How does planning of fixed overhead costs differ from planning of variable overhead costs?

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in case of planning for fixed costs company will have to determine maximum capacity of production of company so that it can reduce per unit cost of goods.

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All right. So at the start up an accounting period, a larger percentage up next to her head casts are locked in, Right? So a larger ah a larger we're ahead, we're ahead. Ah casts are lock and right. So this is in the starting up uh uh This is in the starting up like an accounting period, Right? So uh so then uh is the case uh with various where we were head casts, Right? So when planning pigs were hurt casts, a company must choose the appropriate level of capacity. Right? So a company must choose, a government must choose the appropriate the approach, create the appropriate appropriate level, uh, capacity, right? Appropriate. Level up ah capacity. Our investment, right? Our investment, right? And that will benefit the company over a long time. Right? So this is a strategic decision, right? This is a strategic decision, right?

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Warning: TT: more functions defined than expected

CHAPTER 8

FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND

MANAGEMENT CONTROL

8-1 How do managers plan for variable overhead costs?

Effective planning of variable overhead costs involves: 1. Planning to undertake only those variable overhead activities that add value for customers using the product or service, and 2. Planning to use the drivers of costs in those activities in the most efficient way.

8-2 How does the planning of fixed overhead costs differ from the planning of variable overhead costs?

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 How does standard costing differ from actual costing?

The key differences are how direct costs are traced to a cost object and how indirect costs are allocated to a cost object:

Actual Costing Standard Costing Direct costs Actual prices × Actual inputs used

Standard prices × Standard inputs allowed for actual output Indirect costs Actual indirect rate × Actual inputs used

Standard indirect cost-allocation rate × Standard quantity of cost-allocation base allowed for actual output

8-4 What are the steps in developing a budgeted variable overhead cost-allocation rate?

Steps in developing a budgeted variable-overhead cost rate are: 1. Choose the period to be used for the budget, 2. Select the cost-allocation bases to use in allocating variable overhead costs to the output produced, 3. Identify the variable overhead costs associated with each cost-allocation base, and 4. Compute the rate per unit of each cost-allocation base used to allocate variable overhead costs to output produced.

8-5 What are the factors that affect the spending variance for variable manufacturing overhead?

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 Assume variable manufacturing overhead is allocated using machine-hours. Give three possible reasons for a favorable variable overhead efficiency variance.

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.

8-7 Describe the difference between a direct materials efficiency variance and a variable manufacturing overhead efficiency variance.

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 What are the steps in developing a budgeted fixed overhead rate?

Steps in developing a budgeted fixed-overhead rate are 1. Choose the period to use for the budget, 2. Select the cost-allocation base to use in allocating fixed overhead costs to output produced, 3. Identify the fixed-overhead costs associated with each cost-allocation base, and 4. Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to output produced.

8-9 Why is the flexible-budget variance the same amount as the spending variance for fixed manufacturing overhead?

The relationship for fixed-manufacturing overhead variances is:

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 fixed- manufacturing overhead.

Flexible-budget variance

Efficiency variance Spending variance (never a variance)

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 Describe how flexible-budget variance analysis can be used in the control of costs of activity areas.

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.

8-16 Each of the following statements is correct regarding overhead variances except: a. Actual overhead greater than applied overhead is unfavorable. b. The efficiency overhead variance ignores the standard variable overhead rate. c. Variable overhead rates are not a factor in the production-volume variance calculation. d. Favorable spending and efficiency variances imply that the flexible budget variance must be favorable.

SOLUTION

Choice "b" is the right answer, as that statement is incorrect. The efficiency variance multiplies the standard variable overhead rate by the difference between actual and standard direct labor hours.

The other choices are incorrect as the statements contained in them are accurate.

The statement in "a" is accurate, as actual overhead greater than applied overhead will result in an overall unfavorable variance.

The statement in "c" is accurate, as fixed (rather than variable) overhead rates are factored into the production-volume variance calculation.

The statement in "d" is accurate, as the flexible-budget variance is a combination of the spending and efficiency variances. If both the spending and efficiency variances are favorable, then the flexible-budget variance must be favorable.

8-17 Steed Co. budgets production of 150,000 units in the next year. Steed’s CFO expects that each unit will take 8 hours to produce at an hourly wage rate of $10 per hour. If factory overhead

is applied on the basis of direct labor hours at $6 per hour, the budget for factory overhead will total: a. $7,200,000. b. $9,000,000. c. $12,000,000. d. $19,200,000.

SOLUTION

Choice "a" is correct. 150,000 units at 8 hours per unit is equal to 1,200,000 hours budgeted. Factory overhead is applied at $6 per direct labor hour, so at 1,200,000 hours, factory overhead will be equal to $7,200,000.

Choice "b" is incorrect. This choice incorrectly substitutes the hourly wage rate of $10 for the number of hours to produce a unit.

Choice "c" is incorrect. This answer choice represents the direct labor budget. 150,000 units at 8 hours per unit is equal to 1,200,000 hours budgeted. At an hourly wage rate of $10 per hour, the direct labor budget will be equal to $12,000,000.

Choice "d" is incorrect. This answer choice combines the direct labor and factory overhead budgets.

8-18 As part of her annual review of her company’s budgets versus actuals, Mary Gerard isolates unfavorable variances with the hope of getting a better understanding of what caused them and how to avoid them next year. The variable overhead efficiency variance was the most unfavorable over the previous year, which Gerard will specifically be able to trace to: a. Actual overhead costs below applied overhead costs. b. Actual production units below budgeted production units. c. Standard direct labor hours below actual direct labor hours. d. The standard variable overhead rate below the actual variable overhead rate.

SOLUTION

Choice "c" is correct. The variable overhead efficiency variance is calculated as the difference between actual direct labor hours used versus standard (budgeted) direct labor hours allowed, multiplied by the standard variable overhead rate. If standard hours are below actual hours, this would mean more hours were used than expected and would therefore cause an unfavorable variance.

Choice "a" is incorrect. Overall overhead variance is calculated as actual costs versus applied costs, and this situation would be favorable because applied is above actual.

Choice "b" is incorrect. The volume variance focuses on actual versus budgeted units of production.

Choice "d" is incorrect. The actual variable overhead rate does not factor into the variable overhead efficiency variance calculation.

Material purchased (36,000 pounds at $0 per pound) $21, Material used in production (28,000 pounds) Direct labor (8,200 hours at $9 per hour) 79, Variable manufacturing overhead incurred 41,

What is the variable overhead efficiency variance for Concourse for November Year 2?

1. $2,000 favorable.
2. $1,000 favorable.
3. $2,000 unfavorable.
4. $1,000 unfavorable.

SOLUTION

Choice "4" is correct.

The question asks for the variable overhead efficiency variance for a product.

The actual hours used to produce the 4,000 units of Concourse were 8,200 hours, and the standard hours to produce 4,000 units were 8,000 hours. Variable overhead is based on labor hours. Because the actual hours were more than the standard hours, the variable overhead efficiency variance has to be unfavorable.

The variance formula for the variable overhead efficiency variance can be stated as the standard rate of $5 per hour times the difference between the actual and standard hours used of 200 (8, 8,000), or $1,000 Unfavorable.

8-21 Variable manufacturing overhead, variance analysis. Esquire Clothing is a manufacturer of designer suits. The cost of each suit is the sum of three variable costs (direct material costs, direct manufacturing labor costs, and manufacturing overhead costs) and one fixed-cost category (manufacturing overhead costs). Variable manufacturing overhead cost is allocated to each suit on the basis of budgeted direct manufacturing labor-hours per suit. For June 2017, each suit is budgeted to take 4 labor-hours. Budgeted variable manufacturing overhead cost per labor-hour is $12. The budgeted number of suits to be manufactured in June 2017 is 1,040. Actual variable manufacturing costs in June 2017 were $52,164 for 1,080 suits started and completed. There were no beginning or ending inventories of suits. Actual direct manufacturing labor-hours for June were 4,536.

Required:

1. Compute the flexible-budget variance, the spending variance, and the efficiency variance for variable manufacturing overhead.
2. Comment on the results.

SOLUTION (20 min.) Variable manufacturing overhead, variance analysis.

1. Variable Manufacturing Overhead Variance Analysis for Esquire Clothing for June 2017

Actual Costs Incurred Actual Input Qty. × Actual Rate (1)

Actual Input Qty. × Budgeted Rate (2)

Flexible Budget: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (3)

Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (4) (4,536 × $11) $52,

(4,536 × $12) $54,

(4 × 1,080 × $12) $51,

(4 × 1,080 × $12) $51,

1. Esquire had a favorable spending variance of $2,268 because the actual variable overhead rate was $11 per direct manufacturing labor-hour versus $12 budgeted. It had an unfavorable efficiency variance of $2,592 U because each suit averaged 4 labor-hours (4,536 hours ÷ 1, suits) versus 4 budgeted labor-hours.

8-22 Fixed manufacturing overhead, variance analysis (continuation of 8-21). Esquire Clothing allocates fixed manufacturing overhead to each suit using budgeted direct manufacturing labor-hours per suit. Data pertaining to fixed manufacturing overhead costs for June 2017 are budgeted, $62,400, and actual, $63,916.

Required:

1. Compute the spending variance for fixed manufacturing overhead. Comment on the results.
2. Compute the production-volume variance for June 2017. What inferences can Esquire Clothing draw from this variance?

SOLUTION (20 min.) Fixed-manufacturing overhead, variance analysis (continuation of 8-21).

1 & 2.

Budgeted fixed overhead rate per unit of allocation base =

$ 62 , 400 1 , 040 × 4

=

$ 62 , 400 4 , 160 = $15 per hour

Fixed Manufacturing Overhead Variance Analysis for Esquire Clothing for June 2017

Never a variance

$2,592 U Efficiency variance

$2,268 F Spending variance

Never a variance

$324 U Flexible-budget variance

for how many direct manufacturing labor-hours is Sourdough Bread budgeting?) 2. Prepare a variance analysis of variable manufacturing overhead. Use Exhibit 8-4 (page 304) for reference. 3. Discuss the variances you have calculated and give possible explanations for them.

SOLUTION

(30 min.) Variable manufacturing overhead variance analysis.

1. Denominator level = (3,100,000 × 0 hours) = 62,000 hours

2. Actual Results

Flexible Budget Amounts

1. Output units (baguettes) 2,600,000 2,600,
2. Direct manufacturing labor-hours 46,800 52,000a
3. Labor-hours per output unit (2 1) 0 0.
4. Variable manuf. overhead (MOH) costs $617,760 $520,
5. Variable MOH per labor-hour (4 2) $13 $
6. Variable MOH per output unit (4 1) $0 $0.

a2,600,000 baguettes  0 hours per baguette = 52,000 hours

Variable Manufacturing Overhead Variance Analysis for Sourdough Bread Company for 2017:

Actual Costs Incurred Actual Input Qty. × Actual Rate (1)

Actual Input Qty. × Budgeted Rate (2)

Flexible Budget: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (3)

Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (4) (46,800 × $13) $617,

(46,800 × $10)

$468,

(52,000 × $10)

$520,

(52,000 × $10)

$520,

1. Spending variance of $149,760 U. It is unfavorable because variable manufacturing overhead was 32% 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 $52,000 F. 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 baguettes than management had anticipated in the budget.

$149,760 U

Spending variance Never a variance

$52,000 F

Efficiency variance

Never a variance

$97,760 U

Flexible-budget variance

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 $97,760 U. It is unfavorable because the favorable efficiency variance was not sufficient to compensate for the large unfavorable spending variance.

8-24 Fixed manufacturing overhead variance analysis (continuation of 8-23). The Sourdough Bread Company also allocates fixed manufacturing overhead to products on the basis of standard direct manufacturing labor-hours. For 2017, fixed manufacturing overhead was budgeted at $3 per direct manufacturing labor-hour. Actual fixed manufacturing overhead incurred during the year was $294,000.

Required:

1. Prepare a variance analysis of fixed manufacturing overhead cost. Use Exhibit 8-4 (page 304) as a guide.
2. Is fixed overhead underallocated or overallocated? By what amount?
3. Comment on your results. Discuss the variances and explain what may be driving them.

SOLUTION

(30 min.) Fixed manufacturing overhead variance analysis (continuation of 8-23).

1. Budgeted standard direct manufacturing labor used = 0 per baguette Budgeted output = 3,100,000 baguettes Budgeted standard direct manufacturing labor-hours = 3,100,000 × 0. = 62,000 hours Budgeted fixed manufacturing overhead costs = 62,000 × $3 per hour = $186, Actual output = 2,600,000 baguettes Allocated fixed manufacturing overhead = 2,600,000 × 0 × $ = $156,

Fixed Manufacturing Overhead Variance Analysis for Sourdough Bread Company for 2017

Actual Costs Incurred (1)

Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (2)

Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level (3)

Allocated: Budgeted Input Qty. Allowed for Actual Output × Budgeted Rate (4)

$294,000 $186,000 $186,

(2,600,000 × 0 × $3)

$156,

SOLUTION

(30–40 min.) Manufacturing overhead, variance analysis.

1. The summary information is:

The Rotations Corporation (June 2017) Actual

Flexible Budget

Static Budget Outputs units (number of assembled units) 220 220 150 Hours of assembly time 396 440c 300 a Assembly hours per unit 1 2 2. Variable mfg. overhead cost per hour of assembly time $ 32 $ 31 $ 31. Variable mfg. overhead costs $12,693 $13,640e $ 9,300f Fixed mfg. overhead costs $15,510 $14,100 $14, Fixed mfg. overhead costs per hour of assembly time $ 39 $ 47

a 150 units 2 assembly hours per unit = 300 hours

b 396 hours 220 units = 1 assembly hours per unit

c 220 units 2 assembly hours per unit = 440 hours

d $12,693 396 assembly hours = $33 per assembly hour

e 440 assembly hours $31 per assembly hour = $13,

f 300 assembly hours $31 per assembly hour = $9,

g $15,510 396 assembly hours = $33 per assembly hour

h $14,100 300 assembly hours = $49 per assembly hour

Flexible Budget: Allocated:

Actual Costs Actual Input Qty. 

Budgeted Input Qty. Allowed Budgeted

Budgeted Input Qty. Allowed Budgeted Incurred Budgeted Rate for Actual Output  Rate for Actual Output  Rate Variable 396  $31 440  $31 440  $31. Manufacturin g assy. hrs. per assy. hr. assy. hrs. per assy. hr. assy. hrs. per assy. hr. Overhead $12,693 $12,276 $13,640 $13,

$417 U $1,364 F Spending variance Efficiency variance Never a variance $947 F Flexible-budget variance Never a variance

$947 F Overallocated variable overhead

Flexible Budget: Allocated: Actual Costs Static Budget Lump Sum Static Budget Lump Sum

Budgeted Input Allowed Budgeted Incurred Regardless of Output Level Regardless of Output Level for Actual Output  Rate Fixed 440  $47. Manufacturin g assy. hrs. per assy. hr. Overhead $15,510 $14,100 $14,100 $20,

$1,410 U $6,580 F Spending Variance Never a Variance Production-volume variance

$1,410 U $6,580 F

The summary analysis is:

Spending Variance

Efficiency Variance

Production-Volume Variance Variable Manufacturing Overhead

$417 U $1,364 F Never a variance

Fixed Manufacturing Overhead $1,410 U Never a variance $6,580 F

1. Variable Manufacturing Costs and Variances

a. Variable Manufacturing Overhead Control

12,

693

Accounts Payable Control and various other accounts 12, To record actual variable manufacturing overhead costs incurred.

b. Work-in-Process Control 13, Variable Manufacturing Overhead Allocated 13, To record variable manufacturing overhead allocated.

c. Variable Manufacturing Overhead Allocated 13, Variable Manufacturing Overhead Spending Variance 417 Variable Manufacturing Overhead Control 12, Variable Manufacturing Overhead Efficiency Variance 1, To isolate variances for the accounting period.

d. Variable Manufacturing Overhead Efficiency Variance 1, Variable Manufacturing Overhead Spending Variance 417 Cost of Goods Sold 947 To write off variable manufacturing overhead variances to cost of goods sold.

Fixed Manufacturing Costs and Variances

a. Fixed Manufacturing Overhead Control 15, Salaries Payable, Acc. Depreciation, various other accounts 15, To record actual fixed manufacturing overhead costs incurred.

b. Work-in-Process Control 20, Fixed Manufacturing Overhead Allocated 20, To record fixed manufacturing overhead allocated.

c. Fixed Manufacturing Overhead Allocated 20, Fixed Manufacturing Overhead Spending Variance 1, Fixed Manufacturing Overhead Production-Volume Variance 6, Fixed Manufacturing Overhead Control 15,

To isolate variances for the accounting period.

d. Fixed Manufacturing Overhead Production-Volume Variance 6, Fixed Manufacturing Overhead Spending Variance 1, Cost of Goods Sold 5, To write off fixed manufacturing overhead variances to cost of goods sold.

1. Planning and control of variable manufacturing overhead costs has both a long-run and a short-run focus. It involves Rotations planning to undertake only value-added overhead activities (a long-run view) and then managing the cost drivers of those activities in the most efficient way (a short-run view). Planning and control of fixed manufacturing overhead costs at Rotations have primarily a long-run focus. It involves undertaking only value-added fixed-overhead activities for a budgeted level of output. Rotations makes most of the key decisions that determine the level of fixed-overhead costs at the start of the accounting period.

8-26 4-variance analysis, fill in the blanks. ProChem, Inc., produces chemicals for large biotech companies. It has the following data for manufacturing overhead costs during August 2017:

Variable Fixed Actual costs incurred $35,000 $16, Costs allocated to products 36,000 15, Flexible budget –––––– 16, Actual input × budgeted rate 31,500 ––––––

Fill in the blanks. Use F for favorable and U for unfavorable:

Variable Fixed (1) Spending variance $ $ (2) Efficiency variance (3) Production-volume variance (4) Flexible-budget variance (5) Underallocated (overallocated) manufacturing overhead

SOLUTION

(1015 min.) 4-variance analysis, fill in the blanks.

Variable Fixed

4-Variance Analysis

Spending Variance

Efficiency Variance

Production- Volume Variance Variable Overhead $3,500 U $4,500 F Never a variance Fixed Overhead $ 500 U Never a variance $800 U

8-27 Straightforward 4-variance overhead analysis. The Lopez Company uses standard costing in its manufacturing plant for auto parts. The standard cost of a particular auto part, based on a denominator level of 4,000 output units per year, included 6 machine-hours of variable manufacturing overhead at $8 per hour and 6 machine-hours of fixed manufacturing overhead at $15 per hour. Actual output produced was 4,400 units. Variable manufacturing overhead incurred was $245,000. Fixed manufacturing overhead incurred was $373,000. Actual machine- hours were 28,400.

Required:

1. Prepare an analysis of all variable manufacturing overhead and fixed manufacturing overhead variances, using the 4-variance analysis in Exhibit 8-4 (page 304).
2. Prepare journal entries using the 4-variance analysis.
3. Describe how individual fixed manufacturing overhead items are controlled from day to day.
4. Discuss possible causes of the fixed manufacturing overhead variances.

SOLUTION

(20–30 min.) Straightforward 4-variance overhead analysis.

1. The budget for fixed manufacturing overhead is 4,000 units × 6 machine-hours × $ machine-hours/unit = $360,000.

An overview of the 4-variance analysis is:

4-Variance Analysis

Spending Variance

Efficiency Variance

Production- Volume Variance Variable Manufacturing Overhead

$17,800 U $16,000 U Never a Variance

Fixed Manufacturing Overhead

$13,000 U Never a Variance $36,000 F

Solution Exhibit 8-27 has details of these variances.

A detailed comparison of actual and flexible budgeted amounts is:

Actual Flexible Budget Output units (auto parts) 4,400 4,

Allocation base (machine-hours) 28,400 26,400a Allocation base per output unit 6 6. Variable MOH $245,000 $211,200c Variable MOH per hour $8 $8. Fixed MOH $373,000 $360,000e Fixed MOH per hour $13 – a 4,400 units × 6 machine-hours/unit = 26,400 machine-hours b 28,400 ÷ 4,400 = 6 machine-hours per unit c 4,400 units × 6 machine-hours per unit × $8 per machine-hour = $211, d $245,000 ÷ 28,400 = $8. e 4,000 units × 6 machine-hours per unit × $15 per machine-hour = $360, f $373,000 ÷ 28,400 = $13.

1. Variable Manufacturing Overhead Control 245, Accounts Payable Control and other accounts 245,

Work-in-Process Control 211, Variable Manufacturing Overhead Allocated 211,

Variable Manufacturing Overhead Allocated 211, Variable Manufacturing Overhead Spending Variance 17, Variable Manufacturing Overhead Efficiency Variance 16, Variable Manufacturing Overhead Control 245,

Fixed Manufacturing Overhead Control 373, Wages Payable Control, Accumulated Depreciation Control, etc. 373,

Work-in-Process Control 396, Fixed Manufacturing Overhead Allocated 396,

Fixed Manufacturing Overhead Allocated 396, Fixed Manufacturing Overhead Spending Variance 13, Fixed Manufacturing Overhead Production-Volume Variance 36, Fixed Manufacturing Overhead Control 373,

1. Individual fixed manufacturing overhead items are not usually affected very much by day-to-day control. Instead, they are controlled periodically through planning decisions and budgeting procedures that may sometimes have 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).

2. The fixed overhead spending variance is caused by the actual realization of fixed costs differing from the budgeted amounts. Some fixed costs are known because they are contractually specified, such as rent or insurance, although if the rental or insurance contract expires during the year, the fixed amount can change. Other fixed costs are estimated, such as

How does the planning of fixed overhead costs differ from the planning of variable overhead cost?

How does the planning of fixed overhead costs differ from the planning of variable overhead costs quizlet?

What is the difference between fixed and variable overhead expenses?

What are the steps in developing a budgeted variable overhead cost allocation rate?