Exercise 15-31
The Platter Valley factory of Bybee Industries manufactures field boots.
The cost of each boot includes direct materials, direct labor, and factory
overhead. The firm traces all direct costs to products and assigns overhead
based on direct labor hours.
The firm budgeted $15,000 variable factory overhead and 2,500 direct
labor hours to manufacture 5,000 pairs of boots in March 2010.
The factory spent 2,700 direct labor hours in March 2010 to manufacture
4,800 pairs of boots and spent $15,600 on variable factory overhead
during the month.
Budgeted variable factory overhead
Budgeted direct labor hours
Budgeted production in pairs of boots
Actual variable factory overhead
Actual direct labor hours
Actual production in pairs of boots
$15,000
2,500
5,000
$15,600
2,700
4,800
Required
1.
Compute the flexible-budget variance, the spending variance, and the
efficiency variance for variable overhead for March.
Exercise 15-32
(Continuation of Exercise 15-31.) For March 2010, the Platter Valley factory of Bybee
Industries budgeted $90,000 fixed factory overhead. Its practical capacity is 2,500
direct labor hours per month (to manufacture 5,000 pairs of boots).
The factory spent 2,700 direct labor hours in March 2010 to manufacture 4,800 pairs of
boots. The actual fixed overhead incurred for the month was $92,000.
Budgeted fixed factory overhead
Budgeted direct labor hours
Budgeted production in pairs of boots
Actual fixed factory overhead
Actual direct labor hours
Actual production in pairs of boots
$90,000
2,500
5,000
$92,000
2,700
4,800
Required
1.
2.
Compute the spending (budget) variance and the production-volume
variance for fixed overhead.
Compute fixed overhead flexible budget variance.
Exercise 15-39
The following information is available from Swinnery Company for its
operations in December:
Data
Factory overhead incurred
$40,000
Variable overhead expenses, incurred
$24,150
Fixed overhead expenses, budgeted
$18,000
Direct labor hours (DLH) worked
4,200
Standard direct labor hours allowed
for the units manufactured
4,000
Denominator level of activity, in DLHs
4,500
(a modification of the problem – I always use denominator level rather
than practical capacity)
Actual variable OVH rate/DLH worked
$5.75
Standard variable overhead rate per DLH
$5.00
Swinnery uses direct labor hours (DLHs) to apply factory overhead
cost.
Required
Compute the four overhead variances.
15-31 Variable Factory Overhead Variances (30 minutes)
1. Standard variable overhead rate per direct labor hour (DLH):
BudgetedTotal VariableFactoryOverhead
BudgetedTotalDirect Labor Hours
= $15,000/2,500 hours = $6.00 per direct labor hour (DLH)
Standard direct-labor hours (DLHs) per unit:
BudgetedTotalDirectLabor Hours
BudgetedTotalUnits
= 2,500 DLHs/5,000 units = 0.50 DLHs/unit
Variable Overhead Variance Analysis
Actual Cost
(AQ x AP)
2,700 hrs. x $5.7777/hr.
$6.00/hr.
= $15,600
FB Based on
Inputs
(AQ x SP)
2,700 x $6.00/hr.
FB Based on
Output
(SQ x SP)
(4,800 x 0.5) x
= $16,200
= $14,400
Spending variance
Efficiency variance
= $600 F
= $1,800 U
or, = AQ x (AP – SP)
or,
= (AH – SH) x SR
= 2,700 x ($5.7777 - $6.00)
= (2,700 – 2,400) x $6.00/hr.
= $600F
= $1,800U
Flexible
Budget
Actual Cost
Output
$15,600
Based
on
$14,400
Flexible-budget variance = $15,600 – $14,400
= $1,200U
2. To Record Favorable Variable Overhead Spending Variance:
Dr. Factory Overhead (or, Variable Factory
Overhead)
$ 600
Cr. Variable Overhead Spending Variance
$
600
To Record Unfavorable Variable Overhead Efficiency Variance:
Dr. Variable Overhead Efficiency Variance
$1,800
Cr. Factory Overhead (or, Variable Factory Overhead)
$1,800
3. The factory had a favorable variable overhead spending variance. This could
be a result of conscientious efforts of workers and the manager of the factory
in conserving uses of variable factory items. Alternatively, it could have been
due, at least in part, to the use of an inappropriate activity measure (direct
labor-hours) for assigning variable factory overhead costs.
The $1,800 unfavorable variable overhead efficiency variance is a result of
using more direct labor hours (DLHs) to manufacture the output of the period
(2,700 hours to make 4,800 units of output) than the standard DLHs allowed
(2,400 hours) for this level of output. As long as DLHs worked is related to
variable overhead costs incurred, then the efficiency variance indicates the
cost to the company (in terms of variable overhead) of using 300 extra DLHs
this period.
The $1,200 unfavorable flexible-budget variance indicates that the firm did not
exercise good overall control regarding variable factory overhead costs.
Again, this is a valid conclusion provided that DLHs is a reasonably good
activity measure for the consumption of variable factory overhead cost.
15-32 Fixed Overhead Variances (30 minutes)
1. Standard fixed factory overhead application rate per direct labor hour (DLH):
=
BudgetedFixedFactoryOverhead
TotalDirectLaborHours, PracticalCapacity
= $90,000/2,500 DLHs = $36.00 per DLH
Standard direct-labor hours (DLH) per unit:
Budgeted Total Direct Labor Hours
=
Practical Capacity Units
= 2,500 hours/5,000 units = 0.5 DLHs per unit
Fixed Overhead Variance Analysis
Actual Cost
Applied
(SQ x SP)
4,800 units x 0.5 hrs. x
Budget
$36/hr.
$92,000
$90,000
=
$86,400
Spending variance
Production-volume variance
= $92,000 – $90,000
= $90,000 – $86,400
= $2,000U
= $3,600U
or, = SP x (Denominator Volume – SQ)
= $36/hr. (2,500 hrs. – 2,400 hrs.)
= $36/hr. x 100 hrs. = $3,600U
2. Fixed factory overhead (FOH) flexible-budget variance
= FOH spending variance = $2,000U
3. To Record Unfavorable Fixed Overhead Spending Variance:
Dr. Fixed Overhead Spending Variance
Cr. Factory Overhead (or, Fixed Factory Overhead)
$ 2,000
$2,000
To Record Unfavorable Production-Volume Variance:
Dr. Production Volume Variance
Cr. Factory Overhead (or, Fixed Factory Overhead)
$ 3,600
$ 3,600
4. The $2,000 unfavorable fixed factory overhead spending variance could be a
result of unexpected fluctuations, overspending, or budgeting errors in one or
more fixed overhead items. However, since the amount is small (2.22% of the
budget amount), it is unlikely that the management needs to spend any time
or resources to investigate this variance.
The $3,600 unfavorable production volume variance is a result of the lower
output for the period (4,800 units) as compared to the volume of output (5,000
units) assumed when the fixed overhead allocation rate was determined. The
production manager is responsible for the unfavorable variance if the reason
for the lower output is a result of activities or events in the factory such as
equipment failure, inefficient workers, or high defective rates. However, the
factory is doing its job if the lower production is a result of the decreased
demand for its product. As indicated in the text, this variance generally has
shared responsibility (with marketing, purchasing, etc.).
Note that when the denominator activity level is set at practical capacity, then
resulting production volume variances can be interpreted as the cost of
unused capacity. The disclosure of this information over time can help
managers make better decisions regarding capacity-related spending.
Exercise 15-39
Fixed overhead application rate: $18,000 ÷ 4,500 = $4.00/DLH
Actual fixed overhead: $40,000 – $24,150 = $15,850;
Actual variable OH rate/DLH = $24,150/4,200DLHs = $5.75/DLH
Standard
Cost
Flexible Budget
Flexible Budget
Based on Inputs
Based on Outputs
(AQ x SP)
(SQ x SP)
Applied
to
Actual
Production
(AQ x AP)
(SQ x SP)
Variable (4,200 x $5.75)
(4,200 x $5.00)
(4,000 x $5.00)
$5.00)
Overhead
= $24,150
= $21,000
= $20,000
Spending
Efficiency
Variance = $3,150U Variance = $1,000U
Fixed
Overhead
Actual
Lump-sum
Amount
$15,850
$18,000
Spending
Variance = $2,150F
(4,000 x
= $20,000
N/A
Lump-Sum
Amount
N/A
Applied
(SQ x SP)
(4,000 x $4.00)
$18,000
= $16,000
Production-Volume
Variance = $2,000U
(4,000 x $9.00)
$36,000
$40,000
Total
Overhead
Total Overhead Variance = $4,000U (from a product-costing
standpoint this is referred to as total underapplied overhead of $4,000)
Four-Variance Decomposition of Total Overhead Variance for December:
(1) Variable Overhead Spending Variance =
$3,150U
(2) Variable Overhead Efficiency Variance =
$1,000U
(3) Fixed Overhead Spending Variance
=
$2,150F
(4) Production Volume Variance
=
$2,000U
=
$4,000U
Total Overhead Variance