EXHIBIT 8-7
)Columnar Piesenlalion
\ 01 Fixed Selup
'Overhead Variance
> Analysis: LycoBrass
Works for 2007'
Actual Costs
Incurred
(I)
Flexible Budget:
Same Budgeted
lump Sum
las in Static Budget)
Regardless 01
Output level
Allocated:
Budgeted Input Ouantity
Allowed lor
Actual Output
x Budgeted Rate
(2)
(3)
S220,000
5216,000
t
Level 3
t
$4,000 U
Spending variance
t
Level 2
(1,008b batches x 6 hours/batch x $30/hourl
(6,048 hours x $30/hourl
$181,440
Production-volume
$4,000 U
Flexible-budget variance
t
$34,560 U
variance
t
aF = favorable effect on operating income; U = unfavorable effect on operating income.
bl,008 batches:: 151,200 units -:- 150 units per batch.
~,
Study
Tip: To review
~importanttermsandconcepts in Chapters 7 and 8, work
the crossword puzzle (Student
Guide, p. 99). The solution is on
p.l04.
During
2007,
Lyco planned
to produce
180,000
units
duced 151,200 units. The unfavorable production-volume
of Elegance
but actually
pro-
variance measures the amount
of extra fixed setup costs that Lyco incurred for setup capacity it had but did not use. One
interpretation
is that the unfavorable
$34,560
production-volume
variance represents
inefficient use of setup capacity. However, Lyco may have earned higher operating income
by selling
151,200
units at a higher
price than
180,000
units
at a lower price_ As a result,
the production-volume variance should be interpreted cautiously because it does not consider effects on selling
prices and operating
income.
PROBLEM FOR SELF-STUDY
Maria Lopez is the newly appointed president of Laser Products. She is examining the May 2007
results for the Aerospace Products Division. This division manufactures wing parts for satellites.
Lopez's current concern is with manufacturing overhead costs at the Aerospace Products Division.
Both variable and fixed manufacturing overhead costs are allocated to the wing parts on the basis
of laser-cutting-hours. The follov.'ing budget information is available:
Budgeted variable manufacturing overhead rate
Budgeted fixed manufacturing overhead rate
Budgeted laser-cutting time per wing part
Budgeted production and sales for May 2007
Budgeted lixed manufacturing overhead costs for May 2007
S200 per hour
S240 per hour
1.5 hours
5,000 wing parts
51,800,000
Actual results for J\t1ay2007 are:
Wing parts produced and sold
Laser-cutting-hours used
Variable manufacturing overhead costs
Fixed manufacturing overhead costs
4,800 units
8,400 hours
$1,478,400
$1,832,200
Required
1. Compute the spending variance and the efficiency variance for variable manufacturing overhead.
2. Compute the spending variance and the production-volume
overhead.
variance for fixed manufacturing
3. Give t\VOexplanations for each of the variances calculated in requirements 1 and 2.
SOLUTION
280
1. and 2. See Exhibit 8-8.
EXHIBIT
8·8
IZ)
Flexible Budget:
Budgeted Input Uuantity
Allowed for
Actual Output
x Budgeted Rate
13)
Allocated:
Budgeted Input Uuantity
Allowed for
Actual Output
x Budgeted Rate
(4)
18,400hrs. x $176/hr.1
SI,478,400
(8,400 hrs. x SZOO/hr.)
$1,680,000
(1.5 hrs.!unit x 4,800 units x $200/hr.)
(7,200 hrs. x S200/hr.)
$1,440,000
11.5hrs.!unit x 4,800 units x S200/hr.)
(7,200 hrs. x $200/hr.1
$1,440,000
t
t
t
t
Actual Costs
Incurred:
Actual Input Uuantity
x Actual Rate
(I)
Actual Input Uuantity
x Budgeted Rate
$201,600 F
Spending variance
t
$240,000 U
Efficiency variance
t
$38,400 U
Flexible·budget variance
t
t
t
Never a variance
Never a variance
$38,400 U
Underallocated variable overhead
(Total variable overhead variance)
PANELB: Fixed Manufacturing
Actual Cnsts
Incurred
(1)
Overhead
Same Budgeted
lump Sum
(as in Static Budget)
Regardless of
Output level
(2)
$1,832,200
t
t
t
Flexible Budget:
Same Budgeted lump Sum
(as in Static Budgetl
Regardless of
Output level
(3)
$1,800,000
$1,800,000
t
t
t
S32,200 U
Spending variance
Never a variance
$32,200 U
Flexible-budget variance
Allocated:
Budgeted Input Uuantity
Allowed lor
Actual Output
x Budgeted Rate
(4)
(1.5 hrs.!unit x 4,800 units x $240/hr.)
(7,200 hrs. x $240/hr.)
$1,728,000
S72,OOOU
Production-volume
variance
$72,000 U
Production-volume
variance
$104,200 U
Underallocated fixed overhead
(Total fixed overhead variance)
t
t
t
IF = favorable effect on operating income; U = unfavorable effect on operating income.
Source: From kThe Case for Management Accounting~ by Paul Sherman. Used with permission from STRATEGIC FINANCE, October 2003, published by the
Institute of Management Accountants, Montvale, NJ, www.imanet.org.
3. iI. Variable manufacturing overhead spending variance, 520l,600 E One possible reason for this
variance is that actual prices of individual items included in variable overhead (stich as cut·
ting fluids) are lower than budgeted prices. A second possible reason is that the percentage
increase in the actual quantity usage of individual items in the variable overhead cost pool
is less than the percentage increase in laser-cutting-hours compared to the flexible budget.
b. Variable manufacturing overhead efficiency variance, $240,000 U. One possible reason for
this variance is inadequate maintenance of laser machines, causing them to take more
laser-cutting time per wing part. A second possible reason is use of undermotivated, inexperienced, or underskilled workers with the laser-cutting machines, resulting in more lasercuning time per wing part.
c. Fixed manufacturing overhead spending variance, $32,200 U. One possible reason for this
variance is that the actual prices of individual items in the fixed-cost pool unexpectedly
increased from the prices budgeted (mch as an unexpected increase in machine leasing
costs). A second possible reason is misclassification of items as fixed that are in fact variable.
d. Production-volume variance, $72,000 U. Actual production of wing parts is 4,800 units,
compared with 5,000 units budgeted. One possible reason for this variance is demand fac·
tOfS, such as a decline in an aerospace program that led to a decline in demand for aircraft
parts. A second possible reason is supply factors, such as a production
stoppage due to
labor problems or machine breakdowns.
I
DECISION
POINTS
The following Question·and-answer
format summarizes the chapter's learning objectives. Each decision
presents a key Question related to a learning objective. The guidelines are the answer to that question.
Decision
Guidelines
1. How do managers plan variable
overhead costs and fixed
Planning of both variable and fixed overhead costs involves undertaking only activities that
add value and then being efficient in that undertaking. The key difference is that for variablecost planning, ongoing decisions during the budget period playa much larger role; whereas
for fixed-cost planning, most key decisions are made before the start of the period.
overhead costs?
'"w
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U
282
2. Why do companies use
standard costing?
Standard costing traces direct costs to a cost object by multiplying standard prices or
rates times standard inputs allowed for actual output produced and allocates overhead
costs on the basis of standard overhead rates times standard quantities of the allocation
bases allowed for actual output produced. The standard costs of products are known
at the start of the period. To manage costs, managers compare actual costs to standard
costs.
3. What variances can be calculated
for variable overhead?
When the flexible budget for variable overhead is developed, an overhead efficiency
variance and an overhead spending variance can be computed. The variable overhead
efficiency variance focuses on the difference between the actual quantity of the cost·
allocation base used relative to the budgeted quantity of the cost-allocation base. The variable
overhead spending variance focuses on the difference between the actual cost per unit of the
cost-allocation base relative to the budgeted cost per unit of the cost-allocation base.
4. Is the variable overhead efficiency
variance similar to the efficiency
variance for a direct-cost item?
These two efficiency variances are not similar. The variable overhead efficiency variance
indicates whether more or less of the cost-allocation base per output unit was used than
was included in the flexible budget. The efficiency variance for a direct-cost item indicates
whether more or less of the input per unit of output of that direct-cost item was used than
was included in the flexible budget
5. How is a budgeted fixed overhead
cost rate calculated?
The budgeted fixed overhead cost rate is calculated by dividing the budgeted fixed
overhead costs by the denominator level of the cost-allocation base.
6. How should managers interpret the
production-volume variance?
Managers should interpret cautiously the production~volume variance as a measure of the
economic cost of unused capacity. One caution: management may have maintained some
extra capacity to meet uncertain demand surges that are important to satisfy. Another
caution: the production-volume variance focuses only on fixed overhead costs. The
production-volume variance does not take into account any decreases in the selling
price of output necessary to spur extra demand that would, in turn, make use of any
idle capacity.
7. What is the most detailed way for
a company to reconcile actual
overhead incurred with the amount
allocated during a period?
A 4·variance analysis presents spending and efficiency variances for variable overhead
costs and spending and production-volume variances forfixed overhead costs. By analyzing
these four variances together, managers can reconcile the actual overhead costs with the
amount of overhead allocated to output produced during a period.
8. Can the flexible-budget variance
approach for analyzing overhead costs
be used in activity-based costing?
Yes, flexible budgets in ABC systems give insight into why actual overhead activity costs
differ from budgeted overhead activity costs. Using output and input measures for an
activity, a 4-variance analysis can be conducted.
TERMS
TO
LEARN
Thechapter and the Glossary at the end of the book contain definitions of
denominator level (p. 264)
output-level overhead variance
denominator-levelvariance Ip. 2661
fixed overhead flexible-budget
variance
(p.2651
fixedoverhead spending variance
(p.2651
(p.2661
production-denominator
level (p. 264)
production-volume variance (p. 2661
standard costing (p. 2571
total-overhead variance (p. 2731
variable overhead efficiency variance
Ip.2601
variable overhead flexible-budget
variance (p. 2591
variable overhead spending variance
Ip.2611
Prentice Hall Grade Assist (PHGA)
Your professor may ask you to complete selected exercises and problems in Prentice Hall
PHGrad'A~ist
Grade Assist IPHGAI. PHGAis an online tool that can help you master the chapter's topics.
It provides you with multiple variations of exercises and problems designated by the PHGA
icon. You can rework these exercises and problems-each time with new data-as many
times as you need. You also receive immediate feedback and grading.
ASSIGNMENT
MATERIAL
Questions
8-1 How do managers plan for variable overhead costs?
8-2 How does the planning of fixed overhead costs differ from the planning of variable overhead
costs?
8-3 How does standard costing differ from actual costing?
8-4 What are the steps in developing a budgeted variable overhead cost-allocation rate?
8-5 The spending variance for variable manufacturing overhead is affected by several factors.
Explain.
8-6 Assume variable manufacturing overhead is allocated using machine-hours. Give three possible reasons for a favorable variable overhead efficiency variance.
8-7
Describe the difference between a direct materials
facturing overhead efficiency variance.
efficiency
variance
and a variable
manu-
~
.-•
.-
8-8 What are the steps in developing a budgeted fixed overhead rate?
8-9 Why is the flexible-budget variance the same amount as the spending variance for fixed manufacturing overhead?
iT
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"'~
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0-
8·10 Explain how the analysis of fixed manufacturing overhead costs differs for lal planning and
control on the one hand and (bl inventory costing for financial reporting on the other hand.
8·11 Provide one caveat that will affect whether a production-volume variance is a good measure
of the economic cost of unused capacity.
8·12 "The production-volume variance should always be written off to Cost of Goods Sold." Do you
agree? Explain.
8-13 What are the variances in a 4-variance analysis?
8-14 "Overhead variances should be viewed as interdependent rather than independent." Give an
example.
0
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~
~
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"
g,
if
"
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8-15 Describe how flexible-budget variance analysis can be used in the control of costs of activity
~
'!'
areas.
,
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0-
Exercises
:r
,
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D
8-16 Variable manufacturing
overhead, variance analysis. Esquire Clothing is a manufacturer of
designersuits. The cost of each suit is the sum of three variable costs (direct material costs, direct manufacturinglabor costs, and manufacturing overhead costs) and one fixed-cost category (manufacturing overheadcosts). Variable manufacturing overhead cost is allocated to each suit on the basis of budgeted direct
manufacturing labor-hours per suit. For June 2007, each suit is budgeted to take four labor-hours. Budgeted
variablemanufacturing overhead cost per labor-hour is $12. The budgeted number of suits to be manufac-
turedinJune 2007is 1,040.
D
~
PIl Clade Assisl
"a
D
2..
283
------Required
Actual variable manufacturing costs in June 2007 were $52,164 for 1,080 suits started and completed. There
were no beginning or ending inventories of suits. Actual direct manufacturing labor-hours for June were 4,536.
1. Compute the flexible-budget
manufacturing overhead.
2. Comment on the results.
variance, the spending variance, and the efficiency variance far variable
8-17
Fixed manufacturing overhead, variance analvsis (continuation of 8-161. Esquire Clothing allocates fixed manufacturing overhead to each suit using budgeted direct manufacturing labor-hours per suit
Data pertaining to fixed manufacturing overhead costs for June 2007 are budgeted, $62,400, and actual,
------~
Required
$63,916.
1. Compute the spending variance tor fixed manufacturing overhead. Comment on the results.
2. Compute the production-volume variance for June 2007. What inferences can Esquire Clothing draw
from this variance?
8-18 Variable manufacturing overhead variance analysis, The French Bread Company bakes baguettes
for distribution to upscale grocery stores. The company has two direct-cost categories: direct materials
and direct manufacturing labor. Variable manufacturing overhead is allocated to products on the basis of
standard direct manufacturing labor-hours. Following is some budget data for the French Bread Company:
Direct manufacturing labor use
Variable manufacturing overhead
0.02 hours per baguette
$10.00 per direct manufacturing
labor-hour
The French Bread Company provides the following additional data for the year ended December 31, 2007:
Planned Ibudgeted) output
Actual production
Direct manufacturing labor
Actual variable manufacturing
RequIred
3,200,000 baguettes
2,800,000 baguettes
50AOO hours
overhead
S680,400
1. What is the denominator level used for allocating variable manufacturing overhead? (That is, for how
many direct manufacturing labor-hours is French Bread budgeting?)
2. Prepare a variance analysis of variable manufacturing overhead. Use Exhibit 8-5 (p. 272) for reference.
3. Discuss the variances you have calculated and give possible explanations for them.
8-19 Fixed manufacturing overhead variance analvsis. The French Bread Company bakes baguettes for
distribution to upscale grocery stores. The company has two direct-cost categories: direct materials and
direct manufacturing labor. Fixed manufacturing overhead is allocated to products on the basis of standard
direct manufacturing labor·hours. Following is some budget data for the French Bread Company:
Direct manufacturing labor use
Fixed manufacturing overhead
0.02 hours per baguette
$4.00 per direct labor-hour
The French Bread Company provides the following additional data for the year ended December 31, 2007:
Planned Ibudgeted) output
Actual production
Actual direct manufacturing labor
Actual fixed manufacturing overhead
RequIred
3,200,000 baguettes
2,800,000 baguettes
50,400 hours
$272,000
1. Prepare a variance analysis of fixed manufacturing overhead cost. Use Exhibit 8-5 (p. 272) as a guide.
2. Is fixed overhead underallocated or overallocated? By what amount?
3. Comment on your results. Discuss the variances and explain what may be driving them.
8-20 Manufacturing overhead, variance analvsis. Zircon, Inc., assembles its CardioX product at its
Scottsdale plant. Fixed and variable manufacturing overheads are allocated to each CardioX unit using budgeted assembly-hours. Budgeted assembly time is two hours per unit. The following table shows the budgeted amounts and actual results related to overhead for March 2007.
A
00
'"
w
>--
1
2
3
4
5
B
Actual
Results
5,400
10,280
Zircon (March 2007)
Units of CardioX assembled and sold
Houre of assembly lime
Variable manufacturing overhead cosl per hour of assembly lime
Variable manufacturing overhead costs
$310,500
6 Fixed manufacturing overhead costs
$514,000
C
Static
B
t
5,000
$ 30.00
$480,000
Q,
«
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v
284
If you want to use Excel to solve this exercise, go to the Excel Lab at www.prenhall.com/horngren/cost12e
and download the template for Exercise 8-20.
1. Prepare an analysis of all variable manufacturing overhead and fixed manufacturing overhead variances using the columnar approach in Exhibit 8-5(p. 272).
2. Prepare journal entries for Zircon's March 2007 variable and fixed manufacturing overhead costs and
variances; write off these variances to cost of goods sold for the quarter ending March 2007.
3. How does the planning and control of variable manufacturing overhead costs differ from the planning
and control of fixed manufacturing overhead costs?
8-21 4-variance analysis, fill in the blanks. Use the following manufacturing
following blanks:
Actual costs incurred
Costs allocated to products
Flexible budget: Budgeted input allowed for
actual output produced x budgeted rate
Actual input x budgeted rate
Re••ulred
overhead data to fill in the
Variable
Fixed
$11,900
9,000
$6,000
4,500
9,000
10,000
5,000
5,000
PHGlidtAssin
Use Ffor favora ble and U for unfavorable:
Variable
Fixed
111 Spending variance
(2) Efficiency variance
(3) Production-volume variance
141 Flexible-budget variance
151 Underallocated {overallocatedl
manufacturing overhead
8-22 Straightforward 4-variance overhead analysis. The Lopez Company uses standard costing in its
manufacturing plant for auto parts. The standard cost of a particular auto part, based on a denominator level
of4,000output units per year, included 6 machine-hours of variable manufacturing overhead at $8 per hour
and6 machine-hours of fixed manufacturing overhead at $15 per hour. Actual output produced was 4,400
units.Variable manufacturing overhead incurred was $245,000. Fixed manufacturing overhead incurred was
1373,000.Actual machine-hours were 28,400.
1. Prepare an analysis of all variable manufacturing overhead and fixed manufacturing overhead variances, using the 4-variance analysis in Exhibit 8-5Ip. 2721.
2. Prepare journal entries using the 4-variance analysis.
3. Describe how individual variable manufacturing overhead items are controlled from day to day. Also,
describe how individual fixed manufacturing overhead items are controlled.
PHCiradeAssisl
Required
8-23 Straightforward
coverage of manufacturing overhead, standard-costing system. The Singapore
divisionof a Canadian telecommunications company uses standard costing for its machine-paced production of telephone equipment. Data regarding production during June are as follows:
Variable manufacturing overhead costs incurred
Variable manufacturing overhead cost rate
Fixed manufacturing overhead costs incurred
Fixed manufacturing overhead budgeted
Denominator level in machine-hours
Standard machine-hour allowed per unit of output
Units of output
Actual machine-hours used
Ending work-in-process inventory
$155,100
$12 per standard machine-hour
$401,000
$390,000
13,000
0.30
41,000
13,300
o
1. Prepare an analysis of all manufacturing overhead variances. Use the 4-variance analysis framework
illustrated in Exhibit 8-5 (p. 272).
2. Prepare journal entries for manufacturing overheads and their variances.
3. Describe how individual variable manufacturing overhead items are controlled from day to day. Also,
describe how individual fixed manufacturing overhead items are controlled.
8-24
Overhead variances, service sector. Meals on Wheels (MOW) operates a meal home-delivery service. It has agreements with 20 restaurants to pick up and deliver meals to customers who phone or fax
ordersto MOW. MOW allocates variable and fixed overhead costs on the basis of delivery time. MOW's
owner,Josh Carter, obtains the following information for May 2007 overhead costs:
Re••ulred
,
Q
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,
Q
Q
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•
"-n
"-£.
Q
285
A
Meals on Wheels (Ma 2001)
Output units (numberofdelMries)
HoUIS per delM>y
HoUIS of delM>y time
5,720
Variable overhead cost p.r l10ur of delM>y time
$ 150
Variable overhead costs
$10,296
Fixed overhead costs
$38,600 $35,000
1
2
3
4
5
6
7
If you want to use Excel to solve this exercise, go to the Excel Lab at www.prenhall.com/horngren/cost12e
------•••• ul•• d
and download the template for Exercise 8-24.
1. Compute spending and efficiency variances for MOW's variable overhead in May 2007.
2. Compute the spending variance and production-volume variance for MOW's fixed overhead in May 2007.
3. Comment on MOW's overhead variances and suggest how Josh Carter might manage MOW's variable
overhead differently from its fixed overhead costs.
8·25
Total overhead, J·variance analysis. Wright-Patterson
Air Force Base has an extensive repairfacil-
ity for jet engines. It developed standard costing and flexible budgets to account for this activity. Budgeted
variable overhead at a level of 8,000 standard monthly direct labor-hours was 864,000; budgeted total overhead at 10,000 standard direct labor-hours was $197,600. The standard cost allocated to repair output
------•• qul•• d
included a total overhead rate of 120% of standard direct labor costs. Total overhead incurred for October
was $249,000. Direct labor costs incurred were $202,440. The direct labor price variance was $9,640 unfa·
vorable. The direct labor flexible-budget variance was $14,440 unfavorable. The standard labor price was
$16 per hour. The production-volume variance was $14,000, favorable.
1. Compute the direct labor efficiency variance and the spending, efficiency, and production-volume
variances for overhead. Also, compute the denominator level.
2. Describe how individual variable manufacturing overhead items are controlled from day to day. Also,
describe how individual fixed manufacturing overhead items are controlled.
8-26 Overhead variances,
PHGradtAssil1
------•• qulr.d
missing information. Blakely Printing budgets 12,000 machine-hours
ance for fixed overhead. For the pages actually printed, they should have used 9,900 machine-hours,
they actually used 10,000 machine-hours. Total overhead costs were 880,000.
1. In the columnar presentation below for June 2007's variable manufacturing
By how much'
Actual Input Guantity x Actual Rate
Actual Input Guantity x
Budgeted Rate
Flexible Budget:
Budgeted Input Guantity Allowed for
Actual Output x Budgeted Rate
(11
(2)
(l)
Actual Costs Incurred:
(b)
levell
level 2
•
•
lal
$250 F
Spending variance
(c)
•
•
•
(d)
Ie)
Flexible-budget variance
2. In the columnar presentation below for June 2007's fixed manufacturing
overhead variance analysis,
calculate lal through (e). Will fixed manufacturing overhead be over- or underallocated'
Actual Costs Incurred:
Allocated: Budgeted
Input Guantity Allowed for
Actual Output x Budgeted Rat.
II)
121
(l)
lal
level 2
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8-27
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u
286
~
PHG!adtAssist
By how much?
Flexible Budget:
Same Budgeted lump Sum
las in Static Budget)
Regardless of Output level
levell
"-••
but
overhead variance analy-
sis, calculate (al through (el. Will variable overhead be over- or underallocated?
""
for June
2007. The budgeted variable overhead rate is $6 per machine-hour. At the end of June, its managers
reported a 5250 favorable spending variance for variable overhead and a $1,050 unfavorable spending vari-
•
•
(bl
81,050 U
Spending variance
lei
Flexible-budget variance
9,900 hours x (cl
•
Id)
•
Production volume variance
•
Identifying favorable and unfavorable variances. Consider a company that uses standard costing
and allocates variable and fixed manufacturing overhead based on machine-hours. For each independent
scenario given, indicate whether each of the variances will be favorable or unfavorable or, in case of insufficient information, indicate "cannot be determined."
month of sandal manufacturing for the plant lall amounts in U.S.
dollars). Overhead is allocated based on machine·hours.
Actual
Results
Output units (pairs of sandals)
150,000
Machine-hours
67,500
Machine-hours per output unit
0.45
Variable manufacturing
$1,950,000
overhead costs
Variable manufacturing
$2889
overhead cost per machine-hour
Variable manufacturing
$13.00
overhead cost per output unit
FlexibleBudget Amount
150,000
60,000
0.40
$1,800,000
$30.00
$12.00
The plant manager's performance bonus is tied, in part, to his or
her control of manufacturing overhead costs. There is an unfavorable variable overhead flexible-budget variance of $150,075
for this month's production of 150,000 pairs of sandals. The manager is interested in finding out what happened and why.
QUESTIONS
1. Compute the spending variance and the efficiency vari·
ance for variable manufacturing overhead.
2. What do the spending and efficiency variances mean?
What are possible causes?
3. What explanationlsl should the plant manager give for the
unfavorable variable overhead flexible-budget variance
this month?
293
Collaborative
Learning Probtem
8-41 Overhead variances. ethics. New Mexico Company uses standard costing. The company prepared its static budget for 2007 at 1,000,000 machine-hours for the year. Total budgeted overhead cost
is $12,500,000. The variable overhead rate is $10 per machine-hour 1$20 per unit). Actual results for 2007
follow:
Machine-hours
Output
Variable overhead
Fixed overhead spending variance
Required
960,000 hours
498,000 units
$10,080,000
$600,000 U
1. Compute for the fixed overhead
a. Budgeted amount
b. Budgeted cost per machine-hour
c. Actual cost
d. Production-volume
variance
2. Compute the variable overhead spending variance and the variable overhead efficiency variance.
3. Jerry Remich, the controller, prepares the variance analysis. It is common knowledge in the company
that he and Ron Monroe, the production manager, are not on the best at terms. In a recent executive
committee meeting, Monroe had complained about the lack of usefulness of the accounting reports he
receives. To get back at him, Remich manipulated the actual fixed overhead amount by assigning a
greater-than-normal share of allocated costs to the production area. And, he decided to depreciate all
of the newly acquired production equipment using the double-declining-balance
method rather than
the straight-line method, contrary to the company practice. As a result, there was a sizable unfavorable fixed overhead spending variance. He boasted to one of his confidants, "I am just returning the
favor." Discuss Remich's actions and their ramifications.
Get Connected:
Cost Accounting
in the News
Go to www.orenhall.com/hornoren/cost12e
for additional online exercise(s~ that explore issues affecting
the accounting world today. These exercises offer you the opportunity to analyze and reflect on how cost
accounting helps managers to make better decisions and handle the challenges of strategic planning and
implementation.
CHAPTER
8
Case
TEVA SPORT SANDALS: Variable Overhead
00
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292
Teva Sport Sandals was founded in the 1980s by a seasoned
river guide, Mark Thatcher, who was tired of losing his flip-flop
sandals every time he took a raft ride down the Colorado River.
Thatcher knew firsthand how thong-style rubber sandals abandoned his feet when he was slogging through mud and water.
He figured a thong-style sandal with a heel strap on the back
would be the answer to keeping sandals on. His new sandal creation was called the "Teva" (which means "nature" in Hebrew),
and it was an immediate hit with water sports enthusiasts on
the river and with others nowhere near a river.
Today Teva sandals are manufactured under license by
Deckers Outdoor Corporation of Goleta, California. More than 60
styles for men, women, and children are available through retail
sports stores, catalogs, and department stores around the world.
The entire line of sandals also is sold direct to consumers through
Teva's Web site at www.teva.com. Sandal styles are updated by
designers at Deckers annually for each new selling season.
Variances
Those new sandal specifications are converted into sandal prototypes by the in-house Fabrication Department.
Upon approval of the prototype designs, detailed sandal specifications are given to Pat Devaney, Deckers' vice president of
production, development, and sourcing. Pat has responsibility for
negotiating the best possible prices for finished sandals with the
plant in China that manufactures the sandals. The specifications
are critical to the negotiations. Some of the direct materials are
sourced within China to help reduce the costs and prices of finished goods. Other direct materials must be imported. Either way,
Deckers and the manufacturing plant in China work together to
arrive at the best price. Once the specification and price negotiations are finished, the plant begins production according to the
schedule set during negotiations.
The managers at the manufacturing plant in China have
responsibility for controlling production costs. For illustration
purposes, let's assume the following data apply to a recent
Althe 40,000 budgeted direct manufacturing labor-hour level for August, budgeted direct manufacturing
labor is 5800,000, budgeted variable manufacturing overhead is $480,000, and budgeted fixed manufacturing
overhead is $640,000.
The following actual results are for August:
Direct materials price variance {based on purchases}
Direct materials efficiency variance
Direct manufacturing labor costs incurred
Variable manufacturing overhead flexible-budget variance
Variable manufacturing overhead efficiency variance
Fixed manufacturing overhead incurred
Fixed manufacturing overhead spending variance
$176,000 F
69,000 U
522,750
10,350 U
18,000 U
597,460
42,540 F
The standard cost per pound of direct materials is $11.50. The standard allowance is three pounds of direct
materials for each unit of product. During August, 30,000 units of product were produced. There was no
beginning inventory of direct materials. There was no beginning or ending work in process. In August, the
direct materials price variance was $1.10 per pound.
In July, labor unrest caused a major slowdown in the pace of production, resulting in an unfavorable
direct manufacturing labor efficiency variance of $45,000. There was no direct manufacturing labor price
variance. labor unrest persisted into August. Some workers quit. Their replacements had to be hired at
higher wage rates, which had to be extended to all workers. The actual average wage rate in August
exceeded the standard average wage rate by $0.50 per hour.
------------------------------
1. Compute the following for August:
a. Total pounds of direct materials purchased
b. Total number of pounds of excess direct materials used
c. Variable manufacturing overhead spending variance
d. Total number of actual direct manufacturing labor-hours used
e. Total number of standard direct manufacturing labor-hours allowed for the units produced
f. Production-volume variance
2. Describe how Mancusco's control of variable manufacturing overhead items differs from its control of
fixed manufacturing overhead items.
.equlre"
840 Review of Chapters 7 and 8, J-variance analysis. (CPA, adapted) The Seal Manufacturing
Company's costing system has two direct-cost categories: direct materials and direct manufacturing labor.
Manufacturing overhead (both variable and fixed) is allocated to products on the basis of standard direct
manufacturing labor-hours (OLH). Althe beginning of 2007, Seal adopted the following standards for its manufacturing costs:
Direct materials
Direct manufacturing labor
Manufacturing overhead:
Variable
Fixed
Standard manufacturing cost per output unit
Input
Cost per
Output Unit
3lbs. at $5 per lb.
5 hrs. atS15 per hr.
S 15.00
75.00
$6 per OLH
$8 per OLH
30.00
40.00
$160.00
The denominator level for total manufacturing overhead per month in 2007 is 40,000 direct manufacturinglabor-hours. Beal's flexible budget for January 2007 was based on this denominator level. The records
forJanuary indicated the following:
Direct materials purchased
Direct materials used
Direct manufacturing labor
Total actual manufacturing overhead
(variable and fixed)
Actual production
25,000 Ibs. at $5.20 per lb.
23,1001bs.
40,100 hrs. at$14.60 per hr.
$600,000
7,800 output units
1. Prepare a schedule of total standard manufacturing costs for the 7,800 output units in January 2007.
2. Forthe month of January 2007, compute the following variances, indicating whether each is favorable (F)
or unfavorable (U):
a. Direct materials price variance, based on purchases
b. Direct materials efficiency variance
c. Direct manufacturing labor price variance
d. Direct manufacturing labor efficiency variance
e. Total manufacturing overhead spending variance
I. Variable manufacturing overhead efficiency variance
g. Production-volume variance
.equlre"
291
Setup overhead costs consist of some costs that are variable and some that are fixed with respect to the
number of setup-hours. The following information pertains to 2007.
Static-Budget
Units of TGC produced and sold
Batch size (number of units per batchl
Setup-hours per batch
Variable overhead cost per setup-hour
Total fixed setup overhead costs
.equlred
Amounts
Aclual
Results
30,000
250
5
$25
$18,000
22,500
225
5.25
$24
$17,535
1. For variable setup overhead costs, compute the efficiency and spending variances. Comment on the results.
2. Forfixed setup overhead costs, compute the spending and the production-volume variances. Comment
on the results.
8-37 Activity·based costing, variance analysis. Asma Surgical Instruments, Inc., makes a special line of forceps, SFA,in batches. Asma randomly selects forceps from each SFAbatch for quality-testing purposes. Quality
testing costs are batch-level costs. A separate quality-testing section is responsible for SFA quality testing.
Quality-testing casts consist of same variable and some fixed costs in relation to quality-testing hours.
The following information is for 2007:
Static-Budget
Units of SFA produced and sold
Batch size (number of units per batch)
Testing-hours per batch
Variable overhead cost per testing-hour
Total fixed testing ovarhead costs
R.qul ••••
Amounts
Actua'
Results
21,000
500
5.5
540
$28,875
22,000
550
5.4
$42
527,216
1. For variable testing overhead costs, compute the efficiency and spending variances. Comment on the results.
2. For fixed testing overhead costs, compute the spending and the production·volume variances. Comment on the results.
8-38 Comprehensive overhead variance analvses. Happy Valley is a large wine-producing region in south·
ern Oregon. The Branda Brothers Wine Company, which has a huge following among wine connoisseurs, buys
select wines in bulk from the area's wineries and blends and bottles the wine for sale under its own label. Its
variable overhead costs (power, cleaning supplies, and the like} and fixed overhead costs (salaries of skilled
vintners involved in quality-control and building-related costs) are allocated on the basis of bottling machine·
hours. For the quarter ending September 30,2008, the Brando operation reports the following:
A
1
2
3
4
5
R.qulr."
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"-
"'"
J:
V
290
Production volUlll<(bottle,)
Bottling ",adune-MUIS
Variableoverhead
Fixed overhead
B
C
A<1ual
Result>
Slam
B
t
450,000
3,000
$153,000
$960,000
420,000
2,800
$140,000
$980,000
A total of 66,000 output units requiring 315,000 DLH was produced during May 2007. Manufacturing overhead (MDH) costs incurred for May amounted to $375,000. The actual costs, compared with the annual bud1
get and 12 of the annual budget, are as follows:
Annual
Manufacturing
Total
Amount
Variable MOH
Indirect manufacturing labor
Supplies
Fixed MOH
Supervision
Utilities
Depreciation
Total
Calculate the following
Overhead Budget
Per
Output
Per OlH
Unit
Input Unit
2007
Monthly
MOH Budget
May 2007
Actual MOH
Costs for
May 2007
$ 900,000
1,224,000
$1.25
1.70
$0.25
034
$ 75,000
102,000
S 75,000
111,000
648,000
540,000
1,008,000
$4,320,000
0.90
0.75
1.40
$6.00
0.18
0.15
028
$1.20
54,000
45,000
84,000
$360,000
51,000
54,000
84,000
$375,000
amounts for Nolton Products for May 2007:
Required
1. Total manufacturing overhead costs allocated
2. Variable manufacturing overhead spending variance
3. Fixed manufacturing overhead spending variance
4. Variable manufacturing overhead efficiency variance
5. Production-volume variance
Besure to identify each variance as favorable (F) or unfavorable
(U).
8-34 Overhead analvsis. sensitivity to denominator volume. Armstrong Corporation produces thermostats
andhas no inventories. Armstrong uses standard costing and allocates all overhead an the basis of machinehours.It budgets 0.30 of a machine-hour to manufacture each unit. The following information is for 2007:
A
B
Actual
1
.2..
Production and sales in units
.}, Machine-hours
_'L. Fixed manufacturing overhead
.1- Variable manufacturing overhead
..Q.. Variable manuf. overhead rate per machine-hour
Results
110,000
30,000
$440,000
$960,000
C
I
Siati,
Bud:!;et
120,000
36,000
$450,000
$
30
It you want to use Excel to solve this problem, go to the Excel lab at www.prenhall.comjhorngren/cost12e
anddownload the template tor Problem 8-34.
1. Calculate the variable manufacturing overhead spending and efficiency variances .•
2. Calculate the fixed manufacturing overhead spending and production-volume
variances.
3. Suppose Armstrong had budgeted for 150,000 units instead of 120,000 units and 45,000 (150,000 x 0.301
machine-hours instead of 36,000 machine-hours. All other information in the table remains the same.
Recalculate the variable manufacturing overhead variances and the fixed manufacturing overhead
variances in requirements 1 and 2.
4. Armstrong writes off all variances to cast of goods sold. How would Armstrong's operating income
change if it budgeted for 150,000 units of production and sales rather than 120,000 units?
equl •.• d
8-35 Sales-volume variance, production-volume variance. Morano Company budgeted production and
salesat its maximum capacity of 20,000 units for 2006. However, Morano was able to produce and sell only
18,000units for the year. There are no beginning or ending inventories. Other data for 2006 follow:
Budgeted fixed overhead costs
Budgeted selling price
Budgeted variable cost per unit
S500,000
$100
$40
1. Calculate the static-budget operating income, the flexible-budget operating income, and the operating
income based an the budgeted profit per unit.
2. Compute sales-volume variance, production-volume variance, and operating income volume variance.
What do each of these variances measure?
8-36 Activity-based costing. variance analysis. Toymaster, Inc., produces a plastic toy car, TGC, in
batches.To manufacture a batch of TGCs, Toymaster must set up the machines. Setup costs are batch-level
costs.A separate Setup Department is responsible for setting up machines for TGC.
•••• ul •.•d
~
b1I
PIlGladtA.ssist
239
8-30 Journal entries Icontinuation
Require"
of 8-29).
1. Prepare journal entries for variable and fixed manufacturing overhead (you will need to calculate the
various variances to accomplish this).
2. Overhead variances are written off to the Cost of Goods Sold (COGSI account at the end of the fiscal
year. Show how COGS is adjusted through journal entries.
PHGradtAlsist
8-31
Graphs and overhead variances. The Carvelli Company is a manufacturer of housewares and uses
standard costing. Manufacturing overhead (both variable and fixedl is allocated to products on the basis of
budgeted machine-hours. The budget for 2007 included:
Variable manufacturing overhead
Fixed manufacturing overhead
Denominator level
Require"
$9 per machine-hour
$72,000,000
4,000,000 machine-hours
1. Prepare two graphs, one for variable manufacturing overhead and one for fixed manufacturing overhead. Each graph should display how Carvelli's total manufacturing overhead costs will be depicted for
the purposes of la) planning and control and Ibl inventory costing.
2. Suppose that 3,500,000 machine-hours were allowed for actual output produced in 2007, but 3,800,000
actual machine-hours were used. Actual manufacturing overhead was S36,100,000, variable, and
$72,200,000, fixed. Compute lal the variable manufacturing overhead spending and efficiency variances and (bl the fixed manufacturing overhead spending and production-volume variances. Use the
columnar presentation illustrated in Exhibit 8-5Ip. 2721.
3. What is the amount of the under- or overallocated variable manufacturing overhead and the under· or
overallocated fixed manufacturing overhead? Why are the flexible-budget variance and the under· or
overallocated overhead amount always the same for variable manufacturing overhead but rarely the
same for fixed manufacturing overhead?
4. Suppose the denominator level was 3,000,000 rather than 4,000,000 machine-hours. What variances in
requirement 2 would be affected? Recompute them.
8-32 4-variance analysis, find the unknowns. Consider each of the following situations-cases
A, B,
and C-independently.
Data refer to operations for Apri12007. For each situation, assume standard costing.
Also assume the use of a flexible budget for control of variable and fixed manufacturing overhead based on
machine-hours.
(1) Fixed manufacturing overhead incurred
(2) Variable manufacturing overhead incurred
(3) Denominator level in machine-hours
(4) Standard machine-hours allowed for actual output achieved
151 Fixed manufacturing overhead Iper standard machine-houri
Flexible-budget data:
(6) Variable manufacturing overhead (per standard machine-hour)
171 Budgeted fixed manufacturing overhead
(8) Budgeted variable manufacturing overheada
191 Total budgeted manufacturing overhead'
Additional dala:
110) Standard variable manufacturing overhead allocated
(11) Standard fixed manufacturing overhead allocated
(12) Production-volume variance
l13) Variable manufacturing overhead spending variance
114) Variable manufacturing overhead efficiency variance
(15) Fixed manufacturing overhead spending variance
(16) Actual machine-hours used
ilFor standard machine-hours
Required
'"w
'"
>-
"«
J:
u
288
allowed for actual output produced.
Fill in the blanks under each case. [Hint: Prepare a worksheet similar to that in Exhibit 8-5Ip. 272}. Fill in
the knowns and then solve for the unknowns.]
8-33 Flexible budgets, 4-variance analvsis. ICMA, adapted) Nolton Products uses standard costing.
It allocates manufacturing overhead (both variable and fixed) to products on the basis of standard direct
manufacturing labor·hours (DLH). Noltan develops its manufacturing
overhead rate from the current
annual budget. The manufacturing overhead budget for 2007 is based on budgeted output of 720,000
units, requiring 3,600,000 DLH. The company is able to schedule production uniformly throughout the year.
Fixed
Variable
Overhead
Spending
Scenario
Variance
Variable
Overhead
Fixed
Overhead
Spending
Efficiencv
Variance
Variance
Overhead
ProductionVolume
Variance
Actual machine hours are 10% greater
than flexible-budget machine-hours
Production output is 20% less than
budgeted
Production output is 10% more than
budgeted; actual machine-hours are
5% less than budgeted
Production output is 15% more than
budgeted, and actual fixed overhead
is 6% more than budgeted
Relative to the flexible budget, actual
machine-hours are 10% greater, and
actual variable overhead costs are
8% greater
8-28 Flexible-budget variances, review of Chapters 7 and 8, The Monthly Herald uses standard
and reports the following results in August 2008 for its monthly newspaper:
A
J
2
3
4
5
6
C
Static
B
Number of copies
Number of pages of newsprint
Cost of newsprint (dixect materials)
Variable overhead costs
Fixed overhead costs
Attua!
Re,ulu
320,000
17,280,000
$ 224,640
$
63,936
$
97,000
costing
t
300,000
15,000,000
$ 180,000
$
60,000
$
90,000
B
Newsprint-the
special paper on which the newspaper is printed-is
the only direct-cost category.
Variable and fixed overhead costs are allocated using budgeted rates on the basis of newsprint pages. Each
copyof the Monthly Herald has only 50 newsprint pages, but in August 2008, the printing machines jammed
frequently during printing runs and damaged a lot of newsprint pages.
Ilyou want to use Excel to solve this exercise, go to the Excel Lab at www.prenhall.com/horngren/cost12e
and download the template for Exercise 8-28,
1. Prepare a comprehensive set of flexible-budget variances
direct materials, variable overhead, and fixed overhead.
2. Comment on the results in requirement 1.
at the Monthly Herald in August 2008 for
•• qul ••••
Problems
8-29 Comprehensive variance analysis, FlatScreen manufactures
flat-panel LCO displays, The displays
are sold to major PC manufacturers.
overhead data for FlatScreen for the
Following is some manufacturing
year ended December 31, 2006:
Overhead
Actual
Results
Flexihle
8udget
Allocated
Amount
Variable
Fixed
$1,532,160
7,004,160
$1,536,000
6,961,920
$1,536,000
7,526,400
Manufacturing
FlatScreen's budget was based on the assumption that 17,760 units (panels) would be manufactured
during2006. The planned allocation rate was 2 machine-hours
per unit. Actual number of machine-hours
used during 2006 was 36,480, The static-budget variable manufacturing overhead costs equal $1,4_2_0,_80_0_,
_
Compute the following quantities Iyou should be able to do so in the prescribed order):
•• qulr."
a. Budgeted number of machine-hours planned
b. Budgeted fixed manufacturing overhead costs per machine-hour
c. Budgeted variable manufacturing overhead costs per machine-hour
d. Budgeted number of machine-hours allowed for actual output produced
e. Actual number of output units
f. Actual number of machine-hours used per panel
287