MANAGEMENT ACCOUNTING
CONCEPTS AND TECHNIQUES
By Dennis Caplan, University
at Albany (State University of New York)
CHAPTER
17: Cost Variances for Variable and
Fixed Overhead
Exercises
and Problems:
17-1: Following is selected information about the Hopi Popcorn company. All
information represents total amounts, not per unit amounts.
|
|
Static Budget |
Actual Results |
|
Units made and sold Direct materials costs Direct materials used in
production Fixed overhead |
100 $5,000 1,000 pounds $3,000 |
50 $2,700 450 pounds $4,000 |
Hopi had no beginning or ending inventory of either
finished product or raw materials. Hopi allocates fixed overhead using units of
output as the allocation base, and a budgeted overhead rate with budgeted
production in the denominator.
Required: Calculate the fixed overhead volume variance.
17-2: Border Construction Company is a road-paving company. Such companies are characterized by high fixed costs in plant and equipment. The company allocates fixed overhead to its jobs based on miles of road paved. The company has an unfavorable fixed overhead spending variance, and overallocated fixed overhead. This set of facts is consistent with
(A) Unexpected capital expenditures and the use of practical capacity in the denominator of the fixed overhead rate.
(B) An unexpected decrease in fixed overhead costs, the use of budgeted activity in the denominator of the fixed overhead rate, and an unexpected increase in business.
(C) An unexpected increase in appropriations by the State Legislature for road work, resulting in more business for the company, and unexpected capital expenditures.
(D) The use of actual miles in the denominator of the fixed overhead rate, actual fixed overhead costs in the numerator, and significant unexpected capital expenditures.
17-3: Assume the following information for the
|
Budgeted fixed overhead Plant production capacity Budgeted butyl production Actual butyl production |
$12,000,000 1,000,000 tons of butyl 500,000 tons of butyl 600,000 tons of butyl |
Required:
A) Using budgeted butyl production in the denominator of the fixed overhead rate, calculate the fixed overhead volume variance.
B) Using plant capacity in the denominator of the fixed overhead rate, calculate the fixed overhead volume variance.
C) In one or two sentences, interpret what each of these variances represents.
17-4: Yellow Company budgeted fixed manufacturing overhead of $1,000,000, but actually incurred fixed manufacturing overhead of $1,200,000. The company expected to produce 100,000 units of product, but actually produced 80,000 units. The company allocates fixed overhead using a budgeted rate, based on budgeted production in the denominator.
Required:
A) Calculate the fixed overhead spending variance. Is this variance favorable or unfavorable?
B) Calculate the fixed overhead volume variance. Is this variance favorable or unfavorable?
C) Calculate the overallocated or underallocated fixed overhead.
17-5: The Plutonium Fruitcake Company allocated variable overhead based on pounds of direct materials. The company's production level (units of output) and direct materials prices (cost per pound) in 1957 were exactly as planned in the static budget for that year, but the company used more pounds of direct materials per unit of output than planned. This set of circumstances certainly resulted in
(I) an unfavorable variable overhead efficiency variance.
(II) an unfavorable flexible budget variance for variable overhead.
(III) an unfavorable static budget variance for variable overhead.
(A) (I), (II) and (III)
(B) neither (I), (II) nor (III) need be true
(C) (I) only
(D) (I) and (II) only
17-6: Following is information about December production at the Doorstop Fruitcake Company, and the principal ingredient used in the manufacture of fruitcakes: flour. All flour purchased during the month was used in production. There was no flour on hand at the beginning of the month. Fixed manufacturing overhead was budgeted at $90,000, but was actually $100,000. Fixed manufacturing overhead is allocated using pounds of flour as the allocation base. The factory expects to be operating at capacity in December.
|
|
# of
Fruitcakes produced |
Pounds
of flour used |
Cost of
flour |
|
Actual Budget |
1,150 1,200 |
5,980 6,000 |
$2,840.50 $3,000.00 |
If the company allocates variable overhead based on pounds of flour, the variable overhead efficiency variance will be
(A) Zero
(B) Unfavorable
(C) Favorable
(D) Unable to determine from the information provided
17-7: Which of the following scenarios might not result in an unfavorable production volume variance?
I. Actual production is below practical capacity, when budgeted production is used in the denominator to calculate the overhead rate.
II. Actual production is below practical capacity, when practical capacity is used in the denominator to calculate the overhead rate.
III. Actual production is below budget, when budgeted production is used in the denominator to calculate the overhead rate.
IV. Actual production is above budget, when practical capacity is used in the denominator to calculate the overhead rate.
(A) I and IV
(B) I only
(C) I, II, III and IV
(D) I and III
17-8: Assume the following information
for the
|
Budgeted fixed overhead Production capacity Budgeted production |
$12,000,000 1,000,000 tons 500,000 tons |
Required:
A) Assume we are at the beginning of the year. If the volume variance will be calculated using plant capacity in the denominator of the fixed overhead rate, what would the plant manager have to do to ensure that the production volume variance will be zero?
B) Again, assume we are at the beginning of the year. If the volume variance will be calculated using budgeted production in the denominator of the fixed overhead rate, what would the plant manager have to do to ensure that the production volume variance will be favorable?
C) Assume that we are at the beginning of the year, and that the factory manager is told that the production volume variance, favorable or unfavorable, will be recorded at the corporate level, and not on the factory income statement that forms the basis for the manager’s performance review. Assume also that the factory manager is given the choice of the denominator-level concept for calculating the volume variance (actual, budget, or practical capacity), but that the manager must make the choice at the beginning of the year, knowing only the information in the table at the start of this question, but not knowing actual production or actual fixed overhead costs. What denominator-level concept do you think the factory manager will choose, and why? Would your answer change if, instead of budgeting production of 500,000 tons, production was budgeted for factory practical capacity of 1,000,000 tons?
17-9: If a factory is on a Standard Costing System, and has overallocated fixed overhead, which of the following statements is certainly true?
(A) The factory made more units than planned.
(B) The factory has a favorable spending variance.
(C) The factory has a favorable production volume variance.
(D) The actually amount spent for fixed overhead was less than the amount of fixed overhead allocated to inventory.
17-10: The Large and Expensive Widget Company allocates overhead based on direct labor hours. If the company uses more total direct labor hours than planned, but the actual labor wage rate is the same as the budgeted labor wage rate, which of the following statements might not be true?
(A) There will be an unfavorable static budget variance for labor.
(B) The labor wage rate variance will be zero.
(C) There will be an unfavorable labor efficiency variance.
(D) The labor efficiency and overhead efficiency variances will be in the same direction (i.e., either both variances will be favorable, they will both be unfavorable, or they will both be equal to zero).
17-11: McConnell McDowell McQueen Enterprises makes cotton shirts
in a single factory in
|
|
Static Budget Information |
Actual Results |
|
Production Number of shirts Direct
Materials Cost per yard of fabric Yards of fabric per shirt Direct labor Direct labor cost for all of the shirts Hours of direct labor for all of the shirts Variable Overhead Fixed Overhead |
1,200 $4.50 2.00 $27,000 3,000 $18,000 $15,000 |
1,000 $4.20 2.50 $30,000 3,400 $18,500 $10,500 |
Required:
A) Calculate the spending and efficiency variances for variable overhead.
B) Compute the fixed overhead volume variance. Is it favorable or unfavorable?
C) Compute the spending variance for fixed overhead.
D) Compute the amount of underallocated
or overallocated fixed overhead.
17-12: Li, Lee and Levy Industries makes
widgets in its factory located in the
|
|
Static Budget Information |
Actual Results |
|
Widgets produced Direct materials: copper fibers Direct labor Variable overhead (allocated based on machine hours) Fixed costs (allocated based on units of output, and budgeted production in the denominator) Machine hours |
1,000 15,000 pounds for a total cost of $31,500 1,000 hours for a total cost of $9,000 $18,000 $56,000 800 |
900 12,600 pounds for a total cost of $25,200 950 hours for a total cost of $8,075 $14,553 $57,000 630 |
Required: Calculate the variances for variable and fixed
overhead.
17-13: NPX Company reports the following information for October:
|
|
Static Budget |
Actual Results |
|
Production Direct labor Variable overhead Fixed overhead Machine hours |
1000 units 20 minutes per unit $3,333 $47,000 200 |
1,100 units 15 minutes per unit $3,666 $47,000 220 |
NPX allocates overhead based on direct labor hours,
using a standard costing system, and allocates fixed overhead using the
denominator-level concept of budgeted production.
Required:
A) How much of the flexible
budget variance for variable overhead is due to the fact that NPX produced more
units than planned?
B) The
variable overhead efficiency variance is $917 favorable (rounded to the nearest
dollar). Recalculate the variable overhead efficiency variance assuming the
company allocates overhead based on machine hours instead of labor hours.
C) Calculate
the variable overhead spending variance assuming the company allocates variable
overhead based on machine hours instead of labor hours.
D) Calculate the fixed overhead spending variance. Is it
favorable or unfavorable?
E) How much of the fixed
overhead spending variance is due to the fact that production was higher than
planned?
F) Calculate the fixed overhead volume variance.
G) How much of the fixed overhead volume variance is due
to the fact that production was higher than planned?
H) Calculate the amount of overapplied or underapplied
fixed overhead.
17-14: The Electric Sound Opera Company makes three models of an electronic keyboard. Budgeted and actual information for the year follows:
|
|
Model A |
Model B |
Model C |
Total |
|
Units produced: actual budgeted Direct materials (per unit) actual budgeted Direct labor (per unit) actual budgeted Cost driver info: number of parts (per unit) actual budget
direct labor hours (per unit) actual budget total square feet (budget = actual) Overhead costs: Labor Support (variable overhead) actual budget Materials Support (variable overhead) actual budget Fixed Overhead actual budget Total Overhead actual budget |
315 275 $50 $52 $24 $20 32 32 3.50 4 3,000 |
450 400 $76 $73 $56 $50 56 56 4.60 5 6,000 |
226 300 $100 $105 $38 $40 43 43 4.50 5 10,000 |
991 975 19,000 $ 535,000 $ 600,000 $ 780,000 $ 860,000 $1,250,000 $1,000,000 $2,565,000 $2,460,000 |
Notes:
1. The company uses a Normal Costing System.
2. Total square feet refers to the square feet of factory floor space used in the production of each model of product. It is expressed as total square feet for that model, not square feet per unit.
3. Variable manufacturing overhead is divided into two cost pools, one for labor support and one for materials support.
A) Assume that the Labor Support overhead cost pool is allocated based on direct labor hours (labor hours is the allocation base), that the Materials Support overhead cost pool is allocated based on number of parts (parts is the allocation base), and that the Fixed Overhead cost pool is allocated based on square feet. Calculate the cost per unit for each Model A.
B) Now assume that the Variable Overhead Labor Support cost pool is allocated to product based on direct labor dollars. Calculate the variable overhead spending and efficiency variances for this overhead cost pool category.
C) Calculate the fixed overhead production volume and spending variances, assuming that fixed overhead is allocated using output units as the allocation base, and budgeted production as the denominator-level concept.
17-15: Silverstream Company makes travel trailers. The following information pertains to the company’s Ohio Division, which manufactures and markets only one model of trailer: the 32-foot Ambassador trailer. Following is budgeted and actual information for the Ohio Division for 2004:
|
|
Budgeted |
Actual |
|
|
Trailers manufactured in 2004 Trailers sold in 2004 Sales price per trailer Direct materials costs (all variable costs): Aluminum Steel Other Total materials costs Direct labor costs (all variable costs) Variable overhead manufacturing costs Fixed overhead costs: Manufacturing fixed overhead Non-manufacturing fixed overhead |
Per Unit $4,000 $2,000 $4,000 $10,000 $5,000 $8,000 |
Total 1,000 1,000 $45,000 $4,000,000 $2,000,000 $4,000,000 $10,000,000 $5,000,000 $8,000,000 $10,000,000 $2,000,000 |
800 600 $45,000 $3,400,000 $1,600,000 $3,800,000 $8,800,000 $3,800,000 $6,400,000 $11,000,000 $2,100,000 |
Additional information:
The Ohio Division started the year with no inventory of finished trailers or direct materials.
Direct labor standard: 250 hours per trailer
Actual direct labor hours incurred: 195,000 hours
The budgeted quantity of aluminum: 100 lbs. per trailer
The budgeted cost of aluminum: $40 per lb.
The actual quantity of aluminum purchased 84,000 lbs.
The actual quantity of aluminum
used 82,927 lbs.
The output capacity of the factory: 2,000 trailers
The division allocates overhead based on direct labor hours. The only non-manufacturing costs are certain fixed overhead costs, as shown above.
Required:
Calculate the following:
(A) The
flexible budget variance for variable manufacturing overhead.
(B) The
variable manufacturing overhead spending variance.
(C) The
variable manufacturing overhead efficiency variance.
(D) Recalculate
the variable manufacturing overhead rate, assuming the company applies variable
overhead based on pounds of aluminum, instead of direct labor hours.
(E) Using
the overhead rate calculated in part (D), recalculate
the variable manufacturing overhead spending variance.
(F) Using
the overhead rate calculated in part (D), recalculate
the variable manufacturing overhead efficiency variance.
(G) Using
the overhead rate calculated in part (D), recalculate
the variable manufacturing overhead flexible budget variance.
(H) The
fixed manufacturing overhead spending or budget variance.
(I) The flexible budget variance for fixed manufacturing
overhead.
(J) The
fixed manufacturing overhead production volume variance, assuming the volume
variance is calculated based on budgeted production.
(K) The
fixed manufacturing overhead production volume variance, assuming the volume
variance is calculated based on factory capacity.
(L) The
amount of overapplied or underapplied fixed manufacturing overhead, if the
company applies overhead based on budgeted production.
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Management
Accounting Concepts and Techniques; copyright 2006; most recent update:
November 2010
For a printer-friendly version, contact Dennis Caplan at dcaplan@uamail.albany.edu