CHAPTER 11
Flexible Budgeting and the Management of
Overhead and Support Activity Costs
ANSWERS TO REVIEW QUESTIONS
11-1
A static budget is based on only one level of activity. A flexible budget allows for
several different levels of activity.
11-2
The advantage of a flexible budget is that it is responsive to changes in the activity
level. It enables a comparison between actual costs incurred at the actual level of
activity and the standard allowed costs that should have been incurred at the actual
level of activity.
11-17 The control purpose of a standard-costing system is to provide benchmarks against
which to compare actual costs. Then management by exception is used to follow up
on significant variances and take corrective action. The product-costing purpose of
the standard-costing system is to determine the cost of producing goods and
services. Product costs are needed for a variety of purposes in both managerial and
financial accounting.
SOLUTIONS TO EXERCISES
EXERCISE 11-22 (20 MINUTES)
1.
Variable-overhead spending variance
= actual variable overhead – (AH × SVR)
= $607,500 – (60,750 × $9.00)
= $60,750 U
2.
Variable-overhead efficiency variance
= SVR(AH – SH)
= $9.00(60,750 – 54,000*)
= $60,750 U
*SH = 54,000 hrs. = 13,500 cases × 4 hours per case
3.
Fixed-overhead budget variance
= actual fixed overhead – budgeted fixed overhead
= $183,000 – $180,000
= $3,000 U
4.
Fixed-overhead volume variance
= budgeted fixed overhead – applied fixed overhead
= $180,000 – $162,000†
= $18,000 (positive)**
†Applied
fixed overhead
=
⎛ predetermined fixed ⎞ ⎛ standard allowed ⎞
⎜⎜
⎟⎟ × ⎜⎜
⎟⎟
hours
⎝ overhead rate ⎠ ⎝
⎠
=
⎛ $180,000 ⎞
⎜
⎟ × (13,500 × 4)
⎝ 15,000 × 4 ⎠
= $162,000
**Consistent with the discussion in the text, we choose not to interpret the volume variance
as either favorable or unfavorable. Some accountants would designate a positive volume
variance as "unfavorable" and a negative volume variance as "favorable."
EXERCISE 11-30 (10 MINUTES)
1.
2.
Flexible budgeted amounts, using activity-based flexible budget:
a.
Indirect material: $33,000 ($18,000 + $3,000 + $3,000 + $9,000)
b.
Utilities: $6,000 ($4,500 + $1,500)
c.
Inspection: $3,300
d.
Test kitchen: $2,400
e.
Material handling: $3,000
f.
Total overhead cost: $64,800 ($45,000 + $7,800 + $2,400 + $3,000 + $6,600)
Variance for setup cost:
a.
Using the activity-based flexible budget: $1,000 F (actual cost minus flexible budget =
$3,500 – $4,500)
b.
Using the conventional flexible budget: $500 U (actual cost minus flexible budget =
$3,500 – $3,000)
EXERCISE 11-31 (45 MINUTES)
Budgeted fixed overhead.................................................................... $ 25,000
Actual fixed overhead ........................................................................ $ 32,500a
Budgeted production in units ............................................................
Actual production in units .................................................................
Standard machine hours per unit of output .....................................
Standard variable-overhead rate per machine hour ........................
Actual variable-overhead rate per machine hour.............................
Actual machine hours per unit of output ..........................................
Variable-overhead spending variance ..............................................
Variable-overhead efficiency variance ..............................................
Fixed-overhead budget variance .......................................................
Fixed-overhead volume variance.......................................................
Total actual overhead..........................................................................
Total budgeted overhead (flexible budget).......................................
Total budgeted overhead (static budget)..........................................
Total applied overhead........................................................................
12,500
12,000c
4 hours
$8.00
$9.00b
3d
$ 36,000 U
$ 96,000 F
$ 7,500 U
$ 1,000g (positive or U*)
$356,500
$409,000e
$425,000f
$408,000
*Some accountants would designate a positive fixed-overhead volume variance as unfavorable.
Explanatory Notes:
a.
Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead
$7,500 U = X – $25,000
X = $32,500 = actual fixed overhead
b.
Total actual overhead = actual variable overhead + actual fixed overhead
$356,500 = X + $32,500
X = $324,000 = actual variable overhead
Variable-overhead spending variance
= actual variable overhead – (AH × SR)
$36,000 U = $324,000 – (AH × $8)
$8AH = $288,000
AH = 36,000
Actual variable-overhead
rate per machine hour
=
actual variable overhead
actual hours
=
$324,000
= $9 per hour
36,000
EXERCISE 11-31 (CONTINUED)
c.
Fixed-overhead rate
=
budgeted fixed overhead
budgeted machine hours
=
$25,000
(12,500 units)(4 hrs. per unit)
= $.50 per hr.
Total standard
overhead rate = standard variable overhead rate + fixed-overhead rate
$8.50 = $8.00 + $.50
Total applied overhead
= total standard hours × total standard overhead rate
$408,000 = X × $8.50
X = 48,000 = total standard hrs.
d.
e.
Actual production =
total standard hrs.
standard hrs. per unit
=
48,000
= 12,000 units
4
Actual machine hrs. per unit of output
=
total actual machine hrs.
actual production
=
36,000 hrs.
= 3 hrs. per unit
12,000 units
Total budgeted overhead (flexible budget)
= budgeted fixed overhead + (SVR × SH)
= $25,000 + ($8.00 × 12,000 units × 4 hrs. per unit)
= $409,000
EXERCISE 11-31 (CONTINUED)
f.
g.
Total budgeted overhead (static budget)
=
⎛ total standard ⎞⎛ budgeted ⎞⎛ standard hrs. ⎞
⎜⎜
⎟⎟⎜⎜
⎟⎟⎜⎜
⎟⎟
⎝ overhead rate ⎠⎝ production ⎠⎝ per unit ⎠
=
($8.50)(12,500)(4)
=
$425,000
=
budgeted fixed overhead – applied fixed overhead
=
$25,000 – ($.50)(12,000 × 4)
=
$1,000 (positive)*
Fixed overhead volume variance
*Consistent with the discussion in the text, we choose not to interpret the volume variance as
either favorable or unfavorable. Some accountants would designate a positive volume
variance as "unfavorable" and a negative volume variance as "favorable."
PROBLEM 11-44 (40 MINUTES)
1.
Susan Porter recommended that EduSoft use flexible budgeting in this situation because a
flexible budget would allow Mark Fletcher to compare EduSoft's actual selling expenses
(based on current month's actual activity) with budgeted selling expenses. In general, flexible
budgets:
• Provide management with the tools to evaluate the effects of varying levels of activity on
costs, revenues, and profits.
• Enable management to improve planning and decision making.
• Improve the analysis of actual results.
2.
EDUSOFT CORPORATION
REVISED MONTHLY SELLING EXPENSE REPORT FOR OCTOBER
Advertising ......................................................
Staff salaries ...................................................
Sales salariesa .................................................
Commissionsb .................................................
Per diem expensec ..........................................
Office expensesd .............................................
Flexible
Budget
$3,300,000
250,000
230,400
992,000
316,800
732,000
Actual
$3,320,000
250,000
230,800
992,000
325,200
716,800
Variance
$20,000 (U)
0
400 (U)
0
8,400 (U)
15,200 (F)
Shipping expensese ........................................
Total expenses................................................
1,985,000
$7,806,200
Supporting calculations:
aMonthly
salary for salesperson
$216,000 ÷ 90 = $2,400.
Budgeted amount
$2,400 × 96 = $230,400.
bCommission
rate
$896,000 ÷ $22,400,000 = .04.
Budgeted amount
$24,800,000 × .04 = $992,000.
÷ 90) ÷ 15 days = $220 per day.
($220 × 15) × 96 = $316,800.
c($297,000
– 6,000,000) ÷ 54,000 = $40 per order.
($6,000,000 ÷ 12) + ($40 × 5,800) = $732,000.
d($8,160,000
– ($6 × 2,000,000)] ÷ 12 = $125,000
monthly fixed expense.
e[$13,500,000
$125,000 + ($6 × 310,000) = $1,985,000.
PROBLEM 11-45 (45 MINUTES)
Missing amounts for case A:
2.
$21.00a per hour
3.
$28.50b per hour
6.
$294,150c
9.
$7,500 Ud
10.
$9,000 Fe
1,953,000
$7,787,800
32,000 (F)
$18,400 (F)
11.
$(126,000) (Negative)f (The negative sign means that applied fixed overhead
exceeded budgeted fixed overhead.)
12.
$24,150 underappliedg
13.
$135,000 overappliedh
16.
6,000 unitsi
19.
$270,000j
20.
$756,000k
Explanatory notes for case A:
aBudgeted
direct-labor hours
= budgeted production × standard direct-labor hours per unit
= 5,000 units × 6 hrs. = 30,000 hrs.
Fixed overhead rate =
=
bTotal
budgeted fixed overhead
budgeted direct-labor hours
$630,000
= $21per hr.
30,000 hrs.
standard overhead rate
= variable overhead rate + fixed overhead rate
= $7.50 + $21.00 = $28.50
cVariable-overhead
spending variance
= actual variable overhead – (actual direct-labor hours
× standard variable overhead rate)
$16,650 U = actual variable overhead – (37,000 × $7.50)
Actual variable overhead = $294,150
dVariable-overhead
efficiency variance
= SVR(AH – SH)
= $7.50(37,000 – 36,000)
= $7,500 U
eFixed-overhead
budget variance
= actual fixed overhead – budgeted fixed overhead
= $621,000 – $630,000
= $9,000 F
fFixed-overhead
volume variance
= budgeted fixed overhead – applied fixed overhead
= $630,000 – (36,000 × $21)
= $126,000 (negative sign)
gUnderapplied
variable overhead
= actual variable overhead – applied variable overhead
= $294,150 – (36,000 × $7.50)
= $24,150 underapplied
hOverapplied
fixed overhead
= actual fixed overhead – applied fixed overhead
= $621,000 – (36,000 × $21)
= $135,000 overapplied
iActual
production
jApplied
=
standard allowed direct-labor hours
standard hrs. per unit
=
36,000
= 6,000 units
6
variable overhead
= SH × SVR
= 36,000 × $7.50
= $270,000
kApplied
fixed overhead
= SH × fixed overhead rate
= 36,000 × $21
= $756,000
Missing amounts for case B:
1.
$4.00a per hour
2.
$9.00b per hour
4.
$25,600c
5.
$72,000d
6.
$32,000e
7.
$76,320f
12.
$6,400 underappliedg
13.
$18,720 underappliedh
14.
1,000 unitsi
16.
800 unitsj
19.
$25,600k
20.
$57,600l
Explanatory notes for case B:
aTo
find the standard variable overhead rate:
Variable-overhead efficiency variance
= SVR(AH – SH)
$1,600 F = SVR(6,000 – 6,400)
SVR = $4
bStandard
fixed-overhead rate
= total standard overhead rate – SVR
= $13 – $4 = $9
cFlexible
budget for variable overhead
= SH × SVR
= 6,400 × $4 = $25,600
dFlexible
budget for fixed overhead
= applied fixed overhead + volume variance
= (6,400 × $9) + $14,400
= $72,000
eActual
variable overhead
= applied variable overhead + spending variance + efficiency variance
= (6,400 × $4) + $8,000 U – $1,600 F
= $32,000
fActual
fixed overhead
= budgeted fixed overhead + fixed-overhead budget variance
= $72,000 + $4,320 U
= $76,320
gUnderapplied
variable overhead
= spending variance + efficiency variance
= $8,000 U* + $1,600 F*
= $6,400 underapplied
*Note that the signs cancel when adding variances of different signs.
hUnderapplied
fixed overhead
= fixed-overhead budget variance + volume variance
= $4,320 U + $14,400 (positive)
= $18,720 underapplied
iBudgeted
direct-labor hours
=
=
$72,000
$9
=
8,000
Budgeted production =
=
jActual
production
kApplied
budgeted fixed overhead
fixed-overhead rate
budgeted direct-labor hours
standard hours per unit
8,000
= 1,000 units
8
=
standard allowed hours
standard hours per unit
=
6,400
= 800 units
8
variable overhead
= SH × SVR = 6,400 × $4
= $25,600
lApplied
fixed overhead
= SH × standard fixed-overhead rate
= 6,400 × $9
= $57,600