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Chapter 11 - Flexible Budgeting and Analysis of Overhead Costs
SOLUTIONS TO PROBLEMS
PROBLEM 11-35 (45 MINUTES)
PROJECTED VARIABLE
OVERHEAD
VARIABLE-OVERHEAD SPENDING AND EFFICIENCY VARIANCES
(Hours = Direct-Labor Hours)
Actual
Hours
(AQ)
Actual
Rate
(AVR)
Actual
Hours
(AQ)
Standard
Rate
(SVR)
Standard
Rate
(SVR)
Standard
Rate
(SVR)
Standard
Allowed
Hours
(SQ)
Standard
Allowed
Hours
(SQ)
82,500
82,500
80,000
80,000
$6.20
$6.00
$6.00
$6.00
$16,500 Unfavorable
$15,000 Unfavorable
Variable-overhead
spending variance
Variable-overhead
efficiency variance
No difference
x
x
x
x
FLEXIBLE BUDGET:
VARIABLE OVERHEAD
ACTUAL VARIABLE
OVERHEAD
VARIABLE OVERHEAD
APPLIED TO
WORK-IN-PROCESS
(1)
(2)
(3)
(4)†
Chapter 11 - Flexible Budgeting and Analysis of Overhead Costs
PROBLEM 11-35 (CONTINUED)
FIXED-OVERHEAD BUDGET AND VOLUME VARIANCES
(Hours = Direct-Labor Hours)
(1)
ACTUAL
FIXED
OVERHEAD
(2)
BUDGETED
FIXED
OVERHEAD
(3)
FIXED OVERHEAD
APPLIED TO
WORK IN PROCESS
Standard
$860,000
$900,000*
$800,000
$40,000 Favorable
$100,000 U†
PROBLEM 11-36 (30 MINUTES)
1.
The graphs are shown on the next page. On the variable overhead graph, the slope of
2.
Memorandum
Date:
Today
To:
C. D. Tune, General Manager of Countrytime Studios
From:
I. M. Student
Subject:
Overhead graphs
The variable-overhead graph shows that the flexible-budgeted variable-overhead line
and the applied variable-overhead line are the same line. Since this cost really is
PROBLEM 11-36 (CONTINUED)
$300,000
Variable overhead
$150,000
Fixed overhead
Chapter 11 - Flexible Budgeting and Analysis of Overhead Costs
PROBLEM 11-37 (40 MINUTES)
1.
a.
Units produced during March .....................................................
66,000
Overhead application rate per unit
(budgeted overhead per unit at expected level of output) .....
$12
Applied overhead costs ..............................................................
$792,000
Supporting calculations are presented in the following schedule:
Variable Overhead
Actual
Overhead
Spending
Variance
Projected
Overhead
Efficiency
Variance
Flexible
Budget
(Applied
Overhead)
Indirect material ............
$222,000
$.68
$.68
Indirect labor .................
150,000
.50
Fixed Overhead
Actual
Overhead
Budget
Variance
Flexible
Budget
Volume
Variance
Applied
Overhead
.56
$1.22
Machine hours* .............
330,000
$378,000
$12,000 U
$366,000
$36,600 F**
$ 402,600
Chapter 11 - Flexible Budgeting and Analysis of Overhead Costs
PROBLEM 11-37 (CONTINUED)
2. Graphical analysis of variable-overhead variances:*
$1.18
(standard)
Efficiency
Rate
PROBLEM 11-37 (CONTINUED)
3.
The graph differs from the exhibit in the text, because in Wilmington Composites’ case,
PROBLEM 11-38 (20 MINUTES)
1.
Policy
Type
Standard
Clerical Hours
per Application
Actual
Activity
Standard
Clerical Hours
Allowed
Automobile .......................................
1
375
375
Renter's ............................................
1.5
300
450
2.
The different types of applications require different amounts of clerical time, and variable
overhead cost is related to the use of clerical time. Therefore, basing the flexible budget on
3.
Formula flexible budget:
total
variablebudgeted
where X denotes total clerical time in hours.
Chapter 11 - Flexible Budgeting and Analysis of Overhead Costs
PROBLEM 11-39 (25 MINUTES)
1. Let X = budgeted fixed overhead
2. Variable-overhead spending variance:
Actual machine hours x actual rate
23,100 hours x $7.20*…………………...
$166,320
3. Fixed-overhead volume variance:
Budgeted fixed overhead………………………………
$240,000
Standard machine hours allowed x standard rate
4. Lackawanna Licorice Company spent more than anticipated. Actual fixed overhead
5. Variable overhead is underapplied by $126,195:
Actual overhead: Actual machine hours x actual rate
Chapter 11 - Flexible Budgeting and Analysis of Overhead Costs
PROBLEM 11-39 (CONTINUED)
6. Without having complete information, it is difficult to be 100% certain. However, by
an analysis of data related to the volume variance, a lengthy strike appears to be a
PROBLEM 11-40 (30 MINUTES)
2. Given the focus on a range of activity, a flexible budget would be more useful
because it incorporates several different activity levels.
3. Static budget vs. actual experience:
Static
Budget:
24,000
Units
Actual:
20,000
Units
Variance
Direct material used ($40.00) ........................
$ 960,000
$ 865,000
$ 95,000 F
Direct labor ($10.00) ......................................
240,000
221,200
18,800 F
Calculations:
Direct material used: $2,880,000 ÷ 72,000 units = $40.00 per unit
PROBLEM 11-40 (CONTINUED)
4. Flexible budget vs. actual experience:
Flexible
Budget:
20,000
Units
Actual:
20,000
Units
Variance
Direct material used ($40.00)..........................
$ 800,000
$ 865,000
$ 65,000 U
5. A performance report based on flexible budgeting is preferred. The report compares
budgeted and actual performance at the same volume level, eliminating any
variations in activity. In essence, everything is placed on a “level playing field.”
The general manager’s warning is appropriate because of the sizable
variances that have arisen. With the static budget, performance appears favorable,
PROBLEM 11-41 (30 MINUTES)
1. Performance report:
Budget:
790
Patients
Actual:
790
Patients
Variance
Medical assistants…………...
$ 5,530
$ 6,510
$ 980 U
Calculations:
Medical assistants:
Budget: 790 patients x .5 hours/patient x $14.00/hr = $5,530
2. The variances do not reveal any significant problems. The $165 variance for clinic
PROBLEM 11-41 (CONTINUED)
3. Variances for lab tests:
Spending variance:
Actual tests conducted x actual cost
2,607 tests* x $61/test**…………………………………..
$159,027
Actual tests conducted x standard cost
Yes, the hospital does appear to have some problems. The two variances computed
are fairly sizable in relation to the $154,050 budget. The efficiency variance is of
particular concern, given that it is 10% of budget ($15,405 ÷ $154,050) and
PROBLEM 11-42 (40 MINUTES)
1.
The flexible budget for LakeMaster Company for the month of June, based on 4,800
units, showing separate variable cost budgets is as follows:
LAKEMASTER COMPANY
FLEXIBLE BUDGET
FOR THE MONTH OF JUNE
Revenue [4,800 ($1,800,000/5,000)] .................................
$1,728,000
Deduct: Variable costs:
Direct material (4,800 $90) ..........................................
$ 432,000
PROBLEM 11-42 (CONTINUED)
2.
For the month of June, the company's flexible-budget variances are as follows:
LAKEMASTER COMPANY
FLEXIBLE-BUDGET VARIANCES
FOR THE MONTH OF JUNE
Actual
Flexible
Budget
Flexible-
Budget
Variance
Units .....................................................................
4,800
4,800
0
Revenue ...............................................................
$1,728,000
$1,728,000
$ 0
Variable costs:
Direct material ...............................................
$ 480,000
$ 432,000
$48,000 U
3.
The revised budget and variance data are likely to have the following impact on Al
Richmond's behavior:
• Richmond is likely to be encouraged by the revised data, since the major portion of
Chapter 11 - Flexible Budgeting and Analysis of Overhead Costs
PROBLEM 11-42 (CONTINUED)
PROBLEM 11-43 (55 MINUTES)
1.
Activity Level (Air Miles)
32,000
35,000
38,000
Variable expenses:
Fuel ..........................................................
$ 48,000
$ 52,500
$ 57,000
Aircraft maintenance ..............................
72,000
78,750
85,500
2.
First, there is a large unfavorable variance in passenger revenue, reflecting the fact
Chapter 11 - Flexible Budgeting and Analysis of Overhead Costs
PROBLEM 11-43 (CONTINUED)
3.
Memorandum
Date:
Today
To:
Red Leif, Manager of Aircraft Operations
From:
I. M. Student
Subject:
Variance Report
The variance report is misleading because the expenses in the budget, which was
4.
Formula
Flexible
Budget
(per air
mile)
Actual
(32,000
air
miles)
Flexible
Budget
(32,000
air
miles)
Variance
Variable expenses:
Fuel ........................................
$ 1.50
$ 51,000
$ 48,000
$3,000 U
Aircraft maintenance ............
2.25
70,500
72,000
1,500 F
Chapter 11 - Flexible Budgeting and Analysis of Overhead Costs
PROBLEM 11-43 (CONTINUED)
5.
Jacqueline Frost has acted properly in every way. She noticed a major conceptual
error in the way Red Leif had prepared his performance report. She pointed this out to
him, and she also provided him with a correct analysis of September's performance.
Several ethical standards for managerial accountants apply in this situation. (See
Chapter 1 for a listing of these standards.) Among the relevant standards are the
following:
Competence
• Prepare complete and clear reports and recommendations after appropriate
analyses of relevant and reliable information.
Chapter 11 - Flexible Budgeting and Analysis of Overhead Costs
PROBLEM 11-44 (40 MINUTES)
1.
Susan Porter recommended that EduSoft use flexible budgeting in this situation
because a flexible budget would allow Mark Fletcher to compare EduSoft's actual
selling expenses (based on current month's actual activity) with budgeted selling
expenses. In general, flexible budgets:
Chapter 11 - Flexible Budgeting and Analysis of Overhead Costs
PROBLEM 11-44 (CONTINUED)
2.
EDUSOFT CORPORATION
REVISED MONTHLY SELLING EXPENSE REPORT FOR OCTOBER
Flexible
Budget
Actual
Variance
Advertising .....................................................
$3,300,000
$3,320,000
$20,000 U
Staff salaries ...................................................
250,000
250,000
0
Sales salariesa ................................................
230,400
230,800
400 U
Supporting calculations:
aMonthly salary for salesperson
$216,000 90 = $2,400.
c($297,000 90) 15 days = $220 per day.
($220 15) 96 = $316,800.
Chapter 11 - Flexible Budgeting and Analysis of Overhead Costs
PROBLEM 11-45 (45 MINUTES)
Missing amounts for case A:
2.
$21.00a per direct-labor hour
Explanatory notes for case A:
aBudgeted direct-labor hours
=
budgeted production standard direct-labor hours per unit
