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©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 21 1173
Chapter 21 Flexible Budgets and Standard Costing
QUESTIONS 1. Fixed budget performance reports have limited usefulness because they do not reflect
differences in revenues and variable costs that can occur simply because actual volume is different from budgeted volume. This is a serious limitation when evaluating (benchmarking) the reasonableness of actual revenues and costs.
2. The primary purpose of a flexible budget is to help managers better evaluate past performance, which can improve their abilities to monitor and control operations.
3. The proper title is: Spalding Company Flexible Budget Performance Report For Year Ended December 31, 2013
The proper title communicates to the user the focus of the report. Although it may seem obvious, many reports used in the business world do not have a proper or descriptive title. The sooner a student begins to make this a routine task in completing assignments, the better skilled s/he will be for the business world.
4. A flexible budget performance report is useful for an analysis of the difference between actual performance and budgeted performance—often called variance analysis. Its usefulness stems from the fact that both the budgeted and actual results are based on the same level of activity.
5. A variable cost implies a constant per unit cost for each unit produced or sold within the relevant range.
6. The human resource department is usually responsible for a labor rate variance. The production department is usually responsible for a labor efficiency variance. However, the two responsibilities may not be completely separate. For example, a favorable rate variance may have occurred because the human resource department hired poorly trained employees, in which case the production department used more hours than expected (resulting in an unfavorable efficiency variance) because of higher waste.
7. A price variance is that portion of a cost variance caused by a difference between the actual unit price of an item and its standard price. A quantity variance is that portion of a cost variance caused by a difference between the actual number of units of an item used and the standard number of units budgeted to be used.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1174
8. Standard costs are used to establish a basis to assess the reasonableness of actual costs. A comparison of standard costs to actual costs should help management identify unexpected differences and then pursue explanations as to why actual costs varied from the standard.
9. An overhead volume variance is the difference between (a) the amount of (fixed) overhead that would have been budgeted at the actual operating level achieved during the period (that is, budgeted fixed overhead) and (b) the standard amount of (fixed) overhead applied to actual products produced during the period. A volume variance occurs when the actual volume differs from the expected volume that is used to establish the predetermined rate.
10. A predetermined standard overhead rate is a measure computed and used in a standard cost system to assign overhead costs to products. Before the period begins, budgeted total overhead costs (variable and fixed) at the expected volume are divided by the expected amount of the allocation base (direct labor hours, machine hours, or some other measure of activity). This yields the predetermined standard overhead rate. Then as production activities occur, this predetermined overhead rate is applied to the standard quantity of output produced to establish the amount of overhead assigned to that output.
11. In general, variance analysis is said to provide information about price and quantity variances.
12. A controllable variance is the difference between (a) the total overhead cost actually incurred in the period and (b) the total overhead cost that would have been budgeted at the actual operating level achieved. Specifically, the controllable variance is the sum of the total variable overhead variances (both variable overhead spending and efficiency variances) and the fixed overhead spending variance.
13. Standard costs provide a basis for evaluating actual performance. Summary information comparing actual costs to budgeted costs is captured and reported in a flexible budget. The evaluation reports differences between actual costs and standard costs as variances. Variance analysis draws attention to situations where actual costs differ from standard costs. Management by exception can be used in performing variance analysis by focusing management’s attention on the variances where actual costs are most different from standard costs.
14. Before a period starts, the manager can prepare flexible budgets for the various types of snowmobiles. Then, she could estimate both the best and worst case scenarios for the upcoming period. The manager can then adjust personnel or promotions, for instance, to help achieve acceptable results. After the period ends, the manager can use the flexible budget to determine how actual results compare to the plan for the achieved level of sales.
15. Apple schedules appointments with customers to service Apple computers, iPhones, iPods etc. These service appointments require standard hours at standard rates to complete, depending on the type of service. Apple can calculate the price (rate) and quantity (efficiency) variances for these various services to maintain control over them.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 21 1175
16. The controllable variance should not be affected by achieving an actual operating level different from the budgeted level. If the company operated at 75% of capacity, a controllable variance will arise only if the actual overhead cost is different from the amount shown on a flexible budget for overhead computed at the 75% level.
In contrast, the volume variance is affected when the percent of actual capacity differs from that expected. If the company operated at less than planned (for example, at 75% instead of the 80% budgeted) the volume variance will be unfavorable. This means that the company will not apply as much overhead to each unit or job as planned. Stated differently, each job or unit will be undercosted.
QUICK STUDIES Quick Study 21-1 (15 minutes)
BEECH COMPANY Flexible Budget Performance Report
For Month Ended May 31
Flexible Actual Budget Results Variances
Sales .................................................. $1,300,000 $1,275,000 $25,000 U
Variable costs ................................... 750,000 712,500 37,500 F
Contribution margin ......................... 550,000 562,500 12,500 F
Fixed costs ........................................ 300,000 300,000 0
Income from operations .................. $ 250,000 $ 262,500 $12,500 F
Quick Study 21-2 (5 minutes) A standard cost card for one bat would include: Direct materials (1 kg. @$18 per kg.) ............................................... $18
Direct labor (0.25 hours @$20 per hour) .......................................... 5
Overhead (0.25 labor hours $40 per hour) ....................................... 10
Total ..................................................................................................... $33
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1176
Quick Study 21-3 (5 minutes) Actual cost for one bat ...................................................................... $40
Standard cost for one bat (from QS 21-2) ........................................ 33
Cost variance ...................................................................................... $ 7
As the actual costs are greater than the standard costs, the cost variance is unfavorable. Quick Study 21-4 (10 minutes) 1. Management by exception involves managers focusing on the most
significant variances for analysis and action strategies. It also results in
less attention given to areas where performance is close enough to the
standard to be satisfactory. This means management concentrates on the
exceptional or irregular situations and defers dealing with areas that report
actual results reasonably close to the plan.
2. Management often uses standard costs to compute these variances. Since
standard costs are used by managers to focus on the areas in which actual
results deviate most significantly from the norm, the accurate setting of
standard costs is crucial to effective implementation of management by
exception.
Quick Study 21-5 (10 minutes) Standard direct materials cost .......................................................... $150,000
Materials price variance (favorable) ................................................. (12,000)
Materials quantity variance (favorable) ............................................ (2,000)
Actual total direct materials cost ...................................................... $136,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 21 1177
Quick Study 21-6 (10 minutes) Standard direct labor cost ................................................................. $400,000
Labor rate variance (unfavorable) .................................................... 20,000
Labor efficiency variance (unfavorable) .......................................... 10,000
Actual total direct labor cost ............................................................. $430,000
Quick Study 21-7 (15 minutes) Following information is given
Actual price per pound ................................................................................ $ 78.00
Standard price per pound ............................................................................ 77.50
Material price variance per pound (unfavorable) ...................................... $ 0.50
It is also known that: Material price variance = Price variance per pound x Actual pounds used Actual pounds used = Material price variance / Price variance per pound
Therefore, substituting with the information given above: Actual pounds used = $4,000 / $0.50 = 8,000 pounds Quick Study 21-8 (10 minutes)
Standard overhead cost .............................................................................. $225,000
Overhead volume variance (favorable) ...................................................... (20,000)
Overhead controllable variance (unfavorable) .......................................... 60,400
Actual total overhead cost .......................................................................... $265,400
Quick Study 21-9A (10 minutes) Goods in Process Inventory .................................................... 225,000 Controllable Variance .............................................................. 60,400 Volume Variance ............................................................. 20,000 Factory Overhead ............................................................ 265,400 To apply overhead and to record overhead variances.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1178
Quick Study 21-10 (10 minutes)
Actual variable overhead (4,700 x $4.15)* .................................................. $19,505
Applied variable overhead (5,000 x $4.00)** ............................................. 20,000
Total variable overhead cost variance ....................................................... $ 495 F *Actual machine hours x Actual variable overhead rate **Standard machine hours x Standard variable overhead rate
Quick Study 21-11A (15 minutes)
Variable overhead spending and efficiency variances
Actual Overhead AH x AVR
AH x SVR
Applied Overhead SH x SVR
(4,700 x $4.15) 4,700 x $4.00 5,000 x $4.00 hours per hour hours per hour hours per hour
$19,505 $18,800 $20,000
$705 U
(Spending variance) $1,200 F
(Efficiency variance)
$495 F
(Total variable overhead variance)
Quick Study 21-12 (15 minutes)
Sales Actual Flexible Budget Fixed Budget
Units 50 50 45
Price per unit
$9,000 $9,500 $9,500
Total dollars
(50 x $9,000) (50 x $9,500) (45 x $9,500)
$450,000 $475,000 $427,500
$25,000 U $47,500 F (Sales price variance) (Sales volume variance)
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Solutions Manual, Chapter 21 1179
Quick Study 21-13 (5 minutes)
Fixed costs (unchanged) ............................................................................. $300,000
Variable costs [($246,000/24,000) x 20,000 units] ..................................... 205,000
Total budgeted costs (flexible budget) ...................................................... $505,000
Quick Study 21-14 (10 minutes) From the flexible budget at 20,000 units, compute the sales price and variable costs per unit: Sales price per unit = $400,000/20,000 units = $20.00 per unit Variable cost per unit = $80,000/20,000 units = $4.00 per unit
At a production level of 26,000 units:
Sales (26,000 x $20.00) ................................................................................. $520,000
Variable costs (26,000 x $4.00).................................................................... 104,000
Contribution margin ..................................................................................... 416,000
Fixed costs (unchanged) ............................................................................. 150,000
Income from operations .............................................................................. $266,000
Quick Study 21-15 (10 minutes)
BRODRICK COMPANY Flexible Budget Performance Report
For Year Ended December 31
Flexible Actual Budget Results Variances
Sales (13,000 units) ......................... $520,000 $480,000 $40,000 U
Variable expenses ........................... 104,000 112,000 8,000 U
Contribution margin ........................ 416,000 368,000 48,000 U
Fixed expenses ................................ 150,000 145,000 5,000 F
Income from operations .................. $266,000 $223,000 $43,000 U
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Financial & Managerial Accounting, 5th Edition 1180
Quick Study 21-16 (10 minutes) Direct materials price variance:
Actual cost of direct materials used (given) .............................................. $535,000
Actual quantity used x Standard price (300,000 x $2) .............................. 600,000
Direct materials price variance (favorable) ................................................ $ 65,000
Direct materials quantity variance:
Actual quantity used x Standard price (300,000 x $2) .............................. $600,000
Standard quantity x Standard price (60,000 x 4 x $2) ............................... 480,000
Direct materials quantity variance (unfavorable) ...................................... $120,000
Quick Study 21-17 (10 minutes) Direct labor rate variance:
Actual hours x Actual rate per hour (65,000 x $15) ................................... $975,000
Actual hours x Standard rate per hour (65,000 x $14) .............................. 910,000
Direct labor rate variance (unfavorable) .................................................... $ 65,000
Direct labor efficiency variance:
Actual hours x Standard rate per hour (65,000 x $14) .............................. $910,000
Standard hours x Standard rate per hour (67,000 x $14) ......................... 938,000
Direct labor efficiency variance (favorable) ............................................... $ 28,000
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Solutions Manual, Chapter 21 1181
Quick Study 21-18 (10 minutes)
Actual overhead incurred ............................................................................ $262,800
Less: Applied overhead (based on flexible budget)
Variable overhead (110,000 x $1.40*) ......................................................
Fixed overhead (unchanged) ..................................................................
Controllable overhead variance (favorable) ..............................................
154,000
124,000
$ 15,200 *$162,400/116,000 units = $1.40 variable overhead rate per unit
Quick Study 21-19 (10 minutes)
Actual overhead incurred ............................................................................ $ 28,175
Less: Applied overhead (based on flexible budget)
Variable overhead (9,800 x $3.10) ............................................................
Fixed overhead (unchanged) ..................................................................
Controllable overhead variance (favorable) ..............................................
30,380
12,000
$(14,205)
Quick Study 21-20 (5 minutes)
Budgeted fixed overhead (at 12,000 units) ................................................ $12,000
Fixed overhead applied to production (9,800 x $1) ...................................
Volume variance (favorable) .......................................................................
9,800
$ 2,200
Quick Study 21-21 (15 minutes) Sales Actual Flexible Budget Fixed Budget
Units 216,944 216,944 225,944
Price per unit
$30,200 $30,000 $30,000
Total dollars
(216,944 x $30,200) (216,944 x $30,000) (225,944 x $30,000)
$6,551,708,800 $6,508,320,000 $6,778,320,000
$43,388,800 F $270,000,000 U (Sales price variance) (Sales volume variance)
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Financial & Managerial Accounting, 5th Edition 1182
EXERCISES
Exercise 21-1 (20 minutes)
Item Cost
a. Bike frames Variable
b. Screws for assembly Variable
c. Repair expense for tools (If these costs are only remotely related
to volume, they may be better classified as fixed) Variable
d. Direct labor (If employees receive monthly salaries, this cost would
be fixed) Variable
e. Bike tires Variable
f. Gas used for heating** Variable
g. Incoming shipping expenses* Variable
h. Taxes on property Fixed
i. Office supplies (This item can be a variable cost, but it usually is
not because it doesn’t often change in direct proportion to changes in the volume level)
Fixed
j. Depreciation on tools (If the company uses the units-of-
production method, the depreciation would be variable) Fixed
k. Management salaries Fixed
* Incoming shipping expenses are variable with respect to the number (volume) of
incoming shipments, not production.
** Gas used for heating is often a mixed cost rather than strictly variable.
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Solutions Manual, Chapter 21 1183
Exercise 21-2 (30 minutes)
TEMPO COMPANY Flexible Budgets
For Quarter Ended March 31, 2013
Flexible Budget Flexible Flexible Flexible
Variable Amount per Unit*
Total Fixed Cost
Budget for Unit Sales
of 6,000
Budget for Unit Sales
of 7,000
Budget for Unit Sales
of 8,000
Sales ................................... $400.00 $2,400,000 $2,800,000 $3,200,000
Variable costs
Direct materials ................ 40.00 240,000 280,000 320,000
Direct labor ....................... 70.00 420,000 490,000 560,000
Production supplies ........ 25.00 150,000 175,000 200,000
Sales commissions ......... 20.00 120,000 140,000 160,000
Packaging ......................... 22.00 132,000 154,000 176,000
Total variable costs ......... 177.00 1,062,000 1,239,000 1,416,000
Contribution margin .......... $223.00 1,338,000 1,561,000 1,784,000
Fixed costs
Plant manager salary ....... $ 65,000 65,000 65,000 65,000
Advertising ....................... 125,000 125,000 125,000 125,000
Admin. salaries ................ 85,000 85,000 85,000 85,000
Depr.—Office equip. ........ 35,000 35,000 35,000 35,000
Insurance .......................... 20,000 20,000 20,000 20,000
Office rent ......................... 36,000 36,000 36,000 36,000
Total fixed costs .............. $366,000 366,000 366,000 366,000
Income from operations ....... $ 972,000 $1,195,000 $1,418,000
* Equals total variable costs divided by the volume of 7,000 units.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1184
Exercise 21-3 (25 minutes)
SOLITAIRE COMPANY Flexible Budget Performance Report
For Month Ended June 30
Flexible Actual Budget Results Variances
Sales (10,800 units) ......................... $540,000 $540,000 $ 0
Variable expenses ........................... 378,000 351,000 27,000 F
Contribution margin ........................ 162,000 189,000 27,000 F
Fixed expenses ................................ 21,000 27,000 6,000 U
Income from operations .................. $141,000 $162,000 $21,000 F
Supporting computations
Total fixed budget sales ...................................................... $ 420,000
Total fixed budget units ....................................................... ÷ 8,400
Budgeted selling price......................................................... $50 per unit
Flexible budget units ........................................................... × 10,800
Flexible budget sales ........................................................... $ 540,000
Total fixed budget variable expenses ................................ $ 294,000
Total units budgeted ............................................................ ÷ 8,400
Budgeted variable expenses ............................................... $35 per unit
Flexible budget units ........................................................... × 10,800
Flexible budget variable expenses ..................................... $ 378,000
Total actual expenses .......................................................... $ 378,000
Less actual fixed expenses ................................................. 27,000
Total actual variable expenses ........................................... $ 351,000
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Solutions Manual, Chapter 21 1185
Exercise 21-4 (25 minutes)
BAY CITY COMPANY Flexible Budget Performance Report
For Month Ended July 31
Flexible Actual Budget Results Variances
Sales (7,200 units)............................ $720,000 $737,000 $17,000 F
Variable expenses ........................... 468,000 483,000 15,000 U
Contribution margin ........................ 252,000 254,000 2,000 F
Fixed expenses ................................ 160,000 158,000 2,000 F
Income from operations .................. $ 92,000 $ 96,000 $ 4,000 F
Supporting computations
Total fixed budget sales ............................................ $ 750,000
Total units budgeted .................................................. ÷ 7,500
Budgeted selling price .............................................. $100 per unit
Flexible budget units ................................................. × 7,200
Flexible budget sales ................................................. $ 720,000
Total fixed budget variable expenses ...................... $ 487,500
Total units budgeted .................................................. ÷ 7,500
Budgeted variable expenses ..................................... $ 65 per unit
Flexible budget units ................................................. × 7,200
Flexible budget variable expenses ........................... $ 468,000
Total actual expenses ................................................ $ 641,000
Less actual fixed expenses ....................................... 158,000
Total actual variable expenses ................................. $ 483,000
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Financial & Managerial Accounting, 5th Edition 1186
Exercise 21-5 (30 minutes)
1.
October variances
Preliminary computations Actual hours: 16,250 hours (given) Standard hours: 5,600 units x 3 hrs./unit = 16,800 hrs. Actual rate: $247,000/16,250 hours = $15.20/hr. Standard rate: $15.00/hr. (given)
Direct labor cost variances Actual units at actual cost [16,250 hrs. @ $15.20] ............................................. $247,000 Standard units and standard cost [16,800 hrs. @ $15.00] ................................ 252,000 Direct labor cost variance .................................................................................... $ 5,000 F
Rate and efficiency variances
Actual Cost AH x AR
AH x SR
Standard Cost SH x SR
16,250 x $15.20 16,250 x $15.00 16,800 x $15.00 hours per hour hours per hour hours per hour
$247,000 $243,750 $252,000
$3,250 U
(Rate variance) $8,250 F
(Efficiency variance)
$5,000 F
(Total labor variance)
Alternate solution format Rate variance = AH x (AR – SR) = 16,250 hours x ($15.20 - $15.00) per hour = 16,250 hours x $0.20 per hour = $3,250 U Efficiency variance = (AH - SH) x SR = (16,250 – 16,800) hours x $15.00 per hour = (-550 hours) x $15.00 per hour = $8,250 F Rate variance ...................... $3,250 U Efficiency variance ............. 8,250 F Total ..................................... $5,000 F
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Solutions Manual, Chapter 21 1187
Exercise 21-5 (Concluded)
November variances
Preliminary computations Actual hours: 22,000 hours (given) Standard hours: 6,000 units x 3 hrs./unit = 18,000 hours Actual rate: $335,500/22,000 hrs. = $15.25/hr. Standard rate: $15.00/hr. (given)
Direct labor cost variances Actual units at actual cost [22,000 hrs. @ $15.25] ............................................. $335,500 Standard units at standard cost [18,000 hrs. @ $15.00] .................................... 270,000 Direct labor cost variance .................................................................................... $ 65,500 U
Rate and efficiency variances
Actual Cost AH x AR
AH x SR
Standard Cost SH x SR
22,000 x $15.25 22,000 x $15.00 18,000 x $15.00 hours per hour hours per hour hours per hour
$335,500 $330,000 $270,000
$5,500 U
(Rate variance) $60,000 U
(Efficiency variance)
$65,500 U
(Total labor variance)
2. The unfavorable labor rate variance in October means the actual rate for an hour of labor is greater than budgeted. The favorable labor efficiency variance means the actual hours used are less than budgeted. Together, these results can be interpreted to mean that employees are paid more than budgeted, but are also more productive than budgeted. Perhaps a more skilled labor force was used during the month of October. In November, there was an unfavorable rate variance and an unfavorable efficiency variance. The company needs to look carefully at why there was such a large unfavorable efficiency variance.
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Financial & Managerial Accounting, 5th Edition 1188
Exercise 21-6 (20 minutes)
1. Predetermined overhead rate computations
Expected volume ...................................................................... 75%
Expected total overhead .......................................................... $2,100,000
Expected hours ........................................................................ 375,000 hrs.
Variable cost per hour ($1,500,000/ 375,000) ......................... $4.00
Fixed cost per hour ($600,000/ 375,000) ................................ $1.60
Total cost per hour ($2,100,000/ 375,000) .............................. $5.60
2. Variable overhead cost variance
Variable overhead cost incurred [given] ................................................... $1,375,000
Variable overhead cost applied [350,000 hrs. @ $4.00] ........................... 1,400,000
Variable overhead cost variance ................................................................ $ 25,000 F
Fixed overhead cost variance
Fixed overhead cost incurred [given] .............................................. $ 628,600
Fixed overhead cost applied [350,000 hrs. @ $1.60] ...................... 560,000
Fixed overhead cost variance .......................................................... $ 68,600 U
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 21 1189
Exercise 21-7A (20 minutes) 1.
Variable overhead spending and efficiency variances
Actual Overhead AH x AVR
AH x SVR
Applied Overhead SH x SVR
(Given) 340,000 x $4.00 350,000 x $4.00 hours per hour hours per hour
$1,375,000 $1,360,000 $1,400,000
$15,000 U
(Spending variance) $40,000 F
(Efficiency variance)
$25,000 F
(Total variable overhead variance)
Interpretation:
The $15,000 unfavorable spending variance means the actual cost of variable
overhead is more than budgeted. This unfavorable variance can occur
because the cost of variable overhead is greater than budgeted or because
more variable items are consumed than anticipated. It could also be a
combination of both; where the cost and usage may be greater or less than
anticipated, yet the net impact is an unfavorable spending variance.
The $40,000 favorable efficiency variance occurs because the actual labor
hours used is less than the standard labor hours required for actual
production. Labor hours are used as the allocation base.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1190
Exercise 21-7 A (continued) 2.
Fixed overhead spending and volume variances
Actual Overhead Budgeted Overhead Applied Overhead
(Given) (Given) 350,000 x $1.60 hours per hour
$628,600 $600,000 $560,000
$28,600 U
(Spending variance) $40,000 U
(Volume variance)
$68,600 U
(Total fixed overhead variance)
Interpretation The $28,600 unfavorable spending variance means actual cost of fixed overhead is more than budgeted.
The $40,000 unfavorable volume variance is the result of the company actually operating at 70% capacity rather than the budgeted 75% capacity. Not all of the budgeted fixed overhead is applied to production because actual volume fell below budgeted volume. 3. The controllable variance is computed as:
Variable overhead spending variance ................................... $15,000 U Variable overhead efficiency variance ................................... 40,000 F Fixed overhead spending variance ........................................ 28,600 U Controllable variance ............................................................... $ 3,600 U
The controllable variance refers to activities that are considered within management’s control. The unfavorable controllable variance of $3,600 indicates that overall, management performed relatively poorly in controlling overhead costs.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 21 1191
Exercise 21-8 (30 minutes)
1. Preliminary computations Actual quantity: 22,000 bd. ft. (given) Standard quantity: 3,000 units x 8 bd. ft./unit = 24,000 bd. ft. Actual price: $266,200/22,000 bd. ft. = $12.10/bd. ft. Standard price: $12.00/bd. ft. (given)
Direct material cost variances
Actual units at actual cost [22,000 bd. ft. @ $12.10] ................................. $266,200 Standard units at standard cost [(24,000 bd. ft. @ $12.00] ...................... 288,000 Direct material cost variance ...................................................................... $ 21,800 F
Price and quantity variances
Actual Cost AQ x AP
AQ x SP
Standard Cost SQ x SP
22,000 x $12.10 22,000 x $12.00 24,000 x $12.00 bd. ft. per bd. ft. bd. ft. per bd. ft. bd. ft. per bd. ft.
$266,200 $264,000 $288,000
$2,200 U
(Price variance) $24,000 F
(Quantity variance)
$21,800 F
(Total materials variance)
Alternate solution format Price variance = AQ x (AP – SP) = 22,000 board feet x ($12.10 - $12.00) = $2,200 U Quantity variance = (AQ – SQ) x SP = (22,000 - 24,000) board feet x $12.00/board foot = $24,000 F Price variance ..................... $ 2,200 U Quantity variance ............... 24,000 F Total variance ..................... $21,800 F
2. The unfavorable price variance means the actual price paid is more than
the budgeted price. The favorable quantity variance means the actual quantity used is less than the budgeted amount. It appears the company operated with quality materials in an efficient manner at a slightly higher than expected cost.
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Financial & Managerial Accounting, 5th Edition 1192
Exercise 21-9A (25 minutes)
1.
Goods in Process Inventory .................................................... 288,000
Direct Materials Price Variance* ............................................. 2,200
Direct Materials Quantity Variance ................................ 24,000
Raw Materials Inventory ................................................. 266,200
To record the favorable price and quantity variances.
* This price variance can alternatively be computed and recorded when the direct materials are
purchased.
2.
Direct Materials Quantity Variance ......................................... 24,000
Direct Materials Price Variance ...................................... 2,200
Cost of Goods Sold ......................................................... 21,800
To close the unfavorable price and favorable quantity
variances to cost of goods sold.
3. The $24,000 materials quantity variance should be investigated because of
its relatively large magnitude. In particular, this variance is large relative to
the total materials inventory — $24,000/$266,200, or approximately 9% of
inventory purchased.
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Solutions Manual, Chapter 21 1193
Exercise 21-10 (20 minutes)
Information given
Planned units to be produced = 80% x 50,000 capacity = 40,000 units
Planned hours of direct labor = 25,000 hours
Standard hours per unit = 25,000 hours/40,000 units = 0.625 hours per unit
Total standard hrs. for act. production: 35,000 units x 0.625/unit = 21,875 hr.
1. Total overhead planned at 80% level (25,000 direct labor hours)
Predetermined Cost
Cost per Hour
Fixed overhead................................. $ 50,000 $ 2.00
Variable overhead ............................ 275,000 11.00
Total overhead ................................. $325,000 $13.00
2. Total overhead variance
Total actual overhead (given) ..................................................................... $305,000
Applied overhead ($13/hr. x 21,875 hours) ............................................... 284,375
Total overhead variance .............................................................................. $ 20,625 U
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Financial & Managerial Accounting, 5th Edition 1194
Exercise 21-11 (30 minutes) 1. Preliminary variance computations Variable overhead spending and efficiency variances Actual Overhead
AH x AVR
AH x SVR Applied Overhead
SH x SVR
22,000 x $11 21,875 x $11
$ * $242,000 $240,625
$ *
(Spending variance) $ 1,375 U
(Efficiency variance)
$ *
(Total variable overhead variance)
Fixed overhead spending and volume variances Actual Overhead Budgeted Overhead Applied Overhead
(Given) 21,875 x $2
$ * $50,000 $43,750
$ *
(Spending variance) $6,250 U
(Volume variance)
$ *
(Total fixed overhead variance)
* Not computable from information given
2. Overhead controllable variance*
Total actual overhead (given) ........................................................... $305,000
Flexible budget overhead Variable ($11/hr. x 21,875 hours) .............................. $240,625 Fixed (given) ............................................................... 50,000 Total .......................................................................................................... 290,625 Overhead controllable variance .................................................................. $ 14,375 U
* Alternative solution approach: We know the overhead controllable variance is equal to the
total overhead variance less the overhead volume variance. Then, using the results from parts 1 and 2, we can compute the overhead controllable variance as
Overhead controllable variance = $20,625 U - $6,250 U = $14,375 U
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Solutions Manual, Chapter 21 1195
Exercise 21-12 (25 minutes) 1. Sales price and sales volume variances
Sales Actual Sales Flexible Budget Fixed Budget Units 350 350 365
Price/unit $1,200 $1,100 $1,100
(350 x $1,200) (350 x $1,100) (365 x $1,100) Total $420,000 $385,000 $401,500
$35,000 F
(Sales price variance) $16,500 U
(Sales volume variance)
2. Interpretation
The $35,000 favorable sales price variance implies it sold computers for a higher price than budgeted. The $16,500 unfavorable sales volume variance implies it sold fewer computers than budgeted, perhaps because of the price increase. Exercise 21-13 (10 minutes) a. 4 b. 3 c. 5 d. 2 e. 1
Exercise 21-14 (15 minutes) (1) c (2) a (3) b (4) i (5) e (6) h (7) d (8) f (9) j (10) g
Exercise 21-15 (5 minutes) Following management by exception, the company should focus on those variances that exhibit the greatest differences from the standard. This would likely include the direct materials quantity ($3,000 unfavorable) and direct labor efficiency ($2,200 favorable). Though the fixed overhead volume variance is relatively large ($500 favorable), it merely shows the company operated at a capacity level different than expected.
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Financial & Managerial Accounting, 5th Edition 1196
Exercise 21-16 (25 minutes) Part 1 Direct materials price variance:
Actual cost of direct materials used (16,000 x $4.05) ............................... $ 64,800
Actual quantity used x Standard price (16,000 x $4.00) ........................... 64,000
Direct materials price variance (unfavorable) ........................................... $ 800 Direct materials quantity variance:
Actual quantity used x Standard price (16,000 x $4.00) ........................... $ 64,000
Standard quantity x Standard price (15,000* x $4.00) ............................... 60,000
Direct materials quantity variance (unfavorable) ...................................... $ 4,000 *30,000 units x ½ pound per unit = 15,000 pounds
Part 2 Direct labor rate variance:
Actual hours x Actual rate per hour (5,545 x $19.00***) ........................... $105,355
Actual hours x Standard rate per hour (5,545 x $20.00) ........................... 110,900
Direct labor rate variance (favorable) ......................................................... $ 5,545
Direct labor efficiency variance:
Actual hours x Standard rate per hour (5,545 x $20.00) ........................... $110,900
Standard hours x Standard rate per hour (5,000** x $20.00) .................... 100,000
Direct labor efficiency variance (unfavorable) .......................................... $ 10,900 **30,000 units x 1/6 hour per unit = 5,000 hours ***$105,355/5,545 hours
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Solutions Manual, Chapter 21 1197
PROBLEM SET A Problem 21-1A ( 40 minutes)
Part 1 Direct Materials Variances
Direct materials cost variances Actual units at actual cost [1,615,000 lbs. @ $4.10] .......................................... $6,621,500 Standard units at standard cost [1,620,000 lbs. @ $4.00] ................................. 6,480,000 Direct material cost variance............................................................................... $ 141,500 U
Direct Materials Price and Quantity Variances
Actual Cost AQ x AP
AQ x SP
Standard Cost SQ x SP
1,615,000 x $4.10 1,615,000 x $4.00 1,620,000 x $4.00
$6,621,500 $6,460,000 $6,480,000
$161,500 U
(Price variance) $20,000 F
(Quantity variance)
$141,500 U
(Total materials variance)
Part 2 Direct Labor Variances
Direct labor cost variances Actual units at actual cost [265,000 hrs. @ $13.75] ........................................... $3,643,750 Standard units at standard cost [270,000 hrs. @ $14.00] ................................. 3,780,000 Direct labor cost variance ................................................................................... $ 136,250 F
Direct Labor Rate and Efficiency Variances
Actual Cost AH x AR
AH x SR
Standard Cost SH x SR
265,000 x $13.75 265,000 x $14.00 270,000 x $14.00
$3,643,750 $3,710,000 $3,780,000
$66,250 F
(Rate variance) $70,000 F
(Efficiency variance)
$136,250 F
(Total labor variance)
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Financial & Managerial Accounting, 5th Edition 1198
Problem 21-1A (Continued)
Part 3 Overhead Variances
Controllable variance
Actual overhead [$2,350,000 + $2,200,000] ...............................
$4,550,000
Budgeted overhead [from flexible budget, 90% capacity] ...... 4,560,000
Controllable variance ................................................................. $ 10,000 F
Fixed overhead volume variance
Budgeted fixed overhead [given, at 80% capacity] .................. $2,400,000
Fixed overhead cost applied [270,000 hrs. @ $10] .................. 2,700,000
Fixed overhead volume variance............................................... $ 300,000 F
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Solutions Manual, Chapter 21 1199
Problem 21-2AA (15 minutes) (a) Variable overhead
Variable Overhead Spending and Efficiency Variances
Actual Overhead AH x AVR
AH x SVR
Applied Overhead SH x SVR
265,000 x $8 270,000 x $8
$2,200,000 $2,120,000 $2,160,000
$80,000 U
(Spending variance) $40,000 F
(Efficiency variance)
$40,000 U
(Total variable overhead variance)
(b) Fixed overhead
Fixed Overhead Spending and Volume Variances
Actual Overhead Budgeted Overhead Applied Overhead
270,000 x $10
$2,350,000 $2,400,000 $2,700,000
$50,000 F
(Spending variance) $300,000 F
(Volume variance)
$350,000 F
(Total fixed overhead variance)
(c) Controllable variance
Variable overhead spending variance ................................... $ 80,000 U
Variable overhead efficiency variance ................................... 40,000 F
Fixed overhead spending variance ........................................ 50,000 F
Total overhead controllable variance .................................... $ 10,000 F
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Financial & Managerial Accounting, 5th Edition 1200
Problem 21-3A (60 minutes)
Part 1
Variable or Fixed Classification
Amount per unit
Variable sales (total divided by 15,000 units)
Sales .................................................................................................. $ 200.00
Variable costs (total divided by 15,000 units)
Direct materials ................................................................................ $ 65.00
Direct labor ....................................................................................... 15.00
Machinery repairs ............................................................................ 4.00
Utilities ($45,000 variable) ............................................................... 3.00
Packaging ......................................................................................... 5.00
Shipping ............................................................................................ 7.00
Total variable costs .......................................................................... $ 99.00
Fixed costs
Depreciation—Plant equipment ...................................................... $ 300,000
Utilities ($195,000 - $45,000 variable) ............................................. 150,000
Plant management salaries ............................................................. 200,000
Sales salary ...................................................................................... 250,000
Advertising expense ........................................................................ 125,000
Salaries ............................................................................................. 241,000
Entertainment expense .................................................................... 90,000
Total fixed costs ............................................................................... $1,356,000
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Solutions Manual, Chapter 21 1201
Problem 21-3A (Continued)
Part 2
PHOENIX COMPANY Flexible Budgets
For Year Ended December 31, 2013
Flexible Budget Flexible Flexible
Variable Amount per Unit
Total Fixed Cost
Budget for Unit Sales of 14,000
Budget for Unit Sales of 16,000
Sales ..................................... $200.00 $2,800,000 $3,200,000
Variable costs
Direct materials ................. 65.00 910,000 1,040,000
Direct labor ........................ 15.00 210,000 240,000
Machinery repairs ............. 4.00 56,000 64,000
Utilities ............................... 3.00 42,000 48,000
Packaging .......................... 5.00 70,000 80,000
Shipping ............................. 7.00 98,000 112,000
Total variable costs .......... 99.00 1,386,000 1,584,000
Contribution margin ............ $101.00 1,414,000 1,616,000
Fixed costs
Depreciation—Plant Equip .... $ 300,000 300,000 300,000
Utilities ............................... 150,000 150,000 150,000
Plant mgmt. salaries ......... 200,000 200,000 200,000
Sales salary. ...................... 250,000 250,000 250,000
Advertising expense ......... 125,000 125,000 125,000
Salaries .............................. 241,000 241,000 241,000
Entertainment expense .... 90,000 90,000 90,000
Total fixed costs................ $1,356,000 1,356,000 1,356,000
Income from operations ....... $ 58,000 $ 260,000
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Financial & Managerial Accounting, 5th Edition 1202
Problem 21-3A (Continued) Part 3 Operating income increase for a 15,000 to 18,000 unit sales increase
Possible sales (units) ............................................................... 18,000 Units
Contribution margin per unit ................................................... x $101
Total contribution margin ........................................................ $1,818,000
Less: Fixed costs .................................................................... (1,356,000)
Potential operating income ..................................................... $ 462,000
vs. Budgeted income for 2013 ................................................ 159,000
Increase ..................................................................................... $ 303,000*
*Alternate solution format Unit increase ........................................................................................... 3,000 Units Contribution margin per unit .................................................................. x $101 Increase in contribution margin ............................................................. $303,000
Since there is no increase in fixed costs, the expected increase in operating income is the same $303,000.
Part 4 Operating income (loss) at 12,000 units
Possible sales (units) ............................................................... 12,000 Units
Contribution margin per unit ................................................... x $101
Total contribution margin ........................................................ $1,212,000
Less: Fixed costs .................................................................... (1,356,000)
Potential operating loss ........................................................... $ (144,000)
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Solutions Manual, Chapter 21 1203
Problem 21-4A (45 minutes)
Part 1
PHOENIX COMPANY Flexible Budget Performance Report For Year Ended December 31, 2013
Flexible Actual Budget Results Variances*
Sales (18,000 units) .......................... $3,600,000 $3,648,000 $48,000 F
Variable costs
Direct materials .............................. 1,170,000 1,185,000 15,000 U
Direct labor ..................................... 270,000 278,000 8,000 U
Machinery repairs .......................... 72,000 63,000 9,000 F
Utilities ............................................ 54,000 53,000 1,000 F
Packaging ....................................... 90,000 87,500 2,500 F
Shipping ......................................... 126,000 118,500 7,500 F
Total variable costs ....................... 1,782,000 1,785,000 3,000 U
Contribution margin ......................... 1,818,000 1,863,000 45,000 F
Fixed costs
Depreciation—Plant equip. ........... 300,000 300,000 0
Utilities ............................................ 150,000 147,500 2,500 F
Plant management salaries .......... 200,000 210,000 10,000 U
Sales salary .................................... 250,000 268,000 18,000 U
Advertising expense ...................... 125,000 132,000 7,000 U
Salaries ........................................... 241,000 241,000 0
Entertainment expense ................. 90,000 93,500 3,500 U
Total fixed costs............................. 1,356,000 1,392,000 36,000 U
Income from operations .................. $ 462,000 $ 471,000 $ 9,000 F
*F = Favorable variance; and U = Unfavorable variance.
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Financial & Managerial Accounting, 5th Edition 1204
Problem 21-4A (Continued) Part 2 (a) Analysis of sales variance
Total Per unit
Budgeted sales .............................................................. $3,600,000 $200.00
Actual sales .................................................................... 3,648,000 202.67*
Sales variance (favorable) ............................................ $ 48,000 $ 2.67
Interpretation: The sales variance is favorable because the actual price was higher than planned. * (rounded)
(b) Analysis of direct materials variance
Total Per unit
Budgeted materials........................................................ $1,170,000 $ 65.00
Actual materials used .................................................... 1,185,000 65.83
Direct materials variance (unfavorable) ...................... $ 15,000 $ 0.83 Interpretation: The direct materials variance is unfavorable for two possible reasons. (1) The quantity of materials used may have been more than the quantity budgeted, and/or (2) the amount paid for the materials might have been more than the budgeted purchase price.
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Solutions Manual, Chapter 21 1205
Problem 21-5A (60 minutes)
Part 1
Variable or Fixed Classification
Per unit Amount
Variable costs (total divided by 15,000 units) Indirect materials ............................................................................. $ 3.00 Indirect labor .................................................................................... 12.00 Power ................................................................................................ 3.00 Repairs and maintenance ............................................................... 6.00 Total variable costs ......................................................................... $ 24.00 Fixed costs (per month) Depreciation—Building ................................................................... $ 24,000 Depreciation—Machinery ................................................................ 80,000 Taxes and insurance ....................................................................... 12,000 Supervision ...................................................................................... 79,000 Total fixed costs............................................................................... $195,000
Part 2
ANTUAN COMPANY Flexible Overhead Budgets
For Month Ended October 31
Flexible Budget Flexible Flexible Flexible
Variable Amount per Unit
Total Fixed Cost
Budget for Unit Sales of 13,000
Budget for Unit Sales of 15,000
Budget for Unit Sales of 17,000
Variable overhead costs
Indirect materials ............... $ 3.00 $ 39,000 $ 45,000 $ 51,000
Indirect labor ...................... 12.00 156,000 180,000 204,000
Power .................................. 3.00 39,000 45,000 51,000
Repairs and maint. ............. 6.00 78,000 90,000 102,000
Total variable costs............ $24.00 312,000 360,000 408,000
Fixed overhead costs
Depreciation—Building ..... $ 24,000 24,000 24,000 24,000
Depreciation—Mach........... 80,000 80,000 80,000 80,000
Taxes and insurance.......... 12,000 12,000 12,000 12,000
Supervision ........................ 79,000 79,000 79,000 79,000
Total fixed costs ................. $195,000 195,000 195,000 195,000
Total overhead costs ........... $507,000 $555,000 $603,000
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Financial & Managerial Accounting, 5th Edition 1206
Problem 21-5A (Continued)
Part 3 Direct Materials Variances
Preliminary computations Actual material used: 91,000 lbs. (given) Standard quantity of materials: 15,000 units x 6 lb./unit = 90,000 lb. Actual price: $5.10/lb. (given) Standard price: $5.00/lb. (given)
Direct material cost variances Actual units at actual cost [91,000 lbs. @ $5.10] ..................................... $464,100 Standard units at standard cost [90,000 lbs. @ $5.00] ........................... 450,000 Direct material cost variance .................................................................... $ 14,100 U
Direct Materials Price and Quantity Variances
Actual Costs AQ x AP
AQ x SP
Standard Costs SQ x SP
91,000 x $5.10 91,000 x $5.00 90,000 x $5.00 lbs. per lb. lbs. per lb. Lbs. per lb.
$464,100 $455,000 $450,000
$9,100 U
(Price variance) $5,000 U
(Quantity variance)
$14,100 U
(Total materials variance)
Alternate solution format Price variance = AQ x (AP – SP) = 91,000 lb. x ($5.10 - $5.00) per lb. = 91,000 lb. x ($0.10) per lb. = $9,100 U Quantity variance = (AQ - SQ) x SP = (91,000 – 90,000) lb. x $5.00 per lb. = 1,000 lb. x $5.00 per lb. = $5,000 U Price variance ..................... $ 9,100 U Quantity variance ................ 5,000 U Total variance ...................... $14,100 U
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Solutions Manual, Chapter 21 1207
Problem 21-5A (Continued)
Part 4 Direct labor variances
Preliminary computations Actual hours used: 30,500 hours (given) Standard hours: 15,000 units x 2 hrs./unit = 30,000 hours Actual rate: $17.25/hr. (given) Standard rate: $17.00/hr. (given) Direct labor cost variances
Actual units at actual cost [30,500 hrs. @ $17.25] ............................................. $526,125 Standard units at standard cost [30,000 hrs. @ $17.00] .................................... 510,000 Direct labor cost variance .................................................................................... $ 16,125 U
Direct Labor Rate and Efficiency Variances
Actual Costs AH x AR
AH x SR
Standard Costs SH x SR
30,500 x $17.25 30,500 x $17.00 30,000 x $17.00 hours per hr. hours per hr. hours per hr.
$526,125 $518,500 $510,000
$7,625 U
(Rate variance) $8,500 U
(Efficiency variance)
$16,125 U
(Total labor variance)
Alternate solution format Rate variance = AH x (AR - SR) = 30,500 hours x ($17.25 - $17.00) per hour = 30,500 x $0.25 per hour = $7,625 U Efficiency variance = (AH - SH) x SR = (30,500 – 30,000) hours x $17.00 per hour = 500 hours x $17.00 per hour = $8,500 U Rate variance ...................... $ 7,625 U Efficiency variance ............. 8,500 U Total ..................................... $16,125 U
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Financial & Managerial Accounting, 5th Edition 1208
Problem 21-5A (Concluded) Part 5
ANTUAN COMPANY Overhead Variance Report
For Month Ended October 31
Volume Variance
Expected production level ....................................................... 75% of capacity
Production level achieved ....................................................... 75% of capacity
Volume variance ....................................................................... none Flexible Actual
Controllable Variance Budget Results Variances*
Variable overhead costs
Indirect materials ...................................... $ 45,000 $ 44,250 $ 750 F
Indirect labor ............................................. 180,000 177,750 2,250 F
Power ......................................................... 45,000 43,000 2,000 F
Repairs and maintenance ........................ 90,000 96,000 6,000 U
Total variable costs .................................. 360,000 361,000 1,000 U
Fixed overhead costs
Depreciation—Building ............................ 24,000 24,000 0
Depreciation—Machinery ........................ 80,000 75,000 5,000 F
Taxes and insurance ................................ 12,000 11,500 500 F
Supervision ............................................... 79,000 89,000 10,000 U
Total fixed costs ....................................... 195,000 199,500 4,500 U
Total overhead costs ................................. $555,000 $560,500 $ 5,500 U
*F = Favorable variance; and U = Unfavorable variance.
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Solutions Manual, Chapter 21 1209
Problem 21-6AA (80 minutes)
Part 1 Direct Materials Variances
Preliminary computations Actual quantity of materials used: 138,000 lb. (given) Standard quantity of materials: 9,000 units x 15 lbs./unit = 135,000 lb. Actual price: $3.75 (given) Standard price: $4.00 (given)
Direct materials cost variances Actual units at actual cost [138,000 lbs. @ $3.75] ........................ $517,500 Standard units at standard cost [135,000 lbs. @ $4.00] .............. 540,000 Direct material cost variance ......................................................... $ 22,500 F
Direct Materials Price and Quantity Variances
Actual Cost AQ x AP
AQ x SP
Standard Cost SQ x SP
138,000 x $3.75 138,000 x $4.00 135,000 x $4.00 lbs. per lb. lbs. per lb. lbs. per lb.
$517,500 $552,000 $540,000
$34,500 F
(Price variance) $12,000 U
(Quantity variance)
$22,500 F
(Total materials variance)
Alternate solution format Price variance = AQ x (AP - SP) = 138,000 lb. x ($3.75 - $4.00) per lb. = 138,000 x (-$0.25 per lb.) = $34,500 F Quantity variance = (AQ – SQ) x SP = (138,000 - 135,000) x $4.00 per lb. = 3,000 lb. x $4.00 per lb. = $12,000 U Price variance ..................... $34,500 F Quantity variance ............... 12,000 U Total variance ..................... $22,500 F
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Financial & Managerial Accounting, 5th Edition 1210
Problem 21-6AA (Continued)
Part 2 Direct Labor Variances
Preliminary computations Actual hours: 31,000 hrs. (given) Standard hours: 9,000 units x 3 hrs./unit = 27,000 hrs. Actual rate: $15.10/hr. (given) Standard rate per hour: $15.00 (given)
Direct labor cost variances Actual units at actual cost [31,000 hrs. @ $15.10] .................................. $468,100 Standard units at standard cost [27,000 hrs. @ $15.00] ......................... 405,000 Direct labor cost variance ......................................................................... $ 63,100 U
Direct Labor Rate and Efficiency Variances
Actual Costs AH x AR
AH x SR
Standard Costs SH x SR
31,000 x $15.10 31,000 x $15.00 27,000 x $15.00 hours per hr. hours per hr. hours per hr.
$468,100 $465,000 $405,000
$3,100 U
(Rate variance) $60,000 U
(Efficiency variance)
$63,100 U
(Total labor variance)
Alternate solution format Rate variance = AH x (AR - SR) = 31,000 hours x ($15.10 - $15.00) per hour = 31,000 x $0.10 per hour = $ 3,100 U Efficiency variance = (AH - SH) x SR = (31,000 - 27,000) hours x $15.00 per hour = 4,000 hours x $15.00 per hour = $60,000 U Rate variance ...................... $ 3,100 U Efficiency variance ............. 60,000 U Total..................................... $63,100 U
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Solutions Manual, Chapter 21 1211
Problem 21-6AA (Continued)
Part 3 Overhead Variances
(a) Variable overhead
Preliminary computations Actual variable overhead (given): Indirect materials ......................................................... $15,000 Indirect labor ................................................................ 26,500 Power ........................................................................... 6,750 Maintenance ................................................................ 4,000 Total ............................................................................. $52,250
Actual hours: 31,000 (given) Standard hours: 27,000 (from part 2) Standard rate: = =$2.00/hr
Variable overhead cost variances Variable overhead cost incurred [given] ....................................... $52,250 Variable overhead cost applied [27,000 hrs. @ $2/hr.] ................. 54,000 Variable overhead cost variance .................................................... $ 1,750 F
Variable Overhead Spending and Efficiency Variances
Actual Overhead AH x AVR
AH x SVR
Applied Overhead SH x SVR
31,000 x $2.00 27,000 x $2.00 hours per hr. hours per hr.
$52,250 $62,000 $54,000
$9,750 F
(Spending variance) $8,000 U
(Efficiency variance)
$1,750 F
(Total variable overhead variance)
Budgeted variable overhead
Budgeted direct labor hours
$48,000
24,000 hours
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Financial & Managerial Accounting, 5th Edition 1212
Problem 21-6AA (Continued)
(b) Fixed overhead
Preliminary computations Actual fixed overhead (given): Rent of factory building ............................................... $15,000 Depreciation, machinery .............................................. 10,000 Supervisory salaries .................................................... 22,000 Total ............................................................................. $47,000 Budgeted fixed overhead: $44,400 (given) Standard rate: = = $1.85/hr
Fixed overhead cost variances Fixed overhead cost incurred [given] ............................................ $47,000 Fixed overhead cost applied [27,000 hrs. @ $1.85] ...................... 49,950 Fixed overhead cost variance ........................................................ $ 2,950 F
Fixed Overhead Spending and Volume Variances
Actual Overhead
Budgeted Overhead Fixed Overhead Applied
27,000 x $1.85 hours per hr.
$47,000 $44,400 $49,950
$2,600 U
(Spending variance) $5,550 F
(Volume variance)
$2,950 F
(Total fixed overhead variance)
(c) Total overhead controllable variance
Variable overhead spending variance ............................................. $9,750 F
Variable overhead efficiency variance ............................................. 8,000 U
Fixed overhead spending variance .................................................. 2,600 U
Total overhead controllable variance .............................................. $ 850 U
Budgeted fixed overhead
Budgeted direct labor hours
$44,400
24,000 hours
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Solutions Manual, Chapter 21 1213
Problem 21-6AA (Continued)
Part 4
KEGLER COMPANY Overhead Variance Report For Month Ended May 31
Volume Variance
Expected production level .................................................... 80% of capacity
Production level achieved .................................................... 90% of capacity
Volume variance .................................................................... $5,550 (favorable) Flexible Actual Controllable Variance Budget Results Variances*
Variable overhead costs
Indirect materials ..................................... $16,875 $15,000 $1,875 F
Indirect labor ............................................ 27,000 26,500 500 F
Power ........................................................ 6,750 6,750 0
Maintenance ............................................. 3,375 4,000 625 U
Total variable costs ................................. 54,000 52,250 1,750 F
Fixed overhead costs
Rent of factory building .......................... 15,000 15,000 0
Depreciation—Machinery ........................ 10,000 10,000 0
Supervisory salaries ................................ 19,400 22,000 2,600 U
Total fixed costs....................................... 44,400 47,000 2,600 U
Total overhead costs ................................. $98,400 $99,250 $ 850 U
* F = Favorable variance; and U = Unfavorable variance.
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Financial & Managerial Accounting, 5th Edition 1214
Problem 21-7AA (45 minutes)
Part 1
Dec. 31* Goods in Process Inventory .................................................... 100,000
Direct Materials Quantity Variance ......................................... 3,000
Direct Materials Price Variance ..................................... 500
Raw Materials Inventory ................................................. 102,500
To record materials costs, including
the unfavorable quantity and
favorable price variances.
Dec. 31 Goods in Process Inventory .................................................... 95,800
Direct Labor Rate Variance ..................................................... 1,200
Direct Labor Efficiency Variance ................................... 7,000
Factory Payroll ................................................................ 90,000
To record direct labor costs, including
the favorable efficiency variance and
unfavorable rate variance.
Dec. 31 Goods in Process Inventory .................................................... 354,000
Controllable Variance .............................................................. 9,000
Volume Variance ...................................................................... 12,000
Factory Overhead ........................................................... 375,000
To record overhead costs, including
the unfavorable volume and unfavorable
controllable variances.
* Alternatively, some companies compute and record the price variance when materials are purchased. This would yield two separate entries:
(1) Purchase of materials Raw Materials Inventory .......................................................................... 103,000 Direct Materials Price Variance ......................................................... 500 Accounts Payable............................................................................... 102,500 (2) Issuance of materials into production Goods in Process Inventory .................................................................... 100,000 Direct Materials Quantity Variance .......................................................... 3,000 Raw Materials Inventory ..................................................................... 103,000
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Solutions Manual, Chapter 21 1215
Problem 21-7AA (Continued) Part 2 Under management by exception, the manager would first identify the largest
variances, attempt to uncover their causes, and then implement actions aimed
at correcting them. The smaller variances would be tackled after the major
problems were dealt with, if at all.
The largest variance amounts occur for the material quantity variance, the
direct labor efficiency variance, and the two overhead variances. The manager
should go to the production department to find out why the process used
more materials and less labor hours than expected. The controllable variance
would need to be broken down into its components for individual cost items
to see which ones deviated most from expected results.* Based on these
findings, lower-level managers would be called on to explain what happened.
After the relatively larger amounts are explained and actions taken, the
manager can seek explanations of the less significant material price variance
from the purchasing department and the direct labor rate variance from the
personnel department.
* The unfavorable volume variance indicates that the company produced fewer items than expected. Managers would need to determine whether this was because of declining sales, idle time, breakdowns, or other reasons.
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Financial & Managerial Accounting, 5th Edition 1216
PROBLEM SET B Problem 21-1B (50 minutes) Part 1 Direct Materials Variances
Direct materials cost variances Actual units at actual cost [1,000,000 lbs. @ $4.25] .......................................... $4,250,000 Standard units at standard cost [1,050,000 lbs. @ $4.00] ................................. 4,200,000 Direct material cost variance ............................................................................... $ 50,000 U
Direct Materials Price and Quantity Variances
Actual Cost AQ x AP
AQ x SP
Standard Cost SQ x SP
1,000,000 x $4.25 1,000,000 x $4.00 1,050,000 x $4.00
$4,250,000 $4,000,000 $4,200,000
$250,000 U
(Price variance) $200,000 F
(Quantity variance)
$50,000 U
(Total materials variance)
Part 2 Direct Labor Variances
Direct labor cost variances Actual units at actual cost [250,000 hrs. @ $7.75] ............................................. $1,937,500 Standard units at standard cost [252,000 hrs. @ $8.00] .................................... 2,016,000 Direct labor cost variance .................................................................................... $ 78,500 F
Direct Labor Rate and Efficiency Variances
Actual Cost AH x AR
AH x SR
Standard Cost SH x SR
250,000 x $7.75 250,000 x $8.00 252,000 x $8.00
$1,937,500 $2,000,000 $2,016,000
$62,500 F
(Rate variance) $16,000 F
(Efficiency variance)
$78,500 F
(Total labor variance)
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Solutions Manual, Chapter 21 1217
Problem 21-1B (Continued) Part 3 Overhead Variances
Overhead controllable variance
Actual overhead incurred [$1,960,000 + $1,200,000] ................ $ 3,160,000
Budgeted overhead [from flexible budget] ............................... 3,276,000
Controllable overhead cost variance ......................................... $ 116,000 F
Fixed overhead volume variance
Budgeted fixed overhead cost [at 80% capacity] ..................... $ 2,016,000
Fixed overhead cost applied [252,000 hrs. @ $7] ..................... 1,764,000
Fixed overhead cost variance .................................................... $ 252,000 U
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Financial & Managerial Accounting, 5th Edition 1218
Problem 21-2BA (15 minutes)
(a) Variable Overhead Spending and Efficiency Variances
Actual Overhead AH x AVR
AH x SVR
Applied Overhead SH x SVR
250,000 x $5 252,000 x $5
$1,200,000 $1,250,000 $1,260,000
$50,000 F
(Spending variance) $10,000 F
(Efficiency variance)
$60,000 F
(Total variable overhead variance)
(b) Fixed Overhead Spending and Volume Variances
Actual Overhead Budgeted Overhead Applied Overhead
252,000 x $7
$1,960,000 $2,016,000 $1,764,000
$56,000 F
(Spending variance) $252,000 U
(Volume variance)
$196,000 U
(Total fixed overhead variance)
(c) Controllable variance
Variable overhead spending variance ................................... $ 50,000 F
Variable overhead efficiency variance ................................... 10,000 F
Fixed overhead spending variance ........................................ 56,000 F
Total overhead controllable variance .................................... $116,000 F
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Solutions Manual, Chapter 21 1219
Problem 21-3B (60 minutes) Part 1
Variable or Fixed Classification
Per Unit Amount
Variable sales (total divided by 20,000 units)
Sales .................................................................................................. $ 150.00
Variable costs (total divided by 20,000 units)
Direct materials ................................................................................ $ 60.00
Direct labor ....................................................................................... 13.00
Machinery repairs ............................................................................. 2.85
Utilities (25% variable) ..................................................................... 2.50
Packaging ......................................................................................... 4.00
Shipping ............................................................................................ 5.80
Total variable costs .......................................................................... $ 88.15
Fixed costs
Depreciation—Machinery ................................................................ $ 250,000
Utilities (75% fixed) .......................................................................... 150,000
Plant management salaries ............................................................. 140,000
Sales salary ....................................................................................... 160,000
Advertising expense ........................................................................ 81,000
Salaries .............................................................................................. 241,000
Entertainment expense .................................................................... 90,000
Total fixed costs ................................................................................. $1,112,000
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Financial & Managerial Accounting, 5th Edition 1220
Problem 21-3B (Continued)
Part 2
TOHONO COMPANY Flexible Budgets
For Year Ended December 31, 2013
Flexible Budget Flexible Flexible
Variable Amount per Unit
Total Fixed Cost
Budget for Unit Sales of 18,000
Budget for Unit Sales of 24,000
Sales ..................................... $150.00 $2,700,000 $3,600,000
Variable costs
Direct materials ................. 60.00 1,080,000 1,440,000
Direct labor ........................ 13.00 234,000 312,000
Machinery repairs ............. 2.85 51,300 68,400
Utilities ............................... 2.50 45,000 60,000
Packaging .......................... 4.00 72,000 96,000
Shipping ............................. 5.80 104,400 139,200
Total variable ..................... 88.15 1,586,700 2,115,600
Contribution margin ............ $ 61.85 1,113,300 1,484,400
Fixed costs
Depreciation—Mach. .......... $ 250,000 250,000 250,000
Utilities ............................... 150,000 150,000 150,000
Plant mgmt. salaries ......... 140,000 140,000 140,000
Sales salary. ...................... 160,000 160,000 160,000
Advertising expense ......... 81,000 81,000 81,000
Salaries .............................. 241,000 241,000 241,000
Entertainment expense .... 90,000 90,000 90,000
Total fixed costs................ $1,112,000 1,112,000 1,112,000
Income from operations ....... $ 1,300 $ 372,400
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Solutions Manual, Chapter 21 1221
Problem 21-3B (Continued) Part 3 Operating income increase for a 20,000 to 28,000 unit sales increase
Potential sales (units) .............................................................. 28,000 Units
Contribution margin per unit ................................................... x $61.85
Total contribution margin ........................................................ $1,731,800
Less: Fixed costs .................................................................... (1,112,000)
Potential operating income ..................................................... $ 619,800
vs. Budgeted income for 2013 ................................................ 125,000
Potential increase in income ................................................... $ 494,800*
*Alternate solution format Unit increase ............................................................................. 8,000 Units Contribution margin per unit.................................................... x $61.85 Increase in contribution margin ............................................... $494,800 Since there is no increase in fixed costs, the expected increase in operating income is the same $494,800.
Part 4 Operating income (loss) at 14,000 units
Potential sales (units) .............................................................. 14,000
Contribution margin per unit ................................................... x $61.85
Total contribution margin ........................................................ $ 865,900
Less: Fixed costs .................................................................... (1,112,000)
Potential operating loss ........................................................... $ (246,100)
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Financial & Managerial Accounting, 5th Edition 1222
Problem 21-4B (60 minutes)
Part 1
TOHONO COMPANY Flexible Budget Performance Report For Year Ended December 31, 2013
Flexible Actual Budget Results Variances*
Sales (24,000 units) .......................... $3,600,000 $3,648,000 $48,000 F
Variable costs
Direct materials .............................. 1,440,000 1,400,000 40,000 F
Direct labor ..................................... 312,000 360,000 48,000 U
Machinery repairs .......................... 68,400 60,000 8,400 F
Utilities ............................................ 60,000 64,000 4,000 U
Packaging ....................................... 96,000 90,000 6,000 F
Shipping ......................................... 139,200 124,000 15,200 F
Total variable costs ....................... 2,115,600 2,098,000 17,600 F
Contribution margin ......................... 1,484,400 1,550,000 65,600 F
Fixed costs
Depreciation—Machinery .............. 250,000 250,000 0
Utilities ............................................ 150,000 154,000 4,000 U
Plant management salaries .......... 140,000 155,000 15,000 U
Sales salary .................................... 160,000 162,000 2,000 U
Advertising expense ...................... 81,000 104,000 23,000 U
Salaries ........................................... 241,000 232,000 9,000 F
Entertainment expense ................. 90,000 100,000 10,000 U
Total fixed costs............................. 1,112,000 1,157,000 45,000 U
Income from operations .................. $ 372,400 $ 393,000 $20,600 F
*F = Favorable variance; and U = Unfavorable variance
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Solutions Manual, Chapter 21 1223
Problem 21-4B (Continued) Part 2 (a) Analysis of sales variance
Total Per unit
Budgeted sales .............................................................. $3,600,000 $150.00
Actual sales .................................................................... 3,648,000 152.00
Sales variance (favorable) ............................................ $ 48,000 $ 2.00 Interpretation: The sales variance is favorable because the actual price was higher than planned.
(b) Analysis of direct materials variance
Total Per unit
Budgeted materials........................................................ $1,440,000 $ 60.00
Actual materials used .................................................... 1,400,000 58.33*
Direct materials variance (favorable) ........................... $ 40,000 $ 1.67
Interpretation: The direct materials variance is favorable for two possible reasons. (1) The quantity of materials used might have been less than the quantity budgeted, and/or (2) the amount paid for the materials might have been less than the budgeted purchase price. * (rounded)
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Financial & Managerial Accounting, 5th Edition 1224
Problem 21-5B (60 minutes)
Part 1
Variable or Fixed Classification
Per Unit Amount
Variable costs (total divided by 15,000 units)
Indirect materials ………………………………… $ 1.50
Indirect labor………………………………… …… 6.00
Power……………………………………………… 1.50
Repairs and maintenance……………………… 3.00
Total variable costs……………………………… $12.00
Fixed costs (per month)
Depreciation—Building………………………… $ 24,000
Depreciation—Machinery……………………… 72,000
Taxes and insurance…………………………… 18,000
Supervision……………………………………… 66,000
Total fixed costs………………………………… $180,000
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Solutions Manual, Chapter 21 1225
Problem 21-5B (Continued)
Part 2
SUNCOAST COMPANY Flexible Overhead Budgets
For Month Ended December 31
Flexible Budget Flexible Flexible Flexible
Variable Amount per Unit
Total Fixed Cost
Budget for Unit Sales of 13,000
Budget for Unit Sales of 15,000
Budget for Unit Sales of 17,000
Variable overhead costs
Indirect materials ................... $ 1.50 $ 19,500 $ 22,500 $ 25,500
Indirect labor .......................... 6.00 78,000 90,000 102,000
Power ...................................... 1.50 19,500 22,500 25,500
Repairs and maintenance ...... 3.00 39,000 45,000 51,000
Total variable costs................ $12.00 156,000 180,000 204,000
Fixed overhead costs
Depreciation—Building ......... $ 24,000 24,000 24,000 24,000
Depreciation—Machinery ...... 72,000 72,000 72,000 72,000
Taxes and insurance.............. 18,000 18,000 18,000 18,000
Supervision ............................ 66,000 66,000 66,000 66,000
Total fixed costs ..................... $180,000 180,000 180,000 180,000
Total overhead ......................... $336,000 $360,000 $384,000
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Financial & Managerial Accounting, 5th Edition 1226
Problem 21-5B (Continued) Part 3 Direct Materials Variances
Preliminary computations Actual material used: 69,000 lbs. (given) Standard quantity of materials: 15,000 units x 4.5 lb./unit = 67,500 lb. Actual price: $6.10/lb. (given) Standard price: $6.00/lb. (given)
Direct material cost variances Actual units at actual cost [69,000 lbs. @ $6.10] .......................... $420,900 Standard units at standard cost [67,500 lbs. @ $6.00] ................ 405,000 Direct material cost variance ......................................................... $ 15,900 U
Direct Materials Price and Quantity Variances
Actual Costs AQ x AP
AQ x SP
Standard Costs SQ x SP
69,000 x $6.10 69,000 x $6.00 67,500 x $6.00 lbs. per lb. lbs. per lb. lbs. per lb.
$420,900 $414,000 $405,000
$ 6,900 U
(Price variance) $9,000 U
(Quantity variance)
$15,900 U
(Total materials variance)
Alternate solution format Price variance = AQ x (AP - SP) = 69,000 lb. x ($6.10 - $6.00) per lb. = 69,000 lb. x ($0.10) per lb. = $ 6,900 U Quantity variance = (AQ – SQ) x SP = (69,000 – 67,500) lb. x $6.00 per lb. = 1,500 lb. x $6.00 per lb. = $ 9,000 U Price variance ..................... $ 6,900 U Quantity variance ............... 9,000 U Total variance ..................... $15,900 U
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Solutions Manual, Chapter 21 1227
Problem 21-5B (Continued)
Part 4 Direct labor variances
Preliminary computations Actual hours used: 22,800 hours (given) Standard hours: 15,000 units x 1.5 hrs./unit = 22,500 hours Actual rate: $12.30/hr. (given) Standard rate: $12.00/hr. (given) Direct labor cost variances
Actual units at actual cost [22,800 hrs. @ $12.30] ............................................. $280,440 Standard units at standard cost [22,500 hrs. @ $12.00] .................................... 270,000 Direct labor cost variance .................................................................................... $ 10,440 U
Direct Labor Rate and Efficiency Variances
Actual Costs AH x AR
AH x SR
Standard Costs SH x SR
22,800 x $12.30 22,800 x $12.00 22,500 x $12.00 hours per hr. hours per hr. hours per hr.
$280,440 $273,600 $270,000
$6,840 U
(Rate variance) $3,600 U
(Efficiency variance)
$10,440 U
(Total labor variance)
Alternate solution format Rate variance = AH x (AR - SR) = 22,800 hours x ($12.30 - $12.00) per hour = 22,800 x $0.30 per hour = $ 6,840 U Efficiency variance = (AH - SH) x SR = (22,800 – 22,500) hours x $12.00 per hour = 300 hours x $12.00 per hour = $ 3,600 U Rate variance ...................... $ 6,840 U Efficiency variance ............. 3,600 U Total .................................... $10,440 U
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Financial & Managerial Accounting, 5th Edition 1228
Problem 21-5B (Concluded) Part 5
SUNCOAST COMPANY Overhead Variance Report
For Month Ended December 31
Volume Variance
Expected production level ....................................................... 75% of capacity
Production level achieved ....................................................... 75% of capacity
Volume variance ....................................................................... 0 Flexible Actual Controllable Variance Budget Results Variances*
Variable overhead costs
Indirect materials ..................................... $ 22,500 $ 21,600 $ 900 F
Indirect labor ............................................ 90,000 82,260 7,740 F
Power ........................................................ 22,500 23,100 600 U
Repairs and maintenance ....................... 45,000 46,800 1,800 U
Total variable costs ................................. 180,000 173,760 6,240 F
Fixed overhead costs
Depreciation—Building ........................... 24,000 24,000 0
Depreciation—Machinery ........................ 72,000 75,000 3,000 U
Taxes and insurance ............................... 18,000 16,500 1,500 F
Supervision .............................................. 66,000 66,000 0
Total fixed costs....................................... 180,000 181,500 1,500 U
Total overhead costs ................................. $360,000 $355,260 $4,740 F
*F = Favorable variance; and U = Unfavorable variance
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Solutions Manual, Chapter 21 1229
Problem 21-6BA (80 minutes) Part 1 Direct Materials Variances
Preliminary computations Actual quantity of materials used: 92,000 lb. (given) Standard quantity of materials: 9,000 units x 10 lbs./unit = 90,000 lb. Actual price: $2.95/lb. (given) Standard price: $3.00/lb. (given)
Direct materials cost variances Actual units at actual cost [92,000 lbs. @ $2.95/lb.] ..................... $271,400 Standard units at standard cost [90,000 lbs. @ $3.00/lb.] ............ 270,000 Direct material cost variance .......................................................... $ 1,400 U
Direct Materials Price and Quantity Variances
Actual Cost AQ x AP
AQ x SP
Standard Cost SQ x SP
92,000 x $2.95 92,000 x $3.00 90,000 x $3.00 lbs. per lb. lbs. per lb. lbs. per lb.
$271,400 $276,000 $270,000
$4,600 F
(Price variance) $6,000 U
(Quantity variance)
$1,400 U
(Total materials variance)
Alternate solution format Price variance = AQ x (AP - SP) = 92,000 lb. x ($2.95 - $3.00) per lb. = 92,000 x (-$0.05 per lb.) = $4,600 F Quantity variance = (AQ - SQ) x SP = (92,000 - 90,000) x $3.00 per lb. = 2,000 lb. x $3.00 per lb. = $6,000 U Price variance ..................... $4,600 F Quantity variance ............... 6,000 U Total variance ..................... $1,400 U
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Financial & Managerial Accounting, 5th Edition 1230
Problem 21-6BA (Continued)
Part 2 Direct Labor Variances
Preliminary computations Actual hours: 37,600 hrs. (given) Standard hours: 9,000 units x 4 hrs./unit = 36,000 hrs. Actual rate: $6.05/hr. (given) Standard rate per hour: $6.00/hr. (given)
Direct labor cost variances Actual units at actual cost [37,600 hrs. @ $6.05/hr.] .................... $227,480 Standard units at standard cost [36,000 hrs. @ $6.00/hr.] .......... 216,000 Direct labor cost variance .............................................................. $ 11,480 U
Direct Labor Rate and Efficiency Variances
Actual Costs AH x AR
AH x SR
Standard Costs SH x SR
37,600 x $6.05 37,600 x $6.00 36,000 x $6.00 hours per hr. hours per hr. hours per hr.
$227,480 $225,600 $216,000
$1,880 U
(Rate variance) $9,600 U
(Efficiency variance)
$11,480 U
(Total labor variance)
Alternate solution format Rate variance = AH x (AR - SR) = 37,600 hours x ($6.05 - $6.00) per hour = 37,600 x ($0.05) per hour = $ 1,880 U Efficiency variance = (AH – SH) x SR = (37,600 – 36,000) hours x $6.00 per hour = 1,600 hours x $6.00 per hour = $ 9,600 U Rate variance ...................... $ 1,880 U Efficiency variance ............. 9,600 U Total .................................... $11,480 U
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Solutions Manual, Chapter 21 1231
Problem 21-6BA (Continued)
Part 3 Overhead Variances
(a) Variable overhead
Preliminary computations Actual variable overhead (given): Indirect materials ........................................................ $10,000 Indirect labor .............................................................. 16,000 Power ......................................................................... 4,500 Maintenance ............................................................... 3,000 Total ........................................................................... $33,500
Actual hours: 37,600 (given) Standard hours: 36,000 (from part 2) Standard rate: = = $1.00/hr
Variable overhead cost variances Variable overhead cost incurred [given] ....................................... $33,500 Variable overhead cost applied [36,000 hrs. @ $1.00] ................. 36,000 Variable overhead cost variance.................................................... $ 2,500 F
Variable Overhead Spending and Efficiency Variances
Actual Overhead AH x AVR
AH x SVR
Applied Overhead SH x SVR
37,600 x $1.00 36,000 x $1.00 hours per hr. hours per hr.
$33,500 $37,600 $36,000
$4,100 F
(Spending variance) $1,600 U
(Efficiency variance)
$2,500 F
(Total variable overhead variance)
Budgeted variable overhead
Budgeted direct labor hours
$32,000
32,000 hours
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Financial & Managerial Accounting, 5th Edition 1232
Problem 21-6BA (Continued)
(b) Fixed overhead
Preliminary computations Actual fixed overhead (given): Rent of factory building ............................................... $12,000 Depreciation, machinery .............................................. 19,200 Taxes and insurance .................................................... 3,000 Supervisory salaries .................................................... 14,000 Total ............................................................................. $48,200 Budgeted fixed overhead: $48,000 (given) Standard rate: = = $1.50 / hr
Fixed overhead cost variances Fixed overhead cost incurred [given] ............................................ $48,200 Fixed overhead cost applied [36,000 hrs. @ $1.50] ...................... 54,000 Fixed overhead cost variance ........................................................ $ 5,800 F
Fixed Overhead Spending and Volume Variances
Actual Overhead
Budgeted Overhead Fixed Overhead Applied
36,000 x $1.50 hours per hr.
$48,200 $48,000 $54,000
$200 U
(Spending variance) $6,000 F
(Volume variance)
$5,800 F
(Total fixed overhead variance)
(c) Total overhead controllable variance
Variable overhead spending variance ........................................ $4,100 F
Variable overhead efficiency variance ........................................ 1,600 U
Fixed overhead spending variance ............................................. 200 U
Total overhead controllable variance ......................................... $2,300 F
Budgeted fixed overhead
Budgeted direct labor hours
$48,000
32,000 hours
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Solutions Manual, Chapter 21 1233
Problem 21-6BA (Concluded)
Part 4
GUADELUPE COMPANY Overhead Variance Report For Month Ended March 31
Volume Variance
Expected production level .......................................... 80% of capacity
Production level achieved .......................................... 90% of capacity
Volume variance .......................................................... $6,000 (favorable) Flexible Actual Controllable Variance Budget Results Variances*
Variable overhead costs
Indirect materials ........................... $11,250 $10,000 $1,250 F
Indirect labor .................................. 18,000 16,000 2,000 F
Power .............................................. 4,500 4,500 0
Maintenance ................................... 2,250 3,000 750 U
Total variable costs ....................... 36,000 33,500 2,500 F
Fixed overhead costs
Rent of factory building ................ 12,000 12,000 0
Depreciation—Machinery .............. 20,000 19,200 800 F
Taxes and insurance ..................... 2,400 3,000 600 U
Supervisory salaries ...................... 13,600 14,000 400 U
Total fixed costs............................. 48,000 48,200 200 U
Total overhead costs ....................... $84,000 $81,700 $2,300 F
* F = Favorable variance; and U = Unfavorable variance.
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Financial & Managerial Accounting, 5th Edition 1234
Problem 21-7BA (45 minutes)
Part 1
June 30* Goods in Process Inventory .................................................... 130,000
Direct Materials Quantity Variance ................................ 5,000
Direct Materials Price Variance ..................................... 1,500
Raw Materials Inventory ................................................. 123,500
To record materials costs, including
the favorable quantity and
favorable price variances.
June 30 Goods in Process Inventory .................................................... 67,500
Direct Labor Rate Variance ..................................................... 500
Direct Labor Efficiency Variance ................................... 3,000
Factory Payroll ................................................................ 65,000
To record direct labor costs, including
the favorable efficiency variance and
unfavorable rate variance.
June 30 Goods in Process Inventory .................................................... 230,000
Controllable Variance .............................................................. 8,000
Volume Variance ...................................................................... 12,000
Factory Overhead ........................................................... 250,000
To record overhead costs, including
the unfavorable volume and unfavorable
controllable variances.
* Alternatively, some companies compute and record the price variance when materials are purchased. This would yield two separate entries:
(1) Purchase of materials Raw Materials Inventory........................................................................... 125,000 Direct Materials Price Variance ......................................................... 1,500 Accounts Payable ............................................................................... 123,500 (2) Issuance of materials into production Goods in Process Inventory .................................................................... 130,000 Direct Materials Quantity Variance .................................................... 5,000 Raw Materials Inventory ..................................................................... 125,000
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Solutions Manual, Chapter 21 1235
Problem 21-7BA (Concluded) Part 2 Under management by exception, the manager would first identify the largest
variances, attempt to uncover their causes, and then implement actions aimed
at correcting them. The smaller variances would be tackled after the major
problems were dealt with, if at all.
The largest variance amounts occur for the materials quantity variance, the
materials price variance, the direct labor efficiency variance, and the volume
and controllable overhead variances. The manager should go to the
purchasing department to determine why materials were acquired at a lower
price, and to the production department to find out why the process used less
materials and less labor hours than expected. The controllable variance would
need to be broken down into its components for individual cost items to see
which ones deviated most from expected results.* Based on these findings,
lower-level managers would be called on to explain what happened.
After the relatively larger amounts are explained and actions taken, the
manager can seek explanations of the less significant direct labor rate
variance from the personnel department.
* The unfavorable volume variance indicates that the company produced fewer items
than expected. Managers would need to determine whether this was because of
declining sales, idle time, breakdowns, or other reasons.
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Financial & Managerial Accounting, 5th Edition 1236
SERIAL PROBLEM — SP 21 Serial Problem, Success Systems (30 minutes)
Success Systems Flexible Budget Performance Report
For Quarter Ended June 30
Flexible Actual Budget Results Variances
Desk sales (150 units) ............................... $187,500 $186,000 $1,500 U
Chair sales (80 units) .................................
Variable expenses .....................................
40,000
132,500
41,200
132,880
1,200
380
F
U
Contribution margin .................................. 95,000 94,320 680 U
Fixed expenses .......................................... 30,000 31,000 1,000 U
Income from operations ............................ $ 65,000 $ 63,320 $1,680 U
Supporting computations
Total budgeted desk sales .......................................................... $180,000
Total units budgeted .................................................................... 144
Budgeted selling price ................................................................ $1,250 per unit
Flexible budget units ................................................................... 150
Flexible budget sales ................................................................... $187,500
Total budgeted chair sales.......................................................... $ 36,000
Total units budgeted .................................................................... 72
Budgeted selling price ................................................................ $500 per unit
Flexible budget units ................................................................... 80
Flexible budget sales ................................................................... $ 40,000
Total budgeted variable costs for desks ................................... $108,000
Total units budgeted .................................................................... 144
Budgeted variable expenses per desk ...................................... $750
Flexible budget units ................................................................... 150
Flexible budget variable expenses for desks ........................... $112,500
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Solutions Manual, Chapter 21 1237
Serial Problem, Success Systems (concluded)
Total budgeted variable costs for chairs ................................... $18,000
Total units budgeted .................................................................... 72
Budgeted variable expenses per chair ...................................... $250
Flexible budget units ................................................................... 80
Flexible budget variable expenses for chairs ........................... $20,000
Total budgeted variable expenses* ............................................ $132,500
*($112,500 + $20,000), from calculation above
Total actual expenses .................................................................. $163,880
Actual fixed expenses ................................................................. 31,000
Actual variable expenses ............................................................ $132,880
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Financial & Managerial Accounting, 5th Edition 1238
Reporting in Action — BTN 21-1 1. Polaris reports the annual adjustment (remeasurement adjustment or
translation gains and losses) as a component of Accumulated Other Comprehensive Income in the shareholders’ equity section of its consolidated balance sheet.
2. As reported in its footnote, the assets and liabilities of foreign subsidiaries
(e.g. cash and property, plant and equipment) are translated at exchange rates in effect at the balance sheet date and revenues and expenses are translated at the average foreign exchange rate in effect for each month of the quarter. In addition, transaction gains and losses including intercompany transactions denominated in a currency other than the functional currency of the entity involved are included in “Other income (expense), net” on Polaris’s consolidated statements of income.
Comparative Analysis — BTN 21-2 1. Polaris and Arctic Cat sales figures for the most recent 3 years—data
available from Appendix A—are shown below ($ thousands):
Two Years
Prior
One Year
Prior
Current
Year
One Year
Ahead
Two Years Ahead
Polaris $1,565,887 $ 1,991,139 $2,656,949 _______ _______
27% incr. 33% incr.
Arctic Cat $563,613 $450,728 $464,651 _______ _______
20% decr. 3% incr.
2. Predictions will vary among students. Generally, predictions should
reflect both the trend in the company’s sales data and current industry and economy-wide conditions. Polaris’s sales increased in each of the past two years and the rate of increase was higher in the most recent year. Students may project this increase in sales growth rate as a continuing trend. Arctic Cat’s sales declined from two years prior to one year prior and increased slightly from the prior year to the current year. Students may project that Arctic Cat’s sales will increase slightly over the next two years.
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Solutions Manual, Chapter 21 1239
Ethics Challenge — BTN 21-3 A typical answer might include four individuals selected from the following specialty areas (answers will vary among students):
Specialty Information Input and Explanation
Engineer .................................. Scientific support for quantity standard.
Production manager .............. Actual amount or quantity used in production.
Supplier ................................... Identify reasonable price of inputs.
Purchasing manager ............. Identify reasonable price of inputs.
Market research analyst ........ Market research to support quantity and price standards.
The ethical challenge for a manager responsible for setting and/or revising standards is to select the right individuals for the team and to purposely avoid biases in establishing the standards.
Communicating in Practice — BTN 21-4
MEMORANDUM TO: FROM: DATE: SUBJECT:
Variance Cost of Goods Sold Gross Margin
Part 1. Favorable Decrease Increase
Part 2. Unfavorable Increase Decrease Part 3. A favorable (unfavorable) variance means that actual costs are
lower (higher) than the budgeted or expected amounts. It also helps to point out the link between a favorable (unfavorable) variance and an increase (decrease) in gross margin and net income.
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Financial & Managerial Accounting, 5th Edition 1240
Taking It to the Net — BTN 21-5 1. Benchmarking is a method whereby organizations try to look to other
organizations to identify “best practices” so as to improve and attain
superior performance. A benchmark can also be considered as a standard
that an organization wishes to achieve in the future. It is important to note
that the actual standard may be increasing (i.e., the bar becomes higher
and higher) as firms improve their processes.
2. Given that a benchmark can be considered as a standard, companies
should analyze the costs associated with achieving the benchmark figure.
Firms can then compare their current cost levels with the benchmark cost
so as to identify the potential for cost savings.
Teamwork in Action — BTN 21-6
Answers will vary depending on the two industries selected. Two examples
are identified and briefly described below:
i. Overnight delivery services: 10 a.m. delivery, late-day drop-off, pick-up
service, tracking systems, fast-moving workforce.
ii. Hotel services: clean rooms, fast check-in, fast/in-room check-out, luggage
delivered to room quickly, immediate room service.
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Solutions Manual, Chapter 21 1241
Entrepreneurial Decision — BTN 21-7 To: Mike McCabe, President
Folsom Custom Skis
Re: Management Accounting Quote Interpretations
Quote 1: “Variances are not explanations”
The author of this quote is emphasizing that variances are only a starting
point in controlling production operations. Management must look beyond
the variances to understand why they occurred.
Quote 2: “Management’s goal is not to minimize variances.”
The author of this quote understands that the real objective of management is
to maximize the value of the firm for the stakeholders. For example, it might
not be wise to focus solely on minimizing the direct material price variance if
such a focus would impair product quality. Usually, it is not advisable to trade
off product quality in order to reduce costs.
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Financial & Managerial Accounting, 5th Edition 1242
Hitting The Road — BTN 21-8 1. A typical cheese pizza has three main raw materials: dough, sauce, and
cheese. 2. Observe that the national chain probably follows specific measurement
rules for each of the three items. In contrast, the local business is usually less strict in these guidelines, especially for the sauce and cheese components.
3. These observations reflect an important issue for pizza businesses and for
smaller, local businesses in particular. Excess raw materials applied to food products may not be desirable to many customers. Also, materials such as cheese increase the costs of products. These simple observations often capture the most important components that determine the profits of a business and its ultimate survival.
Global Decision — BTN 21-9
1. Piaggio’s sales figures for the most recent 2 years — data available from its Website — are shown below (€ thousands)
Sales
One Year Prior
Current Year
One Year Ahead
Two Years Ahead
Piaggio .......................... €1,485,351 €1,516,463 _______ _______
2.1% increase from prior year
2. Predictions will vary among students. Generally, predictions should reflect
both the trend in the company’s sales data and current industry and economy-wide conditions. Piaggio’s sales increased at a rate of 2.1% relative to the prior year. Students may predict this sales growth rate to continue.
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