To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL 8-1 Effective planning of variable overhead costs involves: Planning to undertake only those variable overhead activities that add value for customers using the product or service, and Planning to use the drivers of costs in those activities in the most efficient way 8-2 At the start of an accounting period, a larger percentage of fixed overhead costs are locked-in than is the case with variable overhead costs When planning fixed overhead costs, a company must choose the appropriate level of capacity or investment that will benefit the company over a long time This is a strategic decision 8-3 The key differences are how direct costs are traced to a cost object and how indirect costs are allocated to a cost object: Direct costs Indirect costs Actual Costing Actual prices × Actual inputs used Actual indirect rate × Actual inputs used Standard Costing Standard prices × Standard inputs allowed for actual output Standard indirect cost-allocation rate × Standard quantity of cost-allocation base allowed for actual output 8-4 Steps in developing a budgeted variable-overhead cost rate are: Choose the period to be used for the budget, Select the cost-allocation bases to use in allocating variable overhead costs to the output produced, Identify the variable overhead costs associated with each cost-allocation base, and Compute the rate per unit of each cost-allocation base used to allocate variable overhead costs to output produced 8-5 Two factors affecting the spending variance for variable manufacturing overhead are: a Price changes of individual inputs (such as energy and indirect materials) included in variable overhead relative to budgeted prices b Percentage change in the actual quantity used of individual items included in variable overhead cost pool, relative to the percentage change in the quantity of the cost driver of the variable overhead cost pool 8-6 Possible reasons for a favorable variable-overhead efficiency variance are: Workers more skillful in using machines than budgeted, Production scheduler was able to schedule jobs better than budgeted, resulting in lower-than-budgeted machine-hours, Machines operated with fewer slowdowns than budgeted, and Machine time standards were overly lenient 8-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-7 A direct materials efficiency variance indicates whether more or less direct materials were used than was budgeted for the actual output achieved A variable manufacturing overhead efficiency variance indicates whether more or less of the chosen allocation base was used than was budgeted for the actual output achieved 8-8 Steps in developing a budgeted fixed-overhead rate are Choose the period to use for the budget, Select the cost-allocation base to use in allocating fixed overhead costs to output produced, Identify the fixed-overhead costs associated with each cost-allocation base, and Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to output produced 8-9 The relationship for fixed-manufacturing overhead variances is: Flexible-budget variance Efficiency variance (never a variance) Spending variance There is never an efficiency variance for fixed overhead because managers cannot be more or less efficient in dealing with an amount that is fixed regardless of the output level The result is that the flexible-budget variance amount is the same as the spending variance for fixedmanufacturing overhead 8-10 For planning and control purposes, fixed overhead costs are a lump sum amount that is not controlled on a per-unit basis In contrast, for inventory costing purposes, fixed overhead costs are allocated to products on a per-unit basis 8-11 An important caveat is what change in selling price might have been necessary to attain the level of sales assumed in the denominator of the fixed manufacturing overhead rate For example, the entry of a new low-price competitor may have reduced demand below the denominator level if the budgeted selling price was maintained An unfavorable productionvolume variance may be small relative to the selling-price variance had prices been dropped to attain the denominator level of unit sales 8-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-12 A strong case can be made for writing off an unfavorable production-volume variance to cost of goods sold The alternative is prorating it among inventories and cost of goods sold, but this would ―penalize‖ the units produced (and in inventory) for the cost of unused capacity, i.e., for the units not produced But, if we take the view that the denominator level is a ―soft‖ number—i.e., it is only an estimate, and it is never expected to be reached exactly, then it makes more sense to prorate the production volume variance—whether favorable or not—among the inventory stock and cost of goods sold Prorating a favorable variance is also more conservative: it results in a lower operating income than if the favorable variance had all been written off to cost of goods sold Finally, prorating also dampens the efficacy of any steps taken by company management to manage operating income through manipulation of the production volume variance In sum, a production-volume variance need not always be written off to cost of goods sold 8-13 The four variances are: Variable manufacturing overhead costs spending variance efficiency variance Fixed manufacturing overhead costs spending variance production-volume variance 8-14 Interdependencies among the variances could arise for the spending and efficiency variances For example, if the chosen allocation base for the variable overhead efficiency variance is only one of several cost drivers, the variable overhead spending variance will include the effect of the other cost drivers As a second example, interdependencies can be induced when there are misclassifications of costs as fixed when they are variable, and vice versa 8-15 Flexible-budget variance analysis can be used in the control of costs in an activity area by isolating spending and efficiency variances at different levels in the cost hierarchy For example, an analysis of batch costs can show the price and efficiency variances from being able to use longer production runs in each batch relative to the batch size assumed in the flexible budget 8-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-16 (20 min.) Variable manufacturing overhead, variance analysis Actual Costs Incurred Actual Input Qty × Actual Rate (1) (4,536 × $11.50) $52,164 Actual Input Qty × Budgeted Rate (2) (4,536 × $12) $54,432 $2,268 F Spending variance Flexible Budget: Budgeted Input Qty Allowed for Actual Output × Budgeted Rate (3) (4 × 1,080 × $12) $51,840 $2,592 U Efficiency variance $324 U Flexible-budget variance Allocated: Budgeted Input Qty Allowed for Actual Output × Budgeted Rate (4) (4 × 1,080 × $12) $51,840 Never a variance Never a variance Esquire had a favorable spending variance of $2,268 because the actual variable overhead rate was $11.50 per direct manufacturing labor-hour versus $12 budgeted It had an unfavorable efficiency variance of $2,592 U because each suit averaged 4.2 labor-hours (4,536 hours ÷ 1,080 suits) versus 4.0 budgeted labor-hours 8-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-17 (20 min.) Fixed-manufacturing overhead, variance analysis (continuation of 8-16) & Budgeted fixed overhead rate per unit of allocation base $62,400 1,040 $62,400 = 4,160 = $15 per hour = Actual Costs Incurred (1) Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $63,916 $62,400 $62,400 $1,516 U Spending variance Never a variance $1,516 U Flexible-budget variance Allocated: Budgeted Input Qty Allowed for Actual Output × Budgeted Rate (4) (4 × 1,080 × $15) $64,800 $2,400 F Production-volume variance $2,400 F Production-volume variance The fixed manufacturing overhead spending variance and the fixed manufacturing flexible budget variance are the same––$1,516 U Esquire spent $1,516 above the $62,400 budgeted amount for June 2007 The production-volume variance is $2,400 F This arises because Esquire utilized its capacity more intensively than budgeted (the actual production of 1,080 suits exceeds the budgeted 1,040 suits) This results in overallocated fixed manufacturing overhead of $2,400 (4 × 40 × $15) Esquire would want to understand the reasons for a favorable production-volume variance Is the market growing? Is Esquire gaining market share? Will Esquire need to add capacity? 8-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-18 (30 min.) Variable manufacturing overhead variance analysis Denominator level = (3,200,000 × 0.02 hours) = 64,000 hours 2 a Actual Results 2,800,000 50,400 0.018 $680,400 $13.50 $0.243 Output units (baguettes) Direct manufacturing labor-hours Labor-hours per output unit (2 1) Variable manuf overhead (MOH) costs Variable MOH per labor-hour (4 2) Variable MOH per output unit (4 1) 2,800,000 Flexible Budget Amounts 2,800,000 56,000a 0.020 $560,000 $10 $0.200 0.020= 56,000 hours Actual Costs Incurred Actual Input Qty × Actual Rate (1) (50,400 × $13.50) $680,400 Actual Input Qty × Budgeted Rate (2) (50,400 × $10) $504,000 $176,400 U Spending variance Flexible Budget: Budgeted Input Qty Allowed for Actual Output × Budgeted Rate (3) (56,000 × $10) $560,000 $56,000 F Efficiency variance $120,400 U Flexible-budget variance Allocated: Budgeted Input Qty Allowed for Actual Output × Budgeted Rate (4) (56,000 × $10) $560,000 Never a variance Never a variance Spending variance of $176,400U It is unfavorable because variable manufacturing overhead was 35% higher than planned A possible explanation could be an increase in energy rates relative to the rate per standard labor-hour assumed in the flexible budget Efficiency variance of $56,000F It is favorable because the actual number of direct manufacturing labor-hours required was lower than the number of hours in the flexible budget Labor was more efficient in producing the baguettes than management had anticipated in the budget This could occur because of improved morale in the company, which could result from an increase in wages or an improvement in the compensation scheme Flexible-budget variance of $120,400U It is unfavorable because the favorable efficiency variance was not large enough to compensate for the large unfavorable spending variance 8-6 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-19 (30 min.) Fixed manufacturing overhead variance analysis Budgeted standard direct manufacturing labor used = 0.02 per baguette Budgeted output = 3,200,000 baguettes Budgeted standard direct manufacturing labor-hours = 3,200,000 × 0.02 = 64,000 hours Budgeted fixed manufacturing overhead costs = 64,000 × $4.00 per hour = $256,000 Actual output = 2,800,000 baguettes Allocated fixed manufacturing overhead = 2,800,000 × 0.02 × $4 = $224,000 Actual Costs Incurred (1) Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3) $272,000 $256,000 $256,000 $16,000 U Spending variance Never a variance $16,000 U Flexible-budget variance Allocated: Budgeted Input Qty Allowed for Actual Output × Budgeted Rate (4) (2,800,000 × 0.02 × $4) $224,000 $32,000 U Production-volume variance $32,000 U Production-volume variance $48,000 U Underallocated fixed overhead (Total fixed overhead variance) The fixed manufacturing overhead is underallocated by $48,000 The production-volume variance of $32,000U captures the difference between the budgeted 3,200,0000 baguettes and the lower actual 2,800,000 baguettes produced—the fixed cost capacity not used The spending variance of $16,000 unfavorable means that the actual aggregate of fixed costs ($272,000) exceeds the budget amount ($256,000) For example, monthly leasing rates for baguette-making machines may have increased above those in the budget for 2007 8-7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-20 (30–40 min.) Manufacturing overhead, variance analysis The summary information is: Zircon (March 2007) Outputs units (number of assembled CardioX) Hours of assembly time Assembly hours per CardioX unit Variable overhead costs per hour of assembly time Variable overhead costs Fixed overhead costs Fixed overhead costs per hour of assembly time a 5,000 units b 10,280 hours c 5,400 units d $310,500 e 10,800 assembly hours $30 per assembly hour = $324,000 10,000 assembly hours $30 per assembly hour = $300,000 f assembly hours per unit = 10,000 hours 5,400 units = 1.90 assembly hours per unit assembly hours per unit = 10,800 hours 10,280 assembly hours = $30.20 per assembly hour g 10,280 assembly hours = $50 per assembly hour h 10,000 assembly hours = $48 per assembly hour $514,000 $480,000 8-8 Actual 5,400 10,280 1.90b $ 30.20d $310,500 $514,000 $ 50.00g Flexible Budget 5,400 10,800c 2.00 $ 30.00 $324,000e $480,000 Static Budget 5,000 10,000a 2.00 $ 30.00 $300,000f $480,000 $ 48.00h To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Actual Costs Incurred Variable Manufacturing Overhead $310,500 Flexible Budget Budgeted Input Qty Allowed Budgeted for Actual Output Rate 10,800 $30.00 assy hrs per assy hr $324,000 Actual Input Qty Budgeted Rate 10,280 $30.00 assy hrs per assy hr $308,400 $2,100 U $15,600 F Spending variance Efficiency variance Allocated Budgeted Input Qty Allowed for Actual Output 10,800 assy hrs $324,000 Budgeted Rate $30.00 per assy hr Never a variance $13,500 F Flexible-budget variance Never a variance $13,500 F Overallocated variable overhead Flexible Budget: Fixed Manufacturing Overhead Actual Costs Incurred Static Budget Lump Sum Regardless of Output Level Static Budget Lump Sum Regardless of Output Level $514,000 $480,000 $480,000 $34,000 U Allocated: Budgeted Input Allowed for Actual Output 10,800 assy hrs $518,400 $38,400 F Spending Variance Never a Variance $34,000 U $38,400 F Flexible-budget variance Production-volume variance $4,400 F Overallocated fixed overhead 8-9 Production-volume variance Budgeted Rate $48.00 per assy hr To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The summary analysis is: Variable Manufacturing Overhead Fixed Manufacturing Overhead Spending Variance Efficiency Variance Production-Volume Variance $2,100 U $15,600 F Never a variance $34,000 U Never a variance $38,400 F Variable Manufacturing Costs and Variances a Variable Manufacturing Overhead Control Accounts Payable Control and various other accounts To record actual variable manufacturing overhead costs incurred 310,500 b Work-in-Process Control Variable Manufacturing Overhead Allocated To record variable manufacturing overhead allocated 324,000 c Variable Manufacturing Overhead Allocated Variable Manufacturing Overhead Spending Variance Variable Manufacturing Overhead Control Variable Manufacturing Overhead Efficiency Variance To isolate variances for the accounting period 324,000 2,100 310,500 324,000 310,500 15,600 d Fixed Manufacturing Overhead Efficiency Variance 15,600 Variable Manufacturing Overhead Spending Variance 2,100 Cost of Goods Sold 13,500 To write off variable manufacturing overhead variances to cost of goods sold 8-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com If Armstrong writes off all variances to cost of goods sold, and if there are no inventories, then the change in the production volume variance between requirement and requirement will not affect the cost of goods sold or the operating income After variances have been written off, COGS will include the actual fixed overhead costs of $440,000 In the requirement setting, COGS will initially have the allocated $375,000 of fixed overhead, and at the end of the accounting period U will also be debited $75,000 for the production volume variance and credited $10,000 for the spending variance, resulting in a COGS of $440,000 (the actual FOH costs) In the requirement setting, COGS will initially have the allocated $300,000 of fixed overhead, and at the end of the accounting period U will also be debited $150,000 for the production volume variance and credited $10,000 for the spending variance, resulting in a COGS of $440,000 (the actual FOH costs) The end result will be the same COGS in either situation This is not the case if Armstrong has inventories as we will see in Chapter 8-39 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-35 (25 min.) Sales-volume variance, production-volume variance Static-budget operating income is Revenues $100 × 20,000 Variable costs $40 × 20,000 Fixed costs Static-budget operating income $2,000,000 800,000 500,000 $ 700,000 Flexible-budget operating income is Revenues $100 × 18,000 Variable costs $40 × 18,000 Fixed costs Flexible-budget operating income $1,800,000 720,000 500,000 $ 580,000 Budgeted selling price Budgeted variable cost per unit Budgeted fixed cost per unit ($500,000 ÷ 20,000) Budgeted cost per unit Budgeted profit per unit Operating income based on budgeted profit per unit $35 per unit × 18,000 units $100 $40 25 65 $ 35 $630,000 The sales-volume variance recognizes that when Morano sells 18,000 units instead of the budgeted 20,000, only the revenue and the variable costs are affected Fixed costs remain unchanged Sales volume,variance = Budgeted,selling price – Budgeted,variable cost,per unit × Difference in quantity of,units sold relative to the, static budget = ($100 – $40) × 2,000 = $60 × 2,000 = $120,000 U Budgeted fixed Difference in quantity of Production-volume variance = overhead cost × units sold relative to per unit the static budget = $500,000 × 2,000 = $25 × 2,000 = $50,000 U 20,000 Operating-income volume variance = Sales-volume variance – Production-volume variance = $120,000 U – $50,000 U = $70,000 U 8-40 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Compare the sales-volume variance and the production-volume variance The $120,000 U salesvolume variance explains the difference between the static-budget operating income and the flexible-budget operating income: Static-budget operating income Sales-volume variance Flexible-budget operating income $700,000 $120,000 U $580,000 The $50,000 U production-volume variance explains the difference between operating income based on the budgeted profit per unit and the flexible-budget operating income: Operating income based on budgeted profit per unit Production-volume variance Flexible-budget operating income $630,000 50,000 U $580,000 The operating-income volume variance explains the difference between the static-budget operating income and the budgeted operating income for the units actually sold The staticbudget operating income is $700,000 and the budgeted operating income for 18,000 units would have been $630,000 ($35 operating income per unit 18,000 units) The difference, $70,000 U, is the operating-income volume variance i.e., the 2,000 unit drop in actual volume relative to budgeted volume would have caused an expected drop of $70,000 in operating income, at the budgeted operating income of $35 per unit The operating-income volume variance assumes that $50,000 in fixed cost ($25 per unit 2,000 units) would be saved if production and sales volumes decreased by 2,000 units 8-36 (40 min.) Activity-based costing, variance analysis a b c d e f g h i Static-Budget Amounts Units of TGC produced and sold 30,000 Batch size 250 Number of batches (a ÷ b) 120 Setup-hours per batch Total setup-hours (c × d) 600 Variable overhead cost per setup-hour $25 Variable setup overhead costs (e × f) $15,000 Total fixed setup overhead costs $18,000 Fixed overhead cost per setup-hour (h ÷ e) $30 Actual Amounts 22,500 225 100 5.25 525 $24 $12,600 $17,535 $33.40 The flexible-budget is based on the budgeted number of setups for the actual output achieved: 22,500 units ÷ 250 units per batch= 90 batches 8-41 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Computation of variable setup overhead cost variances follows: Actual Costs Incurred (100 × 5.25 × $24) $12,600 Actual Input Qty × Budgeted Rate (100 × 5.25 × $25) $13,125 $525 F Spending variance Allocated: Budgeted Input Qty Allowed for Actual Output × Budgeted Rate (90 × 5.0 × $25) $11,250 $1,875 U Efficiency variance The favorable spending variance is due to the actual variable overhead cost per setup-hour declining from the budgeted $25 per hour to the actual rate of $24 per hour The unfavorable efficiency variance is due to the actual output of 22,500 units (1) requiring more setups (100) than the budgeted amount (90), and (2) each setup taking longer time (5.25 hours) than the budgeted time (5.0 hours) The flexible-budget variance of $1,350 U reflects the larger unfavorable efficiency variance not being offset by the favorable spending variance Computation of the fixed setup overhead cost variances follows: Actual Costs Incurred $17,535 Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level $18,000 $465 F Spending variance Allocated: Budgeted Input Qty Allowed for Actual Output × Budgeted Rate (90 × 5.0 × $30) $13,500 $4,500 U Production-volume variance The fixed setup overhead cost spending variance is $465 F because the amount of actual costs was lower than the budgeted amount of $18,000 The production-volume variance is $4,500 U because the actual units of TGC produced and sold require fewer budgeted setup-hours than the budgeted setup-hour capacity available Toymaster would want to evaluate why actual units sold were much less than budgeted Was it dues to a decline in market size, loss of market share, poor quality or increased competition? 8-42 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-37 (40 min.) Activity-based costing, variance analysis a b c d e f g h i Static-Budget Amounts Units of SFA produced and sold 21,000 Batch size 500 Number of batches (a ÷ b) 42 Testing-hours per batch 5.5 Total testing-hours (c × d) 231 Variable overhead cost per testing-hour $40 Variable testing overhead costs (e × f) $9,240 Total fixed testing overhead costs $28,875 Fixed overhead cost per testing-hour (h ÷ e) $125 Actual Amounts 22,000 550 40 5.4 216 $42 $9,072 $27,216 $126 The flexible budget is based on the budgeted number of testing-hours for the actual output achieved, 22,000 units ÷ 500 units per batch = 44 batches Computation of variable testing overhead cost variances follows: Actual Costs Incurred (40 × 5.4 × $42) $9,072 Actual Input Qty × Budgeted Rate (40 × 5.4 × $40) $8,640 $432 U Spending variance Allocated: Budgeted Input Qty Allowed for Actual Output × Budgeted Rate (44 × 5.5 × $40) $9,680 $1,040 F Efficiency variance The unfavorable spending variance is due to the actual variable overhead cost per testing-hour increasing from the budgeted $40 per hour to the actual rate of $42 per hour The favorable efficiency variance is due to the actual output of 22,000 units (1) requiring fewer batches, 40, than the budgeted amount of 42 and (2) each batch taking less time, 5.4 hours, than the budgeted time of 5.5 hours Computation of the fixed testing overhead cost variances follows: Actual Costs Incurred Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level $27,216 $28,875 $1,659 F Spending variance Allocated: Budgeted Input Allowed for Actual Output × Budgeted Rate (44 × 5.5 × $125) $30,250 $1,375 F Production-volume variance 8-43 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The fixed testing overhead cost spending variance is $1,659 F because the amount of actual costs was lower than the budgeted amount of $28,875 The production-volume variance is $1,375 F because the actual number of SFA produced and sold used more budgeted testinghours than the budgeted testing-hours 8-38 (30 min.) Comprehensive overhead variance analyses Production volume (bottles) Bottling machine hours Variable overhead Fixed overhead Variable overhead rate = Variable overhead machine-hours Fixed overhead rate = Fixed overhead machine-hours a (2,800 machine-hours 420,000 bottles) Actual 450,000 3,000 $153,000 $960,000 $ Flexible Static Budget Budget 450,000 420,000 3,000 a 2,800 $150,000 $140,000 $980,000 $980,000 51 $ 50 per machine-hour $ 350 per machine-hour 450,000 bottles = 3,000 machine-hours Variable Overhead Actual Costs Actual Input Qty × Budgeted Rate Budgeted Input Qty Allowed for Actual Output × Budgeted Rate 3,000 mach hrs × $50/mach hr $153,000 $150,000 $3,000 U Spending variance $150,000 $0 Efficiency variance Variable Manufacturing Overhead Control 153,000 Accounts Payable Control and Various Other Accounts To record actual variable manufacturing overhead costs incurred 153,000 Work-in-Process Control Variable Manufacturing Overhead Allocated To record variable manufacturing overhead cost allocated 150,000 150,000 Variable Manufacturing Overhead Allocated Variable Manufacturing Overhead Spending Variance Variable Manufacturing Overhead Control To isolate variances for the accounting period 150,000 3,000 8-44 153,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2) Actual Costs (1) Allocated: Budgeted Input Qty Allowed for Actual Output Budgeted Rate (3) 3,000 mach hrs $350/mach hr $960,000 $980,000 $20,000 F Spending variance $1,050,000 $70,000 F Production volume variance Fixed Manufacturing Overhead Control Salaries payable, Accumulated Depreciation, etc To record actual fixed overhead costs incurred 960,000 960,000 Work-in-Process Control Fixed Manufacturing Overhead Allocated To record fixed manufacturing overhead cost allocated 1,050,000 1,050,000 Fixed Manufacturing Overhead Allocated 1,050,000 Fixed Manufacturing Overhead Spending Variance Fixed Manufacturing Overhead Production-Volume Variance Fixed Manufacturing Overhead Control To isolate variances for the accounting period Fixed Manufacturing Overhead Spending Variance Variable Manufacturing Overhead Spending Variance Cost of Goods Sold 20,000 70,000 960,000 20,000 3,000 17,000 To write-off variable overhead variances and fixed overhead spending variance to Cost of Goods Sold Work-in-Process Inventory Finished Good Inventory Cost of Goods Sold Total Balances (1) $ 900,000 $1,500,000 $2,400,000 $4,800,000 Balances as percentage of $4,800,000 (2) 18.75% 31.25% 50.00% 8-45 Production-Volume Variance Allocated (3) = $70,000 (2) $13,125 21,875 35,000 $70,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Since the production-volume variance is a favorable variance, its prorated allocation to work-inprocess inventory, finished goods inventory and cost of goods sold will result in a credit to each of those accounts Fixed Manufacturing Overhead Production-Volume Variance 70,000 Work-in-Process Control Finished Goods Control Cost of Goods Sold To write-off the production volume variance to WIP, FG, and COGS 13,125 21,875 35,000 If the plant manager’s bonus is based on controlling cost of goods sold, and if fixed overhead production volume variance is written off to cost of goods sold, there is a potential for manipulation on the part of the manager Being knowledgeable about the production process, she could be tempted to set the plant standards such that there is often a favorable production volume variance, which would ultimately reduce the period’s cost of goods sold The proration method is less susceptible to this problem because it spreads or blunts the benefit of a favorable production volume variance The proration method would also reduce the negative effect of an unfavorable production volume variance on cost of goods sold (relative to the full write-off) In this sense, prorating may be better, given the bonus scheme—it makes manipulation less likely by reducing the upside of a favorable PVV and also reducing the downside of an unfavorable PVV 8-46 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-39 (30 40 min.) Comprehensive review of Chapters and 8, working backward from given variances Solution Exhibit 8-39 outlines the Chapter and framework underlying this solution Pounds of direct materials purchased = $176,000 ÷ $1.10 = 160,000 pounds Pounds of excess direct materials used = $69,000 ÷ $11.50 = 6,000 pounds Variable manufacturing overhead spending variance = $10,350 – $18,000 = $7,650 F Standard direct manufacturing labor rate = $800,000 ÷ 40,000 hours = $20 per hour Actual direct manufacturing labor rate = $20 + $0.50 = $20.50 Actual direct manufacturing labor-hours = $522,750 ÷ $20.50 = 25,500 hours Standard variable manufacturing overhead rate = $480,000 ÷ 40,000 = $12 per direct manuf labor-hour Variable manuf overhead efficiency variance of $18,000 ÷ $12 = 1,500 excess hours Actual hours – Excess hours = Standard hours allowed for units produced 25,500 – 1,500 = 24,000 hours Budgeted fixed manufacturing overhead rate = $640,000 ÷ 40,000 hours = $16 per direct manuf labor-hour Fixed manufacturing overhead allocated = $16 24,000 hours = $384,000 Production-volume variance = $640,000 – $384,000 = $256,000 U a b c d e f The control of variable manufacturing overhead requires the identification of the cost drivers for such items as energy, supplies, and repairs Control often entails monitoring nonfinancial measures that affect each cost item, one by one Examples are kilowatts used, quantities of lubricants used, and repair parts and hours used The most convincing way to discover why overhead performance did not agree with a budget is to investigate possible causes, line item by line item Individual fixed overhead items are not usually affected very much by day-to-day control Instead, they are controlled periodically through planning decisions and budgeting procedures that may sometimes have planning horizons covering six months or a year (for example, management salaries) and sometimes covering many years (for example, long-term leases and depreciation on plant and equipment) 8-47 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTION EXHIBIT 8-39 Direct Materials Direct Manuf Labor Flexible Budget: Budgeted Input Qty Actual Input Qty Allowed for Actual Output Budgeted Rate Purchases Usage Budgeted Rate 160,000 $11.50 96,000 $11.50 30,000 $11.50 $1,840,000 $1,104,000 $1,035,000 $69,000 U $176,000 F Efficiency variance Price variance Actual Costs Incurred (Actual Input Qty Actual Rate) 160,000 $10.40 $1,664,000 0.85 30,000 $20.50 $522,750 0.85 30,000 $20 $510,000 $12,750 U Price variance 0.80 30,000 $20 $480,000 $30,000 U Efficiency variance $42,750 U Flexible-budget variance Variable MOH Actual Costs Incurred Actual Input Qty Actual Rate 0.85 30,000 $11.70 $298,350 Actual Input Qty Budgeted Rate 0.85 30,000 $12 $306,000 Flexible Budget: Budgeted Input Qty Allowed for Actual Output Budgeted Rate 0.80 30,000 $12 $288,000 $7,650 F Spending variance $18,000 U Efficiency $10,350 U variance Flexible-budget variance Actual Costs Incurred (1) Fixed MOH $597,460 Never a variance Never a variance Flexible Budget: Same Budgeted Same Budgeted Lump Sum Lump Sum (as in Static Budget) (as in Static Budget) Regardless of Regardless of Output Level Output Level (2) (3) 0.80 × 50,000 × $16 $640,000 $640,000 $42,500 U Never a variance Spending variance volume variance $42,540 F Flexible-budget variance 8-48 Allocated: Budgeted Input Qty Allowed for Actual Output Budgeted Rate 0.80 30,000 $12 $288,000 Allocated: Budgeted Input Qty Allowed for Actual Output × Budgeted Rate (4) 0.80 x 30,000 × $16 $384,000 $256,000 U $256,000 U Production Productionvolume volume variance variance To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-40 (30 50 min.) Review of Chapters and 8, 3-variance analysis Total standard production costs are based on 7,800 units of output Direct materials, 7,800 $15.00 7,800 lbs $5.00 (or 23,400 lbs $5.00) Direct manufacturing labor, 7,800 $75.00 7,800 hrs $15.00 (or 39,000 hrs $15.00) Manufacturing overhead: Variable, 7,800 $30.00 (or 39,000 hrs $6.00) Fixed, 7,800 $40.00 (or 39,000 hrs $8.00) Total $ 117,000 585,000 234,000 312,000 $1,248,000 The following is for later use: Fixed manufacturing overhead, a lump-sum budget $320,000* * Fixed manufacturing overhead rate = Error! $8.00 = Budget 40,000 hours Budget = 40,000 hours $8.00 = $320 000 Solution Exhibit 8-40 presents a columnar presentation of the variances An overview of the 3-variance analysis using the block format of the text is: 3-Variance Analysis Total Manufacturing Overhead Spending Variance Efficiency Variance Production Volume Variance $39,400 U $6,600 U $8,000 U 8-49 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTION EXHIBIT 8-40 Flexible Budget: Actual Costs Budgeted Input Qty Incurred: Actual Input Qty Allowed for Actual Input Qty Budgeted Price Actual Output × Actual Rate Purchases Usage × Budgeted Price Direct (25,000 $5.20) (25,000 $5.00) (23,100 $5.00) (23,400 $5.00) Materials $130,000 $125,000 $115,500 $117,000 $5,000 U $1,500 F b Efficiency variance a Price variance Direct Manuf Labor (40,100 $14.60) $585,460 (40,100 $15.00) $601,500 $16,040 F c Price variance Variable Manuf Overhead (39,000 $15.00) $585,000 $16,500 U d Efficiency variance Actual Costs Incurred Actual Input Qty Budgeted Rate Flexible Budget: Budgeted Input Qty Allowed for Actual Output Budgeted Rate (not given) (40,100 $6.00) $240,600 (39,000 $6.00) $234,000 $6,600 U Efficiency variance Fixed Manuf Overhead (not given) $320,000 ( given) $600,000 ($240,600 + $320,000) $560,600 $39,400 U e Spending variance (39,000 $6.00) $234,000 Never a variance (39,000 $8.00) $312,000 $320,000 Never a variance Total Manuf Overhead Allocated: (Budgeted Input Qty Allowed for Actual Output Budgeted Rate) $8,000 U* Prodn volume variance ($234,000 + $320,000) $554,000 ($234,000 + $312,000) $546,000 $6,600 U $8,000 U f Efficiency variance g Prodn volume variance * Denominator level in hours Production volume in standard hours allowed Production-volume variance 40,000 39,000 1,000 hours x $8.00 = $8,000 U 8-50 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-41 (45 min.) Overhead variances, ethics a b Total budgeted overhead Budgeted variable overhead ($10 budgeted rate per machine-hour × 1,000,000 budgeted machine-hours) Budgeted fixed overhead Budgeted fixed OH rate = $12,500,000 10,000,000 $ 2,500,000 $2,500,000 Budgeted amount 1,000,000 Budgeted machine - hours = $2.50 per machine-hour c Fixed overhead spending variance = Actual costs incurred – Budgeted amount Because fixed overhead spending variance is unfavorable, the amount of actual costs is higher than the budgeted amount Actual cost = $2,500,000 + $600,000 = $3,100,000 d Production-volume variance = Budgeted fixed overhead Fixed overhead allocated using budgeted,input allowed for actual output units produced – = $2,500,000 – ($2.50 per machine-hour × machine-hours per unit* × 498,000 units) = $2,500,000 – $2,490,000 = $10,000 U * Budgeted variable overhead per unit = $20 Budgeted variable overhead rate = $10 per machine-hour $20 Therefore, budgeted machine hours allowed per unit = = machine-hours $10 Variable overhead spending variance: Actual variable Budgeted variable overhead cost – overhead cost per unit of cost per unit of allocation base cost-allocation base = = Actual quantity of variable overhead × cost-allocation base used for actual output $10,080,000 Budgeted amount – $10 per machine-hour 960,000 actual machine-hours ($10.50 – $10) × 960,000 = $480,000 U 8-51 × 960,000 machine-hours To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Variable overhead efficiency variance: Actual units of variable overhead cost-allocation base used for actual output – Budgeted units of variable overhead cost-allocation base allowed for actual output Budgeted variable × overhead rate = (960,000 – (2 × 498,000)) × $10 = (960,000 – 996,000) × $10 = $360,000 F By manipulating, Remich has created a sizable unfavorable fixed overhead spending variance or, at least, has increased its magnitude Jerry Remich’s action is clearly unethical Variances draw attention to the areas that need management attention If the top management relies on Remich, due to his expertise, to interpret and explain the reasons for the unfavorable variance, it is likely that his report will be biased and misleading to the top management The top management may erroneously conclude that Monroe is not able to manage his fixed overhead costs effectively Another probable adverse outcome of Remich’s actions will be that Monroe will have even less confidence in the usefulness of accounting reports This, of course, defeats the purpose of preparing the reports In summary, Remich’s unethical actions will waste top management’s time and may lead to wrong decisions 8-52 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Video Case The video case can be discussed using only the case writeup in the chapter Alternatively, instructors can have students view the videotape of the company that is the subject of the case The videotape can be obtained by contacting your Prentice Hall representative The case questions challenge students to apply the concepts learned in the chapter to a specific business situation TEVA SPORT SANDALS: Variable Overhead Variances Actual Costs Incurred (67,500 × $28.89) $1,950,075 Actual Input Qty × Budgeted Rate (67,500 × $30.00) $2,025,000 Flexible Budget Budgeted Input Qty Allowed for Actual Output × Budgeted Rate (0.40 × 150,000 × $30) $1,800,000 Spending variance: $1,950,075 – $2,025,000 = $74,925 F (favorable effect on operating income) Efficiency variance: $2,025,000 – $1,800,000 = $225,000 U (unfavorable effect on oper income) The favorable variable overhead spending variance of $74,925 means that the plant spent less on variable overhead items versus the budgeted amount Possible reasons are that actual prices of individual variable overhead items such as energy, indirect materials, or indirect manufacturing labor were lower than budgeted prices, or relative to the flexible budget, the percentage increase in the actual quantity usage of individual items in the variable overhead costpool is less than the percentage increase in machine-hours The unfavorable variable overhead efficiency variance of $225,000 means that more machine-hours were used to create the 150,000 pairs of sandals than were budgeted Possible causes are less skillful workers in the use of manufacturing machines than anticipated, production was inefficiently scheduled, machines were not properly maintained for peak operating performance, or budgeted machine time standards were set without careful analysis of operating conditions The plant manager should explain that the key reason for the unfavorable flexible-budget variance is the higher-than-budgeted number of machine-hours used this month In performing an investigation, the manager could indicate whether this was due to poorly trained labor, poor maintenance, bad production scheduling, or inaccurate budgeted machine time standards 8-53 ... in the cost hierarchy For example, an analysis of batch costs can show the price and efficiency variances from being able to use longer production runs in each batch relative to the batch size... 35,520 machine-hours Budgeted fixed MOH costs per machine-hour can be computed by dividing the flexible budget amount for fixed MOH (which is the same as the static budget) by the number of machine-hours... ÷ 35,520 machine-hours = $196.00 per machine-hour c) Budgeted variable MOH costs per machine-hour are calculated as budgeted variable MOH costs divided by the budgeted number of machine-hours