacturing overhead, standard-costing system. The
Brazil division of an American telecommunications company uses standard costing for its
machine-paced production of telephone equipment. Data regarding production during June are as
follows:
Variable manufacturing overhead costs incurred $537,470
Variable manufacturing overhead cost rate $7 per standard machine-hour
Fixed manufacturing overhead costs incurred $146,101
Fixed manufacturing overhead costs budgeted $136,000
Denominator level in machine-hours 68,000
Standard machine-hour allowed per unit of output 1.2
Units of output 66,500
Actual machine-hours used 75,700
Ending work-in-process inventory 0
Required:
1. Prepare an analysis of all manufacturing overhead variances. Use the 4-variance analysis
framework illustrated in Exhibit 8-4 (page 304).
2. Prepare journal entries for manufacturing overhead costs and their variances.
3. Describe how individual variable manufacturing overhead items are controlled from day to
day.
4. Discuss possible causes of the variable manufacturing overhead variances.
8-5
Spending variance
Never a variance
variance
Flexible-budget variance
Production-volume
variance
