Select solutions to Chapter 11:
11-16 The conceptual problem in applying fixed manufacturing overhead as a product cost is that this procedure treats fixed
overhead as though it were a variable cost. Fixed overhead is applied as a product cost by multiplying the fixed
overhead rate by the standard allowed amount of the cost driver used to apply fixed overhead. For example, fixed
overhead might be applied to Work-in-Process Inventory by multiplying the fixed-overhead rate by the standard allowed
machine hours. As the number of standard allowed machine hours increases, the amount of fixed overhead applied
increases proportionately. This situation is conceptually unappealing, because fixed overhead, although it is a fixed
cost, appears variable in the way that it is applied to work in process.
EXERCISE 11-26 (40 MINUTES)
1.
Variable overhead variances:
VARIABLE-OVERHEAD SPENDING AND EFFICIENCY VARIANCES
(1)
(2)
(3)
ACTUAL VARIABLE
OVERHEAD
Actual
Hours
(AH)
x
50,000
hours
x
Actual
Rate
(AVR)
Actual
Hours
(AH)
x
$19.20
per
hour*
50,000
hours
x
$960,000
Standard
Rate
(SVR)
$18.00
per
hour
FLEXIBLE BUDGET:
VARIABLE OVERHEAD
Standard
Standard
Allowed
x Rate
Hours
(SVR)
(SH)
40,000
hours
$900,000
$18.00
per
hour
40,000
hours
$720,000
$60,000 Unfavorable
$180,000 Unfavorable
Variable-overhead
spending variance
Variable-overhead
efficiency variance
*Actual variable-overhead rate (AVR) 
x
(4)†
VARIABLE OVERHEAD
APPLIED TO
WORK-IN-PROCESS
Standard
Standard
Allowed
x
Rate
Hours
(SVR)
(SH)
x
$18.00
per
hour
$720,000
No difference
actual variable overhead cost
$960,000

 $19.20 per hour
actual hours
50,000
EXERCISE 11-26 (CONTINUED)
2.
Fixed-overhead variances:
FIXED-OVERHEAD BUDGET AND VOLUME VARIANCES
(1)
ACTUAL
FIXED
OVERHEAD
(2)
BUDGETED
FIXED
OVERHEAD
(3)
FIXED OVERHEAD
APPLIED TO
WORK IN PROCESS
Standard
Allowed
Hours
40,000
hours
$291,000
$300,000
†

$240,000
$9,000 Favorable
$60,000 Unfavorable†
Fixed-overhead
budget variance
Fixed-overhead
volume variance
*Fixed overhead rate = $6.00 per hour =

Standard
FixedOverhead
Rate
$6.00 per
hour*
$300,000
(25,000)(2hrs per unit)
Some accountants would designate a positive volume variance as "unfavorable."
EXERCISE 11-31 (45 MINUTES)
Budgeted fixed overhead ........................................................................................
$ 25,000
Actual fixed overhead .............................................................................................
$ 32,500a
Budgeted production in units .................................................................................
12,500
Actual production in units ......................................................................................
12,000c
Standard machine hours per unit of output ...........................................................
4 hours
Standard variable-overhead rate per machine hour ..............................................
$8.00
Actual variable-overhead rate per machine hour ..................................................
$9.00b
Actual machine hours per unit of output ...............................................................
3d
Variable-overhead spending variance ...................................................................
$ 36,000 U
Variable-overhead efficiency variance ...................................................................
$ 96,000 F
Fixed-overhead budget variance ............................................................................
$ 7,500 U
Fixed-overhead variance .........................................................................................
$ 1,000g U*
Total actual overhead ..............................................................................................
$356,500
Total budgeted overhead (flexible budget) ............................................................
$409,000e
Total budgeted overhead (static budget) ...............................................................
$425,000f
Total applied overhead ............................................................................................
$408,000
*Some accountants would designate a positive fixed-overhead volume variance as unfavorable.
EXERCISE 11-31 (CONTINUED)
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
budgetedmachine 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.
Actual production =
total standardhrs.
standardhrs. per unit
=
d.
e.
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.
Total budgeted overhead (static budget)
=
 total standard budgeted  standardhrs.




 overheadrate  production per unit 
= ($8.50)(12,500)(4)
= $425,000
g.
Fixed overhead volume variance
= budgeted fixed overhead – applied fixed overhead
= $25,000 – ($.50)(12,000  4)
= $1,000 U*
* Some accountants would designate a positive volume variance as "unfavorable."
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
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 =
=
budgeted fixed overhead
budgeteddirect-labor hours
$630,000
 $21per hr.
30,000 hrs.
PROBLEM 11-45 (CONTINUED)
bTotal
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 F
(Some accountants would designate a negative volume variance
as “favorable.”)
gUnderapplied
variable overhead
= actual variable overhead – applied variable overhead
= $294,150 – (36,000  $7.50)
= $24,150 underapplied
PROBLEM 11-45 (CONTINUED)
hOverapplied
fixed overhead
= actual fixed overhead – applied fixed overhead
= $621,000 – (36,000  $21)
= $135,000 overapplied
iActual
production
jApplied
=
standardallowed direct-labor hours
standardhrs. 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
PROBLEM 11-47 (60 MINUTES)
1.
Standard machine hours per unit
=
budgetedmachine hours
budgetedproduction
=
30,000
6,000
= 5 hours per unit
2.
Actual cost of direct material per unit
=
$540,000  $166,000
6,200 units
= $113.87 per unit (rounded)
3.
Standard direct-material cost per machine hour =
$504,000 $156,000
30,000
= $22 per machine hour
=
$546,000  $468,000
 $169.00 per unit
6,000 units
4.
Standard direct-labor cost per unit
5.
Standard variable-overhead rate per machine hour
=
$1,294,400 - $1,254,000
$40,400

= $20.20 per machine hour
32,000 - 30,000
2,000 hours
6.
First, continue using the high-low method to determine total budgeted fixed overhead
as follows:
Total budgeted overhead at 30,000 hours .................................................
Total budgeted variable overhead at 30,000 hours (30,000  $20.20) .....
Total budgeted fixed overhead ...................................................................
$1,254,000
606,000
$ 648,000
The key is to realize that fixed overhead includes not only insurance and depreciation,
but also the fixed component of the semivariable-overhead costs (supervision and
inspection). (Note that maintenance and supplies are true variable costs.)
Now, we can compute the standard fixed-overhead rate per machine hour, as follows:
Standard fixed-overhead rate per machine hour =
$648,000
30,000 hours
= $21.60 per hour
PROBLEM 11-47 (CONTINUED)
7.
First, compute actual variable overhead as follows:
Total actual overhead ..................................................................................
Total fixed overhead (given) .......................................................................
Total variable overhead ...............................................................................
Variable-overhead spending variance
$1,266,000
648,000
$ 618,000
= Actual variable overhead – (AH  SVR)
= $618,000 – (32,000  $20.20)
= $28,400 Favorable
8.
Variable-overhead efficiency variance
= (AH  SVR) – (SH  SVR)
= (32,000  $20.20) – (31,000*  $20.20) = $20,200 Unfavorable
*Standard allowed machine hours = 6,200 units  5 hours per unit
9.
Fixed-overhead budget variance
= actual fixed overhead – budgeted fixed overhead
= $648,000 – $648,000 = 0
10.
Fixed-overhead volume variance
=
budgeted fixed overhead – applied fixed overhead
=
$648,000 – (31,000  $21.60) = $21,600 F*
* Some accountants would designate a negative volume variance as "favorable."
PROBLEM 11-47 (CONTINUED)
11.
Flexible budget formula, using the high-low method of cost estimation:
Variable cost per machine hour =
$3,080,000  $2,928,000
 $76 per hour
32,000  30,000
Total budgeted cost at 30,000 hours ..........................................................
Total variable cost at 30,000 hours (30,000  $76) ....................................
Fixed overhead cost ....................................................................................
Thus, the flexible budget formula is as follows:
Total production cost = $76X + $648,000
where X = number of machine hours allowed.
Therefore, the total budgeted production cost for 6,050 units is:
($76  30,250*) + $648,000 = $2,947,000
*Standard allowed machine hours = 6,050 units  5 hours per unit
$2,928,000
2,280,000
$ 648,000
PROBLEM 11-48 (40 MINUTES)
1.
a.
Three weaknesses in Albuquerque Wood Crafts, Inc.'s monthly Bookcase
Production Performance Report are as follows:
 The report is based on a static budget. Management should use a flexible budget
that compares the same level of activity, calculating variances between the actual
results and the flexible budget. Also, management might consider implementing an
activity-based costing system.
 Costs over which the supervisors have no control, such as fixed production costs
and allocated overhead costs, are included in the report.
 The report uses a single plant-wide rate to allocate fixed production costs. Square
footage may not drive the fixed production costs, and there may be a more
appropriate base such as number of units produced. It may be more appropriate to
use different cost drivers for each of the different product lines.
b.
Due to Sara McKinley's remarks Steve Clark is likely to:
 Feel tense and apprehensive. The timing of McKinley's remarks, immediately
before the meeting, without an opportunity for discussion and feedback, will leave
Clark feeling tense and probably inattentive throughout the meeting.
 Be frustrated and confused by the conflicting signals of the report and what is
occurring in his department and in the market. This confusion about the
department's results and, consequently, the uncertainty of his job will lead to stress
which may negatively affect his performance.
2.
a.
To improve the monthly performance report, management should:
 Use a flexible budget.
 Hold supervisors responsible for only those costs over which they have control by
using a contribution approach.
 Include footnotes to make the report more understandable.
PROBLEM 11-48 (CONTINUED)
A revised monthly performance report based on a flexible budget is as follows:
ALBUQUERQUE WOOD CRAFTS, INC.
BOOKCASE PRODUCTION PERFORMANCE REPORT FOR NOVEMBER
Units .......................................................................
Revenue .................................................................
Variable production costs: ...................................
Direct material ...................................................
Direct labor ........................................................
Machine time .....................................................
Manufacturing overhead ..................................
Total variable costs ..........................................
Contribution margin ..............................................
Actual
3,000
$483,000
Flexible
Budget
3,000
$495,000a
$ 69,300
54,900
57,600
123,000
$304,800
$178,200
$ 72,000b
54,000c
58,500d
126,000e
$310,500
$184,500
Variance
$12,000 U
$ 2,700 F
900 U
900 F
3,000 F
$ 5,700 F
$ 6,300 U
budget ÷ 2,500 budgeted units)  3,000 actual units
60,000 budget ÷ 2,500 budgeted units)  3,000 actual units
c($ 45,000 budget ÷ 2,500 budgeted units)  3,000 actual units
d($ 48,750 budget ÷ 2,500 budgeted units)  3,000 actual units
e($105,000 budget ÷ 2,500 budgeted units)  3,000 actual units
a($412,500
b($
b.
Steve Clark should be more motivated by the revised report since it clearly shows that
the variable cost variances for his product line were better than Sara McKinley had
thought, despite the fact that there is an unfavorable contribution margin variance.
Clark is not responsible for the revenue variance which resulted from a decrease in
the sales price.
In addition, the separation of costs into controllable and noncontrollable
categories allows Clark to devote full effort to those costs which he can influence.
Clark will probably exhibit a positive attitude and will continue looking for ways to
improve his operation.
PROBLEM 11-49 (35 MINUTES)
1.
Calculation of variances:
Direct-material price variance = PQ(AP – SP)
= 15,000($2.20* – $2.00)
= $3,000 Unfavorable
*$2.20 = $33,000  15,000
Direct-material quantity variance
= SP(AQ – SQ)
= $2.00(15,000 – 14,500*)
= $1,000 Unfavorable
*14,500 lbs. = 725  20 lbs. per unit
Direct-labor rate variance
= AH(AR – SR)
= 4,000($18.90* – $18.00)
= $3,600 Unfavorable
*$18.90 = $75,600  4,000
Direct-labor efficiency variance = SR(AH – SH)
= $18.00(4,000 – 3,625*)
= $6,750 Unfavorable
*3,625 hours = 725 units  5 hours per unit
Variable-overhead spending variance
= actual variable overhead – (AH  SVR)
= $5,500 – (4,000)($1.50)
= $500 Favorable
Variable-overhead efficiency variance
= SVR(AH – SH)
= $1.50(4,000 – 3,625)
= $562.50 Unfavorable
PROBLEM 11-49 (CONTINUED)
Fixed-overhead budget variance
= actual fixed overhead – budgeted fixed overhead
= $13,000 – $12,500*
= $500 Unfavorable
*$12,500 = $150,000 (annual)  12 months
Fixed-overhead volume variance
= budgeted fixed overhead – applied fixed overhead
= $12,500 – $10,875* = $1,625 U†
*$10,875 = 725 units  $15.00 per unit
†
Some accountants would designate a positive volume variance as "unfavorable."
PROBLEM 11-52 (20 MINUTES)
1.
Sales price variance
=
(Actual sales price – budgeted sales price)  actual sales volume
=
($48* – $50†)  7,500 = $15,000 Unfavorable
*Actual sales price = $360,000/7,500
†Budgeted
2.
sales price = $450,000/9,000
Sales volume variance
= (Actual sales volume – budgeted sales volume)  budgeted sales price
= (7,500 – 9,000)  $50** = $75,000 Unfavorable
**Budgeted sales price = $450,000/9,000
CASE 11-55 (50 MINUTES)
1.
New contribution report for February based on a flexible budget:
Flexible Budget*
Actual
Variance
______________________________________
Units (in pounds)………………..
225,000
225,000
-Revenue…………………………...
Direct material……………………
$1,800,000
326,250
$1,777,500
432,500
$ 22,500 U
106,250 U
Direct labor……………………….
Variable overhead……………….
Total variable costs………….
Contribution margin……………..
189,000
364,500
$ 879,750
$ 920,250
174,000
375,000
$ 981,500
$ 796,000
15,000 F
10,500 U
$101,750 U
$124,250 U
*Each dollar number in the flexible budget column is equal to the static budget number
given in the problem multiplied by 1.125 (225,000/200,000). This reflects the increase in
the volume of sales from 200,000 units to 225,000 units.
2.
The total contribution margin on the flexible budget is $920,250. See
requirement (1). Alternatively, multiply the static budget contribution margin of
$818,000 by 1.125 (225,000/200,000), as explained in requirement (1).
CASE 11-55 (CONTINUED)
3.
The interpretation of the contribution margin on the flexible budget, $920,250, is
as follows: If the unit sales price and unit variable costs had all remained at
their budgeted levels, and sales volume increased from 200,000 units to 225,000
units, the contribution margin would have been $920,250.
4.
The variance between the flexible budget contribution margin and the actual
contribution margin, from requirement (1) is $124,250 U.
This $124,250 unfavorable variance between the flexible budget and actual
contribution margin for the chocolate nut supreme cookie product line during
April is explained by the following variances:
a.
Direct-material price variance:
Type of Material
PQ*(AP+  SP)
Cookie mix ..........................
2,325,000($.02$.02) ............
Milk chocolate .....................
1,330,000($.20$.15) ............
Almonds ..............................
240,000($.50$.50) ...............
Total ...........................................................................................
Variance
$
0
66,500 U
0
$66,500 U
*PQ = AQ, because all materials were used during the month of purchase.
+AP = actual total cost (given)  actual quantity
b.
Direct-material quantity variance:
Type of Material
SP(AQ  SQ*)
Cookie mix ..........................
$.02(2,325,0002,250,000) ...
Milk chocolate .....................
$.15(1,330,0001,125,000) ...
Almonds ..............................
$.50(240,000225,000) .........
Total ...........................................................................................
Variance
$ 1,500 U
30,750 U
7,500 U
$39,750 U
*SQ = standard ounces of input per pound of cookies  actual pounds of
cookies produced.
c.
Direct-labor rate variance = AH(AR  SR) = 0.
Dividing the total actual labor cost by the actual labor time used, for each
type of labor, shows that the actual rate and the standard rate are the same
(i.e., AR = SR). Thus, this variance is zero.
CASE 11-55 (CONTINUED)
d.
Direct-labor efficiency variance:
Type of Labor
SR*(AH  SH+)
Mixing ..................................
$.24(225,000225,000) .........
Baking .................................
$.30(400,000450,000) .........
Total ...........................................................................................
Variance
$
0
15,000 F
$15,000 F
*Standard rate per minute = standard rate per hour  60 minutes
+Standard minutes per unit (pound)  actual units (pounds) produced
e.
Variable-overhead spending variance
= actual variable overhead  (AH  SVR)
= $375,000  [(625,000*/60)  $32.40]
= $37,500 U
*Total actual minutes of direct labor.
f.
Variable-overhead efficiency variance
= SVR(AH  SH*)
 625,000 3  225,000 

= $32.40 

60
 60

= $27,000 F
*SH = (3 minutes per unit, or pound  225,000 units, or pounds)  60
minutes
g.


actual
budgeted
actual
Sales-price variance = sales price  sales price  sales volume
= ($7.90*  $8.00)  225,000
= $22,500 U
*Actual sales price = $1,777,500  225,000 units sold
CASE 11-55 (CONTINUED)
Summary of variances:
Direct-material price variance .........................................................
Direct-material quantity variance....................................................
Direct-labor rate variance ................................................................
Direct-labor efficiency variance ......................................................
Variable-overhead spending variance ............................................
Variable-overhead efficiency variance ...........................................
Sales-price variance ........................................................................
Total ..................................................................................................
5.
$ 66,500 U
39,750 U
0
15,000 F
37,500 U
27,000 F
22,500 U
$124,250 U
a.
One problem may be that direct labor is not an appropriate cost driver for
Colonial Cookies, Inc. because it may not be the activity that drives
variable overhead. A good indication of this situation is shown in the
variance analysis. The direct-labor efficiency variance is favorable, while
the variable-overhead spending variable is unfavorable. Another problem
is that baking requires considerably more power than mixing does; this
difference could distort product costs.
b.
Activity-based costing (ABC) may solve the problems described in
requirement 5(a) and therefore is an alternative that management should
consider. Since direct labor does not seem to have a direct cause-andeffect relationship with variable overhead, the company should try to
identify the activity or activities that drive variable overhead. If the same
proportion of these activities is used in all of Colonial’s products, then
ABC may not be beneficial. However, if the products require a different
mix of these activities, then ABC could be beneficial.
FOCUS ON ETHICS (See page 476 in the text.)
In this situation, misstated standards are affecting the accuracy of accounting
reports.
Cleverly is misusing the standard costing system at Shrood to manage its
relationship with the parent company, Gigantic. By overestimating direct-labor
hours, too much overhead is routinely applied to products, artificially inflating cost of
goods sold (CGS) during the year. This accounting fudge is ‘corrected’ in the fourth
quarter of each year by means of a variance adjustment, which serves to instantly
reduce CGS and thus boost profits.
It is possible that Cleverly and his staff are sufficiently knowledgeable about the real
costs of production that the artificial direct-labor hour estimates do not impede their
decision making (although this is not certain). However, it is unlikely that the
managers at the parent company are in the same position. The information which is
being passed to them is distorted, and thus provides a poor basis for managerial
decision making. That is, the distorted data may have a negative impact on the
business, leading to loss of enterprise value and perhaps jobs. Hence it is unethical
for Cleverly to provide this distorted quarterly information to Gigantic, knowing that
the company uses the data to make management decisions.
A further ethical dilemma occurs because the quarterly numbers from Shrood are
provided to analysts and stockholders as a basis on which to judge the financial
performance of Gigantic. The management of Gigantic is thus in contravention of its
ethical and legal obligations to market regulators, since it is knowingly providing
false information to investors.
Because of these ethical and legal concerns, it is imperative that Shrood provide
accurate information to Gigantic henceforth. Note, however, that this does not
necessarily mean that Shrood needs to change its internal cost accounting
standards, although it would be preferable to manage according to the most accurate
cost numbers available.