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CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-47 (Continued)
Before-the-fact flexible budgeting allows managers to assess risk and uncertainty.
3. The financial performance as revealed in Requirements 1 and 2 is not very
promising. Two out of three scenarios lose money. Only the optimistic scenario
promises a positive return, and it is only about 3% of sales. Most steering
committees would be reluctant to press ahead with the new product given
these projected financial results. There are a number of possibilities. One
possibility is to instruct engineering to produce a design that reduces the cost—
especially the acquisition cost. It may be possible to produce a design that lowers
the manufacturing cost of the outsourced producers and Stillwater Designs’
acquisition cost. By reducing the weight and bulkiness of the product, freight costs
may also be reduced. After all the cost improvements are obtained that can be, then
the question becomes—if the return is questionable—would the company still
want to produce the product?
Producing a product that will not stand by itself is sometimes desirable. The
11-20
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-48
1. 1,700 Direct labor hours:
Maintenance [$7,500 + ($5 × 1,700)]……………………………
…
$16,000
2. For costs that don’t change, the formula is simply the fixed component.
To prepare the formulas for the costs that change, use the high-low method:
Maintenance:
Supplies:
V = ($4,600 – $2,300)/(2,000 – 1,000) = $2.30
F = $4,600 – $2.30(2,000) = $0
Supplies Cost = $2.30X
11-21
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-49
1.
Formula 200 240 280
Variable costs:
Maintenance……………
…
$0.76 $ 152.00 $ 182.40 $ 212.80
2. The additional baskets will require additional direct labor hours and will increase
the budgeted variable overhead for May. For example, if the hours used per
Activity Level (hours)*
Orchard Fresh Inc.
Overhead Budget
For the Month of May
11-22
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-50
1. Flexible budget for a normal school month:
Revenue:
Sandwiches (5,000 × $4.50)…………………………………………… $22,500
Sodas (5,000 × $1.50)…………………………………………………
…
7,500
Total revenue………………………………………………………………
…
$30,000
Variable food costs:
Direct laborc ($1,720 + $1,032)…………………………………………
…
2,752
Total costs…………………………………………………………………
…
$22,127
aCost per Sandwich:
* Rounded
bCost per 12 oz. Drink
= 12/128 × $2.56
= $0.24
11-23
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-50 (Continued)
2. Flexible budget for October:
Revenue:
Sandwiches (6,500 × $4.50)……………………………………………
…
$29,250
Sodas (6,500 × $1.50)……………………………………………………
…
9,750
Total revenue…………………………………………………………………
…
$39,000
aCost per sandwich:
Meat: (4/16 × $7)………………………………………………………
…
$1.75
Cheese: (2/16 × $6)…………………………………………………… 0.75
Roll: ($28.80/144)……………………………………………………… 0.20
*Rounded
bCost per 12 oz. Drink
= 12/128 × $2.56
= $0.24
3.
Y
es, the increase in revenue was $9,000 ($30,000 – $39,000) but, cost increased b
y
only $5,460 ($27,587 – $22,127). Thus, profit increases by $3,540.
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-51
1.
A
ctual Costs
Direct labor……………
…
$210,000 $200,000 $ 10,000 U
2.
A
ctual Costs
Direct labor……………
…
$210,000 $200,000 $10,000 U
3. The multiple cost driver approach captures the cause-and-effect cost
relationships and, consequently, is more accurate than the direct labor-based
approach.
Budget Variance
Budgeted Costs Budget Variance
Budgeted Costs
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-52
1.
Actual Costs
Direct materials………
…
$ 440,000 $40,000 F
Direct labor……………
…
355,000 35,000 U
*Budget formulas for each item can be computed by using the high-low method (using the
appropriate cost driver for each method). Using this approach, the budgeted costs for the actual
activity levels are computed as follows:
Budget formulas using high low method:
Direct materials: $6 × 80,000 DLH = $480,000
= per batch
Note: The first pool has material and labor costs, as well as depreciation, included.
Unit cost:
Pool 1: $11 × 10,000 DLH……………………
…
$225,000/200 batches
$1,125
$110,000
Westcott Inc.
Performance Report
For the Year 2014
Budget VarianceBudgeted Costs*
$ 480,000
320,000
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-52 (Continued)
3. Knowing the resources consumed by activities and how the resource costs
change with the activity driver should provide more insight into managing the
Materials handling:
Forklifts………………………………………
…
$ 40,000 $ 40,000
20,000 moves 40,000 moves
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-53
1.
Direct Labor = $10 × Direct Labor Hours
Utilities = $3,000 + ($0.15 × Direct Labor Hours)
$0.15 per direct
labor hour
Fixed Cost = $21,000 – ($0.15)(120,000) = $3,000
Depreciation =
Supplies = $0.25 × Direct Labor Hours
$2.20 per direct
labor hour
Fixed Cost = $284,000 – ($2.20)(120,000) = $20,000
120,000 hours – 100,000 hours
$225,000
$21,000 – $18,000
High Cost – Low Cost
High Activity – Low Activity
120,000 hours – 100,000 hours
$284,000 – $240,000
=
=
Variable Rate
=
=
=
Variable Rate
Variable Rate
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-53 (Continued)
2.
Conversion Cost
A
ctual Budget
V
ariance
Direct labo
r
a
…………………………
…
$ 963,200 $1,120,000 $156,800 F
a($10)(112,000 DLH) = $1,120,000
b$3,000 + ($0.15 × 112,000 DLH) = $19,800
c($0.25)(112,000 DLH) = $28,000
Thorpe Inc.
Conversion Cost Report
For Last Yea
r
11-29
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-54
1. Standard Fixed Overhead Rate = $2,160,000/(120,000 units × 5 DLH)
= $3.60 per DLH
Standard Variable Overhead Rate = $1,440,000/(120,000 units × 5 units)
= $2.40 per DLH
3. Fixed overhead analysis:
expected level.
4.
V
ariable overhead analysis:
Budgeted FOH
Actual VOH
$2.40 × 592,300 hours
A
pplied FOH
Budgeted VOH
A
pplied VOH
Actual FOH
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-54 (Continued)
5. Overhead variance isolation:
Debit Credit
VOH Control 400
FOH Control 15,600
Closing to Cost of Goods Sold:
Debit Credit
Cost of Goods Sold 26,480
VOH Spending Variance 1,280
FOH Volume Variance 25,200
Date Account & Explanation
Journal
Date Account & Explanation
Journal
P 11-55
1.
V
ariable overhead variances:
2. Fixed overhead variances:
Efficiency
$20,000 U$40,000 U
Spending
Actual VOH
$820,000
Actual VOH Budgeted VOH
$10 × 80,000 hrs.
A
pplied VOH
$800,000
$10 × 82,000 hrs.
$860,000
$6 × 1.60 hrs. ×
$6 × 1.60 hrs. ×
Budgeted VOH
60,000 units
50,000 units
Applied VOH
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-56
1. Standard Fixed Overhead Rate = $1,286,400/(120,000 units × 4 DLH)
2. Fixed: 119,000 × 4 × $2.68 =
Variable: 119,000 × 4 × $1.85 =
3. Fixed overhead analysis:
4. Variable overhead analysis:
$1.85 × 487,900 hours
$24,395 U
$927,010 $902,615
$1,275,680
$880,600
Actual VOH Budgeted VOH
Actual FOH
$1,300,000 $1,275,680
Applied FOHBudgeted FOH
$1,286,400
$880,600
$1.85 × 476,000 hours
Applied VOH
$22,015 U
11-33
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-57
1. The budgeted overhead costs are broken down into fixed and variable costs by
the high-low method:
Standard VOH Rate =
2. Budgeted Fixed Overhead = Y2 – VX2
= $540,000 – $12(30,000)
3. To find the VOH spending variance, we need to find the actual hours. To find AH,
we first need to find the standard hours, SH:
Fixed OH Volume Variance = Budgeted Fixed Overhead –
(Fixed Overhead Rate × SH)
4. 26,667 hours/100,000 units = 0.26667 hour per unit
Change in Cost
CHAPTER 11 Flexible Budget and Overhead Analysis
P 11-58
1.
Actual
Costs Costs*
Direct materials…………………
…
$ 775,000 $ 750,000 $25,000 U
2. a. FOH variances:
Spending Variance = Actual FOH – Budgeted FOH
= $180,000 – $165,000
*Note: FOH rate is calculated as follows:
Hours Allowed = 60,000 hours/50,000 units
b.
V
OH variances:
V
ariable OH Rate = $300,000/60,000 hours
= $5.00 per hou
r
V
ariance
Budgeted
Shumaker Company
Performance Report
11-35
CHAPTER 11 Flexible Budget and Overhead Analysis
Case 11-59
2. Athens plant:
The spending variance is almost certainly caused by supervisor salaries (for
example, an unexpected midyear increase due to union pressures). It is unlikely
that the lease payments or depreciation would be greater than budgeted.
Changing the terms on a 10-year lease in the first year would be unusual (unless
there is some sort of special clause permitting increased payments for something
Actual FOH Budgeted FOH
Applied FOH
CASES
$4 × 600,000 hou
r
11-36
CHAPTER 11 Flexible Budget and Overhead Analysis
Case 11-59 (Continued)
3. It appears that the 120,000-hour unused capacity (60,000 subassemblies)
is permanent for the Little Rock plant. This plant has 10 supervisors, each
making $50,000. Supervision is a step-cost driven by the number of
production lines. Unused capacity of 120,000 hours means that 2 lines
can be shut down, saving the salaries of two supervisors ($100,000 at the
4. For each plant, the standard fixed overhead rate is $4 per direct labo
r
hour. Since each subassembly should use two hours, the fixed overhead
cost per unit is $8, regardless of where they are produced. Should they
differ? Some may argue that the rate for the Little Rock plant needs to be
recalculated. For example, one possibility is to use expected actual
capacity, instead of practical capacity. In this case, the Little Rock plant
would have a fixed overhead rate of $2,400,000/480,000 hours = $5 per
11-37
CHAPTER 11 Flexible Budget and Overhead Analysis
Case 11-60
1. If reducing negative environmental impacts is a legitimate firm-wide
objective or if legally mandated, then there is an ethical obligation to help
achieve the desired reduction. Furthermore, if it is possible to reduce
environmental impacts while simultaneously reducing costs, then this
2. Any financial officer should be concerned with cost reduction. If reducing
environmental waste or pollutants also produces a reduction in cost, then
it seems like there is an ethical obligation to undertake and support these
3. A variety of answers will emerge. There are always ethical dilemmas that
can surface when performance evaluations occur. For example, is it
ethical for a financial executive to deliberately and systematically overstate
the unit variable cost in a flexible budget? (The objective may be to force
11-38
