PROBLEM 11.36 Linking flexible budgets and variances: medical centre
1
Following is the performance report as per the given information:
Medical assistants
Clinic supplies
Lab tests
Total
Budget:
1 580 patients
$11 060
9 480
308 100
Actual:
1 580 patients
$ 13 020
9 150
318 054
Variance
$ 1 960 U
330 F
9 954 U
$328 640
$340 224
$11 584 U
Calculations (Working notes):
Medical assistants:
Budget: 1 580 patients  0.5 hours  $14.00 = $11 060
Actual: 840 hours  $15.50 = $13 020
Clinic supplies:
Budget: 1 580 patients  0.5 hours  $12.00 = $9 480
Actual: $9 150 (given)
Lab tests:
Budget: 1 580 patients  3 tests  $65.00 = $308 100
Actual: $318 054 (given)
2
The variances do not reveal any significant problems. The $330 variance for clinic supplies is only 3.48
per cent of the budgeted amount ($330 ÷ $9 480) and favourable. Similarly, the lab test variance, while
unfavourable, is only 3.23 per cent of the budget ($9 954 ÷ $308 100).
3
Following is the computation of variances for lab tests as per the given information:
Spending variance:
Actual tests conducted  actual cost
5 214 tests*  $61**
Actual tests conducted  standard cost
5 214 tests  $65
Variable overhead spending variance
* 1 580 patients  3.3 tests
$318 054U
338 910F
$20 856 F
** $318 054 ÷ 5214 tests
Efficiency variance:
Actual tests conducted  standard cost
5 214 tests  $65
Standard tests allowed  standard cost
4 740 tests*  $65
Variable overhead efficiency (quantity) variance
* 1 580 patients  3 tests
$338 910U
308 100F
$30 810 U
Yes, the medical centre does appear to have some problems. The two variances computed are sizable in
relation to the $308 100 budget. The efficiency variance is of particular concern, given that it is 10 per cent
of budget ($30 810 ÷ $308 100) and unfavourable. This variance arises because the assistants are
conducting an average of 3.3 tests per patient when the standard calls for only three tests. The standard
may be set too low or perhaps the assistants are somewhat sloppy, having to re-do tests that were done
improperly.
The administration should also investigate the causes of the $4 decline in the cost per test, from the standard
cost of $65 to the actual cost of $61 per test.
4
The spending and efficiency variances add up to equal the flexible budget variance ($20 856F + $30 810U
= $9 954U). The flexible budget variance reflects the total of the individual standard cost variances.
PROBLEM 11.37 Flexible budget; performance report; activity-based flexible budget:
1
software distributor
1
SOFTGRO LTD
REVISED MONTHLY SELLING EXPENSE REPORT FOR NOVEMBER
Flexible budget
Advertising
Staff salaries
Sales salariesa
Commissionsb
Daily travel allowancec
Office expensesd
Shipping expensese
Total expenses
$3 300 000
250 000
230 400
992 000
316 800
732 000
1 985 000
$7 806 200
Actual
Variance
$3 320 000
250 000
230 800
992 000
325 200
716 800
1 953 000
$7 787 800
$20 000 (U)
0
400 (U)
0
8 400 (U)
15 200 (F)
32 000 (F)
$18 400 (F)
Supporting calculations:
a Monthly salary for salesperson
$216 000  90 = $2 400
Budgeted amount
$2 400  96 = $230 400
b Commission rate
$896 000  $22 400 000 = 0.04
Budgeted amount
$24 800 000  0.04 = $992 000
c ($297 000  90)  15 days = $220 per day
($220  15)  96 = $316 800
d ($8 160 000 – 6 000 000)  54 000 = $40 per order
($6 000 000  12) + ($40  5 800) = $732 000
e Monthly fixed expense
[$13 500 000 – ($6  2 000 000)]  12 = $125 000
$125 000 + ($6  310 000) = $1 985 000
2
SoftGro should benefit from the use of flexible budgeting in this situation, because a flexible budget would
allow Mark Fletcher to compare SoftGro’s actual selling expenses with budgeted selling expenses (based
on the current month’s actual activity). 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.
Using an activity-based flexible budget brings advantages over the use of traditional budgets, as
follows:

it will not assume that costs are either fixed or vary directly with just one, unit based, cost driver

being based on specific activity drivers that represent specific cost behaviours the activity-based
flexible budget will give more accurate budget targets

it is easier to link targets and variances to responsible managers.
However, activity-based flexible budgets provide challenges and expenses as there are so many
combinations of different activity levels, giving an enormous number of flexible budgets that could
be drawn up from the different combinations of changed data.
PROBLEM 11.40 Complete analysis of cost variances; review of Chapters 10and 11:
manufacturer
2
1
Following is the complete analysis of cost variances as possible as per the given information:
=
=
=
PQ(AP – SP)
30 000 ($2.20* – $2.00)
$6 000 Unfavourable
=
=
=
SP(AQ – SQ)
$2.00 (30 000 – 29 000*)
$2 000 Unfavourable
=
=
=
AH(AR – SR)
8 000 ($18.90* – $18.00)
$7 200 Unfavourable
=
=
=
SR(AH – SH)
$18.00 (8 000 – 7 250*)
$13 500 Unfavourable
=
actual variable overhead – (AH  SVR)
=
=
$11 000 – (8 000)($1.50)
$1 000 Favourable
=
SVR(AH – SH)
=
=
$1.50 (8 000 – 7 250)
$1 125 Unfavourable
=
actual fixed overhead – budgeted fixed
overhead
$26 000 – $25 000*
$1 000 Unfavourable
Direct material price variance
* $2.20 = $66 000 30 000
Direct material quantity variance
* 29 000 kg = 1 450  20 kg per unit
Direct labour rate variance
* $18.90 = $151 200  8 000
Direct labour efficiency variance
* 7 250 hours = 1 450 units  5 hours per unit
Variable overhead spending
variance
Variable overhead efficiency
variance
Fixed overhead budget variance
* $25 000 = $300 000 (annual)  12 months
Fixed overhead volume variance
=
=
=
=
=
budgeted fixed overhead – applied fixed
overhead
$25 000 – $21 750*
$3 250 Unfavourable
* $21 750 = 1 450 units  $15.00 per unit
2
Following is the above solution in Excel spreadsheet format:
3
Optional Questions
EXERCISE 11.23 Diagram of overhead variances: manufacturer
1
Following is the computation of various variable and fixed overhead variances as per the given
information:
Variable overhead spending and efficiency variances
______________________________________________________________________________________
Flexible budget for variable
Flexible budget for variable
overhead
overhead
(based on actual direct labour
(based on standard direct labour
Actual variable cost
hours)
hours allowed for actual output)
Actual
hours
(AH)
50 000
hours
´
Actual
rate
(AVR)
Actual
hours
(AH)
´
$6.40
per hour*
50 000
hours
$320 000
´
Standard
rate
(SVR)
Standard
hours
allowed
(SH)
´
Standard
rate
(SVR)
´
$6.00
per hour
40 000
hours
´
$6.00
per hour
$300 000
$20 000 Unfavourable
variable overhead spending
variance
$240 000
$60 000 Unfavourable
variable overhead efficiency
variance
______________________________________________________________________________________
* Actual variable overhead rate (AVR) =
actual variable overhead cost
= $320 000 / 50 000 = $6.40 per hour
actual hours
Fixed overhead variances:
Fixed overhead budget and volume variances
______________________________________________________________________________________
(1)
(2)
(3)
Actual fixed overhead
Budgeted fixed overhead
Fixed overhead applied to work in
process
Standard
Standard
hours
fixed
´
allowed
overhead
4
40 000
hours
$97 000
$3 000 Favourable fixed
overhead budget variance
´
rate
$2.00
per hour*
$100 000
$80 000
$20 000 Unfavourable fixed
overhead volume variance
_________________________________________________________________________________
_____
* Fixed overhead rate = $2.00 per hour = $ 100 000 / (25 000 × 2 hours per unit)
5
2
Following is the diagram showing determination of fixed overhead volume variance:
EXERCISE 11.24 Reconstruct missing information from partial data: manufacturer
$9.00a
3b
$32 500c
12 000d
$8.00
4 hours
$25 000
12 500
$36 000U
$96 000F
$7 500U
$1 000 e U
$356 500
$409 000f
$425 000g
$408 000
Actual variable overhead rate per machine hour
Actual machine hours per unit of output
Actual fixed overhead
Actual production in units
Standard variable overhead rate per machine hour
Standard machine hours per unit of output
Budgeted fixed overhead
Budgeted production in units
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
Explanatory notes:
a
Total actual overhead
$356 500
X
Variable overhead spending variance
=
=
=
=
actual variable overhead + actual fixed overhead
X + $32 500
$324 000 = actual variable overhead
actual variable overhead – (AH  SR)
6
$36 000 U
$8AH
AH
Actual variable overhead
rate per machine hour
=
=
=
=
=
b
c
Actual machine hours per unit of output
Fixed overhead budget variance
$7 500 U
X
d
Fixed overhead rate
=
$324 000 – (AH  $8)
$288 000
36 000
actual variable overhead
actual hours
$324 000
= $9 per hour
36 000
total actual machine hours
actual production
=
36 000 hours
= 3 hours per unit
12 000 units
=
=
=
actual fixed overhead – budgeted fixed overhead
X – $25 000
$32 500 = actual fixed overhead
=
=
budgeted fixed overhead
budgeted machine hours
$25 000
(12 500 units)(4 hours per unit )
=
$0.50 per hour
Total standard overhead rate
$8.50
Total applied overhead
=
=
=
$408 000
X
=
=
standard variable overhead rate + fixed overhead rate
$8.00 + $.50
total standard hours allowed for actual output  total
standard overhead rate
X $8.50
48 000 = total standard hours allowed for actual
output
Actual production
=
=
e
Fixed overhead volume variance
f
Total budgeted overhead (flexible budget)
g
Total budgeted overhead (static budget)
=
=
=
=
=
=
=
=
=
total standard hours
standard hours per unit
48 000
= 12 000 units
4
budgeted fixed overhead – applied fixed overhead
$25 000 – ($0.50)(12 000  4)
$1000 U
budgeted fixed overhead + (SVR  SH)
$25 000 + ($8.00  12 000 units  4 hrs per unit)
$409 000
æ total standard öæ budgeted öæ standard hoursö
ç
֍
֍
÷
è overhead rate øè production øè per unit ø
($8.50)(12 500)(4)
$425 000
PROBLEM 11.32 Straightforward overhead variances: manufacturer
Following are the computation of required variances as per the given information:
Variable overhead spending and efficiency variances
_________________________________________________________________________________
_____
(1)
(2)
(3)
(4)
Actual variable
Flexible budget for
Flexible budget for
Variable overhead applied
overhead
variable overhead
variable overhead
to work in process
(based on actual direct
(based on standard direct
labour hours)
labour hours allowed for
actual output)
7
Actual
hours
(AH)
165 000
hours
´
Actual
rate
(AVR)
Actual
hours
(AH)
´
$9.30
per hour*
165 000
hours
$1 534 500
´
Standard
rate
(SVR)
Standard
hours
allowed
(SH)
´
$9.00
per hour*
160 000
hours
$1 485 000
$49 500 Unfavourable
variable overhead
spending variance
´
Standard
rate
(SVR)
Standard
hours
allowed
(SH)
´
Standard
rate
(SVR)
´
$9.00
per hour
160 000
hours
´
$9.00
per hour
$1 440 000
$45 000 Unfavourable
variable overhead efficiency
variance
$1 440 000
No difference
* Actual variable overhead rate (AVR)  actual variable overhead cost  $1 534 500  $9.30
actual hours
165 000
† Column (4) is not used to compute the variances. It is included to point out that the flexible budget amount for variable
overhead, $1 440 000, is the amount that will be applied to work in process inventory for product costing purposes.
Following are the computation of required variances as per the given information:
Fixed overhead budget and volume variances
_________________________________________________________________________________
_____
(1)
(2)
(3)
Actual fixed overhead
Budgeted fixed overhead
Fixed overhead applied to WIP
Standard
Standard
fixed
hours
´
overhead
allowed
rate
160 000
$15.00
´
hours
per hour*
$2 580 000
$2 700 000*
$2 400 000
$120 000 Favourable fixed
$300 000 Unfavourable
overhead budget variance
_________________________________________________________________________________
_____
* Budgeted fixed overhead = 180 000 hours ´ $15 per hour.
PROBLEM 11.38 Finding missing data; overhead accounting
Following is the computation of missing amounts for Company A:
2.
3.
6.
9.
10.
11.
12.
13.
16.
19.
20.
$7.00a per hour
$9.50b per hour
$98 050c
$2 500 Ud
$3 000 Fe
($42 000) (Negative)f (The negative sign means that applied fixed overhead exceeded budgeted
fixed overhead.)
$8 050 underappliedg
$45 000 overappliedh
6 000 unitsi
$90 000j
$252 000k
8
Explanatory notes for Company A:
a
Budgeted direct labour hours
Fixed overhead rate
=
=
budgeted production  standard direct labour hours per unit
5 000 units  6 hours = 30 000 hours
=
budgeted fixed overhead
budgeted direct - labour hours
=
$210 000
 $7 per hour
30 000 hours
b Total standard overhead rate
=
=
variable overhead rate + fixed overhead rate
$2.50 + $7.00 = $9.50
c Variable overhead spending variance
=
=
=
actual variable overhead – (actual direct labour hours 
standard variable overhead rate)
actual variable overhead – (37 000  $2.50)
$98 050
=
=
=
SVR(AH – SH)
$2.50(37 000 – 36 000)
$2 500 U
e Fixed overhead budget variance
=
=
=
actual fixed overhead – budgeted fixed overhead
$207 000 – $210 000
$3 000 F
f Fixed overhead volume variance
=
=
=
budgeted fixed overhead – applied fixed overhead
$210 000 – (36 000  $7)
$42 000 (negative sign)
g Underapplied variable overhead
=
=
=
actual variable overhead – applied variable overhead
$98 050 – (36 000  $2.50)
$8 050 underapplied
$5 550 U
Actual variable overhead
d
Variable overhead efficiency variance
h Overapplied fixed overhead
=
=
=
I Actual production
=
=
´
actual fixed overhead – applied fixed overhead
$207 000 – (36 000  $7)
$45 000 overapplied
standard allowed direct - labour hours
standard hours per unit
36 000
 6 000 units
6
j Applied variable overhead
=
=
=
SH  SVR
36 000  $2.50
$90 000
k Applied fixed overhead
=
=
=
SH  fixed overhead rate
36 000  $7
$252 000
Following is the computation of missing amounts for Company B:
1.
2.
4.
5.
6.
7.
12.
13.
14.
16.
$4.00a per hour
$9.00b per hour
$6 400c
$18 000d
$8 000e
$19 080f
$1 600 underappliedg
$4 680 underappliedh
1 000 unitsi
800 unitsj
9
19.
20.
$6 400k
$14 400l
Explanatory notes for Company B:
a To find the standard variable overhead rate:
Variable overhead efficiency variance =
$400 F =
SVR =
SVR(AH – SH)
SVR(1 500 – 1 600)
$4
b Standard fixed-overhead rate
=
=
total standard overhead rate – SVR
$13 – $4 = $9
c Flexible budget for variable overhead
=
=
SH  SVR
1 600  $4 = $6 400
d Flexible budget for fixed overhead
=
=
=
applied fixed overhead + volume variance
(1 600  $9) + $3 600
$18 000
e Actual variable overhead
=
=
=
applied variable overhead + spending variance + efficiency variance
(1 600  $4) + $2 000 U – $400 F
$8 000
f Actual fixed overhead
=
=
=
=
=
=
budgeted fixed overhead + fixed overhead budget variance
$18 000 + $1 080 U
$19 080
spending variance + efficiency variance
$2 000 U* + $400 F*
$1 600 underapplied
g Underapplied variable overhead
* Note that the signs cancel when adding variances of different signs.
h Underapplied fixed overhead
=
=
=
fixed overhead budget variance + volume variance
$1 080 U + $3 600 (positive)
$4 680 underapplied
I Budgeted direct-labour hours
=
budgeted fixed overhead
fixed - overhead rate
=
Budgeted production
$18 000
$9
=
2 000 hours
=
budgeted direct - labour hours
standard hours per unit
=
j Actual production
=
standard allowed hours
standard hours per unit
=
k Applied variable overhead
=
=
SH  SVR = 1 600  $4
$6 400
fixed overhead
=
=
=
SH  standard fixed overhead rate
1 600  $9
$14 400
10