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 Centerville 2 plant of Polypar, which manufactures only butyl.††

 

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 Pittsfield factory of Carnegie Steel.††††††

 

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 managerís 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 Cold Spring, VT. The company uses a Standard Costing System. The company allocates fixed and variable overhead separately. Variable overhead is allocated using direct labor hours as the allocation base. Fixed overhead is allocated based on output units (i.e., the allocation base is shirts), and factory practical capacity is the denominator-level concept. Practical capacity is 2,000 shirts per month. Following is budgeted and actual information for the month.

 

 

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 Marina Shores district of Seattle. The company uses a standard costing system. Following is budgeted and actual information for the month.

 

 

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 companyís 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