Chapter 21
Flexible Budgets and Standard Costing
QUESTIONS
1.
Fixed budget performance reports have limited usefulness because they do not reflect
differences in revenues and variable costs that can occur simply because actual volume
is different from budgeted volume. This is a serious limitation when evaluating
(benchmarking) the reasonableness of actual revenues and costs.
2.
The primary purpose of a flexible budget is to help managers better evaluate past
performance, which can improve their abilities to monitor and control operations.
3.
The proper title is:
Spalding Company
Flexible Budget Performance Report
For Year Ended December 31, 2013
The proper title communicates to the user the focus of the report. Although it may
seem obvious, many reports used in the business world do not have a proper or
descriptive title. The sooner a student begins to make this a routine task in completing
assignments, the better skilled s/he will be for the business world.
4.
A flexible budget performance report is useful for an analysis of the difference between
actual performance and budgeted performance—often called variance analysis. Its
usefulness stems from the fact that both the budgeted and actual results are based on
the same level of activity.
5.
A variable cost implies a constant per unit cost for each unit produced or sold within
the relevant range.
6.
The human resource department is usually responsible for a labor rate variance. The
production department is usually responsible for a labor efficiency variance. However,
the two responsibilities may not be completely separate. For example, a favorable rate
variance may have occurred because the human resource department hired poorly
trained employees, in which case the production department used more hours than
expected (resulting in an unfavorable efficiency variance) because of higher waste.
7.
A price variance is that portion of a cost variance caused by a difference between the
actual unit price of an item and its standard price. A quantity variance is that portion of
a cost variance caused by a difference between the actual number of units of an item
used and the standard number of units budgeted to be used.
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Solutions Manual, Chapter 21
1173
8.
Standard costs are used to establish a basis to assess the reasonableness of actual
costs. A comparison of standard costs to actual costs should help management
identify unexpected differences and then pursue explanations as to why actual costs
varied from the standard.
9.
An overhead volume variance is the difference between (a) the amount of (fixed)
overhead that would have been budgeted at the actual operating level achieved during
the period (that is, budgeted fixed overhead) and (b) the standard amount of (fixed)
overhead applied to actual products produced during the period. A volume variance
occurs when the actual volume differs from the expected volume that is used to
establish the predetermined rate.
10. A predetermined standard overhead rate is a measure computed and used in a standard
cost system to assign overhead costs to products. Before the period begins, budgeted
total overhead costs (variable and fixed) at the expected volume are divided by the
expected amount of the allocation base (direct labor hours, machine hours, or some
other measure of activity). This yields the predetermined standard overhead rate. Then
as production activities occur, this predetermined overhead rate is applied to the
standard quantity of output produced to establish the amount of overhead assigned to
that output.
11. In general, variance analysis is said to provide information about price and quantity
variances.
12. A controllable variance is the difference between (a) the total overhead cost actually
incurred in the period and (b) the total overhead cost that would have been budgeted at
the actual operating level achieved. Specifically, the controllable variance is the sum of
the total variable overhead variances (both variable overhead spending and efficiency
variances) and the fixed overhead spending variance.
13. Standard costs provide a basis for evaluating actual performance.
Summary
information comparing actual costs to budgeted costs is captured and reported in a
flexible budget. The evaluation reports differences between actual costs and standard
costs as variances. Variance analysis draws attention to situations where actual costs
differ from standard costs. Management by exception can be used in performing
variance analysis by focusing management’s attention on the variances where actual
costs are most different from standard costs.
14. Before a period starts, the manager can prepare flexible budgets for the various types of
snowmobiles. Then, she could estimate both the best and worst case scenarios for the
upcoming period. The manager can then adjust personnel or promotions, for instance,
to help achieve acceptable results. After the period ends, the manager can use the
flexible budget to determine how actual results compare to the plan for the achieved
level of sales.
15. Apple schedules appointments with customers to service Apple computers, iPhones,
iPods etc. These service appointments require standard hours at standard rates to
complete, depending on the type of service. Apple can calculate the price (rate) and
quantity (efficiency) variances for these various services to maintain control over them.
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1174
Financial & Managerial Accounting, 5th Edition
16. The controllable variance should not be affected by achieving an actual operating level
different from the budgeted level. If the company operated at 75% of capacity, a
controllable variance will arise only if the actual overhead cost is different from the
amount shown on a flexible budget for overhead computed at the 75% level.
In contrast, the volume variance is affected when the percent of actual capacity differs
from that expected. If the company operated at less than planned (for example, at 75%
instead of the 80% budgeted) the volume variance will be unfavorable. This means that
the company will not apply as much overhead to each unit or job as planned. Stated
differently, each job or unit will be undercosted.
QUICK STUDIES
Quick Study 21-1 (15 minutes)
BEECH COMPANY
Flexible Budget Performance Report
For Month Ended May 31
Flexible
Budget
Sales .................................................. $1,300,000
Actual
Results
Variances
$1,275,000
$25,000 U
Variable costs ...................................
750,000
712,500
37,500 F
Contribution margin .........................
550,000
562,500
12,500 F
Fixed costs ........................................
300,000
300,000
Income from operations .................. $ 250,000
$ 262,500
0
$12,500 F
Quick Study 21-2 (5 minutes)
A standard cost card for one bat would include:
Direct materials (1 kg. @$18 per kg.) ...............................................
Direct labor (0.25 hours @$20 per hour) ..........................................
Overhead (0.25 labor hours $40 per hour) .......................................
Total .....................................................................................................
$18
5
10
$33
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Solutions Manual, Chapter 21
1175
Quick Study 21-3 (5 minutes)
Actual cost for one bat ......................................................................
Standard cost for one bat (from QS 21-2) ........................................
Cost variance ......................................................................................
$40
33
$ 7
As the actual costs are greater than the standard costs, the cost variance is
unfavorable.
Quick Study 21-4 (10 minutes)
1. Management by exception involves managers focusing on the most
significant variances for analysis and action strategies. It also results in
less attention given to areas where performance is close enough to the
standard to be satisfactory. This means management concentrates on the
exceptional or irregular situations and defers dealing with areas that report
actual results reasonably close to the plan.
2. Management often uses standard costs to compute these variances. Since
standard costs are used by managers to focus on the areas in which actual
results deviate most significantly from the norm, the accurate setting of
standard costs is crucial to effective implementation of management by
exception.
Quick Study 21-5 (10 minutes)
Standard direct materials cost .......................................................... $150,000
Materials price variance (favorable) .................................................
(12,000)
Materials quantity variance (favorable) ............................................
(2,000)
Actual total direct materials cost ...................................................... $136,000
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1176
Financial & Managerial Accounting, 5th Edition
Quick Study 21-6 (10 minutes)
Standard direct labor cost ................................................................. $400,000
Labor rate variance (unfavorable) ....................................................
20,000
Labor efficiency variance (unfavorable) ..........................................
10,000
Actual total direct labor cost ............................................................. $430,000
Quick Study 21-7 (15 minutes)
Following information is given
Actual price per pound ................................................................................
$ 78.00
Standard price per pound ............................................................................77.50
Material price variance per pound (unfavorable) ......................................
$ 0.50
It is also known that:
Material price variance
= Price variance per pound x Actual pounds used
Actual pounds used
= Material price variance / Price variance per pound
Therefore, substituting with the information given above:
Actual pounds used
= $4,000 / $0.50
= 8,000 pounds
Quick Study 21-8 (10 minutes)
Standard overhead cost ..............................................................................
$225,000
Overhead volume variance (favorable) ......................................................
(20,000)
Overhead controllable variance (unfavorable) ..........................................
60,400
Actual total overhead cost ..........................................................................
$265,400
Quick Study 21-9A (10 minutes)
Goods in Process Inventory....................................................
225,000
Controllable Variance ..............................................................60,400
Volume Variance .............................................................
Factory Overhead ............................................................
20,000
265,400
To apply overhead and to record overhead variances.
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Solutions Manual, Chapter 21
1177
Quick Study 21-10 (10 minutes)
Actual variable overhead (4,700 x $4.15)* ..................................................
$19,505
Applied variable overhead (5,000 x $4.00)** .............................................
20,000
Total variable overhead cost variance .......................................................
$ 495 F
*Actual machine hours x Actual variable overhead rate
**Standard machine hours x Standard variable overhead rate
Quick Study 21-11A (15 minutes)
Variable overhead spending and efficiency variances
Actual Overhead
Applied Overhead
AH x AVR
AH x SVR
SH x SVR
(4,700 x $4.15)
hours per hour
4,700 x $4.00
hours per hour
$19,505
5,000 x $4.00
hours
per hour
$18,800
$705 U
(Spending variance)
$20,000
$1,200 F
(Efficiency variance)
$495 F
(Total variable overhead variance)
Quick Study 21-12 (15 minutes)
Sales
Actual
Flexible Budget
Fixed Budget
Units
50
50
45
$9,000
$9,500
$9,500
(50 x $9,000)
(50 x $9,500)
(45 x $9,500)
$450,000
$475,000
$427,500
Price per
unit
Total
dollars
$25,000 U
(Sales price variance)
$47,500 F
(Sales volume variance)
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1178
Financial & Managerial Accounting, 5th Edition
Quick Study 21-13 (5 minutes)
Fixed costs (unchanged) .............................................................................
$300,000
Variable costs [($246,000/24,000) x 20,000 units] .....................................
205,000
Total budgeted costs (flexible budget) ......................................................
$505,000
Quick Study 21-14 (10 minutes)
From the flexible budget at 20,000 units, compute the sales price and variable
costs per unit:
Sales price per unit = $400,000/20,000 units = $20.00 per unit
Variable cost per unit = $80,000/20,000 units = $4.00 per unit
At a production level of 26,000 units:
Sales (26,000 x $20.00).................................................................................
$520,000
Variable costs (26,000 x $4.00)....................................................................
104,000
Contribution margin .....................................................................................
416,000
Fixed costs (unchanged) .............................................................................
150,000
Income from operations ..............................................................................
$266,000
Quick Study 21-15 (10 minutes)
BRODRICK COMPANY
Flexible Budget Performance Report
For Year Ended December 31
Flexible
Budget
Actual
Results
Sales (13,000 units) .........................
$520,000
$480,000
$40,000 U
Variable expenses ...........................
104,000
112,000
8,000 U
Contribution margin ........................
416,000
368,000
48,000 U
Fixed expenses ................................
150,000
145,000
5,000 F
Income from operations ..................
$266,000
$223,000
$43,000 U
Variances
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Solutions Manual, Chapter 21
1179
Quick Study 21-16 (10 minutes)
Direct materials price variance:
Actual cost of direct materials used (given) ..............................................
$535,000
Actual quantity used x Standard price (300,000 x $2) ..............................
600,000
Direct materials price variance (favorable) ................................................
$ 65,000
Direct materials quantity variance:
Actual quantity used x Standard price (300,000 x $2) ..............................
$600,000
Standard quantity x Standard price (60,000 x 4 x $2) ...............................
480,000
Direct materials quantity variance (unfavorable) ......................................
$120,000
Quick Study 21-17 (10 minutes)
Direct labor rate variance:
Actual hours x Actual rate per hour (65,000 x $15) ...................................
$975,000
Actual hours x Standard rate per hour (65,000 x $14) ..............................
910,000
Direct labor rate variance (unfavorable) ....................................................
$ 65,000
Direct labor efficiency variance:
Actual hours x Standard rate per hour (65,000 x $14) ..............................
$910,000
Standard hours x Standard rate per hour (67,000 x $14) .........................
938,000
Direct labor efficiency variance (favorable) ...............................................
$ 28,000
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1180
Financial & Managerial Accounting, 5th Edition
Quick Study 21-18 (10 minutes)
Actual overhead incurred ............................................................................
$262,800
Less: Applied overhead (based on flexible budget)
Variable overhead (110,000 x $1.40*) ......................................................
154,000
Fixed overhead (unchanged) ..................................................................
124,000
Controllable overhead variance (favorable) ..............................................
$ 15,200
*$162,400/116,000 units = $1.40 variable overhead rate per unit
Quick Study 21-19 (10 minutes)
Actual overhead incurred ............................................................................
$ 28,175
Less: Applied overhead (based on flexible budget)
Variable overhead (9,800 x $3.10) ............................................................
30,380
Fixed overhead (unchanged) ..................................................................
12,000
Controllable overhead variance (favorable) ..............................................
$(14,205)
Quick Study 21-20 (5 minutes)
Budgeted fixed overhead (at 12,000 units) ................................................
$12,000
Fixed overhead applied to production (9,800 x $1) ...................................9,800
Volume variance (favorable) .......................................................................
$ 2,200
Quick Study 21-21 (15 minutes)
Sales
Actual
Flexible Budget
Fixed Budget
Units
216,944
216,944
225,944
Price per
unit
$30,200
$30,000
$30,000
(216,944 x $30,200)
(216,944 x $30,000)
(225,944 x $30,000)
$6,551,708,800
$6,508,320,000
$6,778,320,000
Total
dollars
$43,388,800 F
(Sales price variance)
$270,000,000 U
(Sales volume variance)
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Solutions Manual, Chapter 21
1181
EXERCISES
Exercise 21-1 (20 minutes)
a.
Item
Cost
Bike frames
Variable
b. Screws for assembly
Variable
c.
Variable
Repair expense for tools (If these costs are only remotely related
to volume, they may be better classified as fixed)
d. Direct labor (If employees receive monthly salaries, this cost would
Variable
be fixed)
e.
Bike tires
Variable
f.
Gas used for heating**
Variable
g. Incoming shipping expenses*
Variable
h. Taxes on property
Fixed
i.
Fixed
Office supplies (This item can be a variable cost, but it usually is
not because it doesn’t often change in direct proportion to changes in
the volume level)
j.
Depreciation on tools (If the company uses the units-of-
Fixed
production method, the depreciation would be variable)
k.
Management salaries
Fixed
*
Incoming shipping expenses are variable with respect to the number (volume) of
incoming shipments, not production.
**
Gas used for heating is often a mixed cost rather than strictly variable.
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1182
Financial & Managerial Accounting, 5th Edition
Exercise 21-2 (30 minutes)
TEMPO COMPANY
Flexible Budgets
For Quarter Ended March 31, 2013
Flexible Budget
Variable Total
Amount
Fixed
per Unit*
Cost
Sales...................................
$400.00
Flexible
Budget for
Unit Sales
of 6,000
Flexible
Budget for
Unit Sales
of 7,000
Flexible
Budget for
Unit Sales
of 8,000
$2,400,000
$2,800,000 $3,200,000
Variable costs
Direct materials ................ 40.00
240,000
280,000
320,000
Direct labor ....................... 70.00
420,000
490,000
560,000
Production supplies ........ 25.00
150,000
175,000
200,000
Sales commissions ......... 20.00
120,000
140,000
160,000
Packaging ......................... 22.00
132,000
154,000
176,000
Total variable costs .........177.00
1,062,000
1,239,000
1,416,000
Contribution margin ..........
$223.00
1,338,000
1,561,000
1,784,000
Fixed costs
Plant manager salary .......
$ 65,000
65,000
65,000
65,000
Advertising .......................
125,000
125,000
125,000
125,000
Admin. salaries ................
85,000
85,000
85,000
85,000
Depr.—Office equip. ........
35,000
35,000
35,000
35,000
Insurance ..........................
20,000
20,000
20,000
20,000
Office rent .........................
36,000
36,000
36,000
36,000
Total fixed costs ..............
$366,000
366,000
366,000
366,000
Income from operations .......
$ 972,000
$1,195,000 $1,418,000
* Equals total variable costs divided by the volume of 7,000 units.
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Solutions Manual, Chapter 21
1183
Exercise 21-3 (25 minutes)
SOLITAIRE COMPANY
Flexible Budget Performance Report
For Month Ended June 30
Flexible
Budget
Actual
Results
Sales (10,800 units) .........................
$540,000
$540,000
Variable expenses ...........................
378,000
351,000
27,000 F
Contribution margin ........................
162,000
189,000
27,000 F
Fixed expenses ................................
21,000
27,000
6,000 U
Income from operations ..................
$141,000
$162,000
$21,000 F
Variances
$
0
Supporting computations
Total fixed budget sales ......................................................
$ 420,000
Total fixed budget units.......................................................
÷
8,400
Budgeted selling price.........................................................
$50 per unit
Flexible budget units ...........................................................
×
10,800
Flexible budget sales ...........................................................
$ 540,000
Total fixed budget variable expenses ................................
$ 294,000
Total units budgeted ............................................................
÷
8,400
Budgeted variable expenses...............................................
$35 per unit
Flexible budget units ...........................................................
×
10,800
Flexible budget variable expenses .....................................
$ 378,000
Total actual expenses ..........................................................
$ 378,000
Less actual fixed expenses .................................................
27,000
Total actual variable expenses ...........................................
$ 351,000
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1184
Financial & Managerial Accounting, 5th Edition
Exercise 21-4 (25 minutes)
BAY CITY COMPANY
Flexible Budget Performance Report
For Month Ended July 31
Flexible
Budget
Actual
Results
Sales (7,200 units)............................
$720,000
$737,000
$17,000 F
Variable expenses ...........................
468,000
483,000
15,000 U
Contribution margin ........................
252,000
254,000
2,000 F
Fixed expenses ................................
160,000
158,000
2,000 F
Income from operations ..................
$ 92,000
$ 96,000
$ 4,000 F
Variances
Supporting computations
Total fixed budget sales ............................................
$
750,000
Total units budgeted ..................................................
÷
7,500
Budgeted selling price ..............................................
$100 per unit
Flexible budget units .................................................
×
7,200
Flexible budget sales .................................................
$
720,000
Total fixed budget variable expenses ......................
$
487,500
Total units budgeted ..................................................
÷
7,500
Budgeted variable expenses.....................................
$ 65 per unit
Flexible budget units .................................................
×
7,200
Flexible budget variable expenses ...........................
$
468,000
Total actual expenses ................................................
$
641,000
Less actual fixed expenses .......................................
158,000
Total actual variable expenses .................................
$
483,000
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Solutions Manual, Chapter 21
1185
Exercise 21-5 (30 minutes)
1.
October variances
Preliminary computations
Actual hours:
16,250 hours (given)
Standard hours:
5,600 units x 3 hrs./unit = 16,800 hrs.
Actual rate:
$247,000/16,250 hours = $15.20/hr.
Standard rate:
$15.00/hr. (given)
Direct labor cost variances
Actual units at actual cost [16,250 hrs. @ $15.20] .............................................
$247,000
Standard units and standard cost [16,800 hrs. @ $15.00] ................................
252,000
Direct labor cost variance ....................................................................................
$ 5,000 F
Rate and efficiency variances
Actual Cost
AH x AR
Standard Cost
SH x SR
AH x SR
16,250 x $15.20
hours per hour
16,250 x $15.00
hours
per hour
$247,000
16,800 x $15.00
hours
per hour
$243,750
$3,250 U
(Rate variance)
$252,000
$8,250 F
(Efficiency variance)
$5,000 F
(Total labor variance)
Alternate solution format
Rate variance
= AH x (AR – SR)
= 16,250 hours x ($15.20 - $15.00) per hour
= 16,250 hours x $0.20 per hour
= $3,250 U
Efficiency variance
= (AH - SH) x SR
= (16,250 – 16,800) hours x $15.00 per hour
= (-550 hours) x $15.00 per hour
= $8,250 F
Rate variance ......................$3,250 U
Efficiency variance ............. 8,250 F
Total .....................................$5,000 F
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1186
Financial & Managerial Accounting, 5th Edition
Exercise 21-5 (Concluded)
November variances
Preliminary computations
Actual hours:
22,000 hours (given)
Standard hours: 6,000 units x 3 hrs./unit = 18,000 hours
Actual rate:
$335,500/22,000 hrs. = $15.25/hr.
Standard rate:
$15.00/hr. (given)
Direct labor cost variances
Actual units at actual cost [22,000 hrs. @ $15.25] .............................................
$335,500
Standard units at standard cost [18,000 hrs. @ $15.00] ....................................
270,000
Direct labor cost variance ....................................................................................
$ 65,500 U
Rate and efficiency variances
Actual Cost
AH x AR
Standard Cost
SH x SR
AH x SR
22,000 x $15.25
hours per hour
22,000 x $15.00
hours
per hour
$335,500
$330,000
$5,500 U
(Rate variance)
18,000 x $15.00
hours
per hour
$270,000
$60,000 U
(Efficiency variance)
$65,500 U
(Total labor variance)
2.
The unfavorable labor rate variance in October means the actual rate for an
hour of labor is greater than budgeted. The favorable labor efficiency
variance means the actual hours used are less than budgeted. Together,
these results can be interpreted to mean that employees are paid more than
budgeted, but are also more productive than budgeted. Perhaps a more
skilled labor force was used during the month of October. In November, there
was an unfavorable rate variance and an unfavorable efficiency variance. The
company needs to look carefully at why there was such a large unfavorable
efficiency variance.
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Solutions Manual, Chapter 21
1187
Exercise 21-6 (20 minutes)
1. Predetermined overhead rate computations
Expected volume ......................................................................
75%
Expected total overhead.......................................................... $2,100,000
Expected hours ........................................................................
375,000 hrs.
Variable cost per hour ($1,500,000/ 375,000) .........................
$4.00
Fixed cost per hour ($600,000/ 375,000) ................................
$1.60
Total cost per hour ($2,100,000/ 375,000) ..............................
$5.60
2. Variable overhead cost variance
Variable overhead cost incurred [given] ...................................................
$1,375,000
Variable overhead cost applied [350,000 hrs. @ $4.00] ...........................
1,400,000
Variable overhead cost variance ................................................................
$ 25,000 F
Fixed overhead cost variance
Fixed overhead cost incurred [given] ..............................................
$ 628,600
Fixed overhead cost applied [350,000 hrs. @ $1.60] ......................
560,000
Fixed overhead cost variance ..........................................................
$ 68,600 U
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1188
Financial & Managerial Accounting, 5th Edition
Exercise 21-7A (20 minutes)
1.
Variable overhead spending and efficiency variances
Actual Overhead
AH x AVR
(Given)
AH x SVR
340,000 x $4.00
hours
per hour
$1,375,000
Applied Overhead
SH x SVR
350,000 x $4.00
hours
per hour
$1,360,000
$15,000 U
(Spending variance)
$1,400,000
$40,000 F
(Efficiency variance)
$25,000 F
(Total variable overhead variance)
Interpretation:
The $15,000 unfavorable spending variance means the actual cost of variable
overhead is more than budgeted. This unfavorable variance can occur
because the cost of variable overhead is greater than budgeted or because
more variable items are consumed than anticipated. It could also be a
combination of both; where the cost and usage may be greater or less than
anticipated, yet the net impact is an unfavorable spending variance.
The $40,000 favorable efficiency variance occurs because the actual labor
hours used is less than the standard labor hours required for actual
production. Labor hours are used as the allocation base.
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Solutions Manual, Chapter 21
1189
Exercise 21-7 A (continued)
2.
Fixed overhead spending and volume variances
Actual Overhead
Budgeted Overhead
Applied Overhead
(Given)
(Given)
350,000 x $1.60
hours
per hour
$628,600
$600,000
$560,000
$28,600 U
(Spending variance)
$40,000 U
(Volume variance)
$68,600 U
(Total fixed overhead variance)
Interpretation
The $28,600 unfavorable spending variance means actual cost of fixed
overhead is more than budgeted.
The $40,000 unfavorable volume variance is the result of the company actually
operating at 70% capacity rather than the budgeted 75% capacity. Not all of
the budgeted fixed overhead is applied to production because actual volume
fell below budgeted volume.
3. The controllable variance is computed as:
Variable overhead spending variance ................................... $15,000 U
Variable overhead efficiency variance ................................... 40,000 F
Fixed overhead spending variance ........................................ 28,600 U
Controllable variance............................................................... $ 3,600 U
The controllable variance refers to activities that are considered within
management’s control. The unfavorable controllable variance of $3,600
indicates that overall, management performed relatively poorly in controlling
overhead costs.
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1190
Financial & Managerial Accounting, 5th Edition
Exercise 21-8 (30 minutes)
1. Preliminary computations
Actual quantity:
Standard quantity:
Actual price:
Standard price:
22,000 bd. ft. (given)
3,000 units x 8 bd. ft./unit = 24,000 bd. ft.
$266,200/22,000 bd. ft. = $12.10/bd. ft.
$12.00/bd. ft. (given)
Direct material cost variances
Actual units at actual cost [22,000 bd. ft. @ $12.10] .................................
$266,200
Standard units at standard cost [(24,000 bd. ft. @ $12.00] ......................
288,000
Direct material cost variance ......................................................................
$ 21,800 F
Price and quantity variances
Actual Cost
AQ x AP
Standard Cost
SQ x SP
AQ x SP
22,000 x $12.10
bd. ft. per bd. ft.
22,000 x $12.00
bd. ft. per bd. ft.
$266,200
$264,000
$2,200 U
(Price variance)
24,000 x $12.00
bd. ft. per bd. ft.
$288,000
$24,000 F
(Quantity variance)
$21,800 F
(Total materials variance)
Alternate solution format
Price variance
= AQ x (AP – SP)
= 22,000 board feet x ($12.10 - $12.00)
= $2,200 U
Quantity variance
= (AQ – SQ) x SP
= (22,000 - 24,000) board feet x $12.00/board foot
= $24,000 F
Price variance .....................$ 2,200 U
Quantity variance ............... 24,000 F
Total variance .....................$21,800 F
2. The unfavorable price variance means the actual price paid is more than
the budgeted price. The favorable quantity variance means the actual
quantity used is less than the budgeted amount. It appears the company
operated with quality materials in an efficient manner at a slightly higher
than expected cost.
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Solutions Manual, Chapter 21
1191
Exercise 21-9A (25 minutes)
1.
Goods in Process Inventory....................................................
288,000
Direct Materials Price Variance* .............................................2,200
Direct Materials Quantity Variance ................................
Raw Materials Inventory .................................................
24,000
266,200
To record the favorable price and quantity variances.
* This price variance can alternatively be computed and recorded when the direct materials are
purchased.
2.
Direct Materials Quantity Variance .........................................
24,000
Direct Materials Price Variance ......................................
Cost of Goods Sold .........................................................
2,200
21,800
To close the unfavorable price and favorable quantity
variances to cost of goods sold.
3. The $24,000 materials quantity variance should be investigated because of
its relatively large magnitude. In particular, this variance is large relative to
the total materials inventory — $24,000/$266,200, or approximately 9% of
inventory purchased.
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1192
Financial & Managerial Accounting, 5th Edition
Exercise 21-10 (20 minutes)
Information given
Planned units to be produced = 80% x 50,000 capacity = 40,000 units
Planned hours of direct labor = 25,000 hours
Standard hours per unit = 25,000 hours/40,000 units = 0.625 hours per unit
Total standard hrs. for act. production: 35,000 units x 0.625/unit = 21,875 hr.
1. Total overhead planned at 80% level (25,000 direct labor hours)
Predetermined
Cost
Cost per
Hour
Fixed overhead.................................
$ 50,000
$ 2.00
Variable overhead ............................
275,000
11.00
Total overhead .................................
$325,000
$13.00
2. Total overhead variance
Total actual overhead (given) .....................................................................
$305,000
Applied overhead ($13/hr. x 21,875 hours) ...............................................
284,375
Total overhead variance..............................................................................
$ 20,625 U
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Solutions Manual, Chapter 21
1193
Exercise 21-11 (30 minutes)
1. Preliminary variance computations
Variable overhead spending and efficiency variances
Actual Overhead
AH x AVR
AH x SVR
Applied Overhead
SH x SVR
22,000 x $11
$*
21,875 x $11
$242,000
$*
(Spending variance)
$240,625
$ 1,375 U
(Efficiency variance)
$*
(Total variable overhead variance)
Fixed overhead spending and volume variances
Actual Overhead
Budgeted Overhead
(Given)
$*
$50,000
$*
(Spending variance)
Applied Overhead
21,875 x $2
$43,750
$6,250 U
(Volume variance)
$*
(Total fixed overhead variance)
* Not computable from information given
2. Overhead controllable variance*
Total actual overhead (given)........................................................... $305,000
Flexible budget overhead
Variable ($11/hr. x 21,875 hours) ..............................$240,625
Fixed (given) ............................................................... 50,000
Total ..........................................................................................................
290,625
Overhead controllable variance ..................................................................
$ 14,375 U
* Alternative solution approach: We know the overhead controllable variance is equal to the
total overhead variance less the overhead volume variance. Then, using the results from
parts 1 and 2, we can compute the overhead controllable variance as
Overhead controllable variance = $20,625 U - $6,250 U = $14,375 U
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1194
Financial & Managerial Accounting, 5th Edition
Exercise 21-12 (25 minutes)
1. Sales price and sales volume variances
Sales
Units
Actual Sales
350
Price/unit
Total
Flexible Budget
350
Fixed Budget
365
$1,200
$1,100
$1,100
(350 x $1,200)
$420,000
(350 x $1,100)
$385,000
(365 x $1,100)
$401,500
$35,000 F
(Sales price variance)
$16,500 U
(Sales volume variance)
2. Interpretation
The $35,000 favorable sales price variance implies it sold computers for a
higher price than budgeted. The $16,500 unfavorable sales volume variance
implies it sold fewer computers than budgeted, perhaps because of the price
increase.
Exercise 21-13 (10 minutes)
a. 4
b. 3
c. 5
d. 2
e. 1
Exercise 21-14 (15 minutes)
(1) c
(2) a
(3) b
(4) i
(5) e
(6) h
(7) d
(8) f
(9) j
(10) g
Exercise 21-15 (5 minutes)
Following management by exception, the company should focus on those
variances that exhibit the greatest differences from the standard. This would
likely include the direct materials quantity ($3,000 unfavorable) and direct
labor efficiency ($2,200 favorable). Though the fixed overhead volume
variance is relatively large ($500 favorable), it merely shows the company
operated at a capacity level different than expected.
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Solutions Manual, Chapter 21
1195
Exercise 21-16 (25 minutes)
Part 1
Direct materials price variance:
Actual cost of direct materials used (16,000 x $4.05) ...............................
$ 64,800
Actual quantity used x Standard price (16,000 x $4.00) ...........................
64,000
Direct materials price variance (unfavorable) ...........................................
$
800
Direct materials quantity variance:
Actual quantity used x Standard price (16,000 x $4.00) ...........................
$ 64,000
Standard quantity x Standard price (15,000* x $4.00) ...............................
60,000
Direct materials quantity variance (unfavorable) ......................................
$ 4,000
*30,000 units x ½ pound per unit = 15,000 pounds
Part 2
Direct labor rate variance:
Actual hours x Actual rate per hour (5,545 x $19.00***) ...........................
$105,355
Actual hours x Standard rate per hour (5,545 x $20.00) ...........................
110,900
Direct labor rate variance (favorable) .........................................................
$ 5,545
Direct labor efficiency variance:
Actual hours x Standard rate per hour (5,545 x $20.00) ...........................
$110,900
Standard hours x Standard rate per hour (5,000** x $20.00) ....................
100,000
Direct labor efficiency variance (unfavorable) ..........................................
$ 10,900
**30,000 units x 1/6 hour per unit = 5,000 hours
***$105,355/5,545 hours
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1196
Financial & Managerial Accounting, 5th Edition
PROBLEM SET A
Problem 21-1A ( 40 minutes)
Part 1 Direct Materials Variances
Direct materials cost variances
Actual units at actual cost [1,615,000 lbs. @ $4.10] ..........................................
$6,621,500
Standard units at standard cost [1,620,000 lbs. @ $4.00] .................................
6,480,000
Direct material cost variance...............................................................................
$ 141,500 U
Direct Materials Price and Quantity Variances
Actual Cost
Standard Cost
AQ x AP
AQ x SP
SQ x SP
1,615,000 x $4.10
1,615,000 x $4.00
$6,621,500
$6,460,000
$161,500 U
(Price variance)
1,620,000 x $4.00
$6,480,000
$20,000 F
(Quantity variance)
$141,500 U
(Total materials variance)
Part 2 Direct Labor Variances
Direct labor cost variances
Actual units at actual cost [265,000 hrs. @ $13.75] ...........................................
$3,643,750
Standard units at standard cost [270,000 hrs. @ $14.00] .................................
3,780,000
Direct labor cost variance ...................................................................................
$ 136,250 F
Actual Cost
AH x AR
Direct Labor Rate and Efficiency Variances
Standard Cost
AH x SR
SH x SR
265,000 x $13.75
265,000 x $14.00
$3,643,750
$3,710,000
$66,250 F
(Rate variance)
270,000 x $14.00
$3,780,000
$70,000 F
(Efficiency variance)
$136,250 F
(Total labor variance)
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Solutions Manual, Chapter 21
1197
Problem 21-1A (Continued)
Part 3 Overhead Variances
Controllable variance
Actual overhead [$2,350,000 + $2,200,000] ...............................$4,550,000
Budgeted overhead [from flexible budget, 90% capacity] ...... 4,560,000
Controllable variance .................................................................$
10,000 F
Fixed overhead volume variance
Budgeted fixed overhead [given, at 80% capacity] ..................$2,400,000
Fixed overhead cost applied [270,000 hrs. @ $10] .................. 2,700,000
Fixed overhead volume variance...............................................$ 300,000 F
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1198
Financial & Managerial Accounting, 5th Edition
Problem 21-2AA (15 minutes)
(a) Variable overhead
Variable Overhead Spending and Efficiency Variances
Actual Overhead
Applied Overhead
AH x AVR
AH x SVR
SH x SVR
265,000 x $8
$2,200,000
$2,120,000
$80,000 U
(Spending variance)
270,000 x $8
$2,160,000
$40,000 F
(Efficiency variance)
$40,000 U
(Total variable overhead variance)
(b) Fixed overhead
Fixed Overhead Spending and Volume Variances
Actual Overhead
Budgeted Overhead
Applied Overhead
270,000 x $10
$2,350,000
$2,400,000
$50,000 F
(Spending variance)
$2,700,000
$300,000 F
(Volume variance)
$350,000 F
(Total fixed overhead variance)
(c)
Controllable variance
Variable overhead spending variance ................................... $ 80,000 U
Variable overhead efficiency variance ................................... 40,000 F
Fixed overhead spending variance ........................................ 50,000 F
Total overhead controllable variance .................................... $ 10,000 F
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Solutions Manual, Chapter 21
1199
Problem 21-3A (60 minutes)
Part 1
Amount
per unit
Variable or Fixed Classification
Variable sales (total divided by 15,000 units)
Sales .................................................................................................. $
200.00
Variable costs (total divided by 15,000 units)
Direct materials ................................................................................ $
65.00
Direct labor .......................................................................................
15.00
Machinery repairs ............................................................................
4.00
Utilities ($45,000 variable) ...............................................................
3.00
Packaging .........................................................................................
5.00
Shipping ............................................................................................
7.00
Total variable costs.......................................................................... $
99.00
Fixed costs
Depreciation—Plant equipment ...................................................... $ 300,000
Utilities ($195,000 - $45,000 variable) .............................................
150,000
Plant management salaries .............................................................
200,000
Sales salary ......................................................................................
250,000
Advertising expense ........................................................................
125,000
Salaries .............................................................................................
241,000
Entertainment expense....................................................................
90,000
Total fixed costs ............................................................................... $1,356,000
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1200
Financial & Managerial Accounting, 5th Edition
Problem 21-3A (Continued)
Part 2
PHOENIX COMPANY
Flexible Budgets
For Year Ended December 31, 2013
Flexible Budget
Variable
Total
Amount
Fixed
per Unit
Cost
Sales ..................................... $200.00
Flexible
Budget for
Unit Sales
of 14,000
Flexible
Budget for
Unit Sales
of 16,000
$2,800,000
$3,200,000
Variable costs
Direct materials .................
65.00
910,000
1,040,000
Direct labor ........................
15.00
210,000
240,000
Machinery repairs .............
4.00
56,000
64,000
Utilities ...............................
3.00
42,000
48,000
Packaging ..........................
5.00
70,000
80,000
Shipping .............................
7.00
98,000
112,000
Total variable costs ..........
99.00
1,386,000
1,584,000
Contribution margin ............ $101.00
1,414,000
1,616,000
Fixed costs
Depreciation—Plant Equip....
$ 300,000
300,000
300,000
Utilities ...............................
150,000
150,000
150,000
Plant mgmt. salaries .........
200,000
200,000
200,000
Sales salary. ......................
250,000
250,000
250,000
Advertising expense .........
125,000
125,000
125,000
Salaries ..............................
241,000
241,000
241,000
Entertainment expense ....
90,000
90,000
90,000
Total fixed costs................
$1,356,000
1,356,000
1,356,000
Income from operations .......
$
58,000
$ 260,000
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Solutions Manual, Chapter 21
1201
Problem 21-3A (Continued)
Part 3
Operating income increase for a 15,000 to 18,000 unit sales increase
Possible sales (units)...............................................................
Contribution margin per unit...................................................x
18,000 Units
$101
Total contribution margin ........................................................$1,818,000
Less: Fixed costs ....................................................................(1,356,000)
Potential operating income .....................................................$ 462,000
vs. Budgeted income for 2013 ................................................
159,000
Increase .....................................................................................$ 303,000*
*Alternate solution format
Unit increase ...........................................................................................
3,000 Units
Contribution margin per unit .................................................................. x $101
Increase in contribution margin .............................................................$303,000
Since there is no increase in fixed costs, the expected increase in operating
income is the same $303,000.
Part 4
Operating income (loss) at 12,000 units
Possible sales (units)...............................................................
Contribution margin per unit...................................................x
12,000 Units
$101
Total contribution margin ........................................................$1,212,000
Less: Fixed costs ....................................................................(1,356,000)
Potential operating loss...........................................................$ (144,000)
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1202
Financial & Managerial Accounting, 5th Edition
Problem 21-4A (45 minutes)
Part 1
PHOENIX COMPANY
Flexible Budget Performance Report
For Year Ended December 31, 2013
Flexible
Budget
Sales (18,000 units) .......................... $3,600,000
Actual
Results
Variances*
$3,648,000
$48,000 F
Variable costs
Direct materials ..............................
1,170,000
1,185,000
15,000 U
Direct labor .....................................
270,000
278,000
8,000 U
Machinery repairs ..........................
72,000
63,000
9,000 F
Utilities ............................................
54,000
53,000
1,000 F
Packaging .......................................
90,000
87,500
2,500 F
Shipping .........................................
126,000
118,500
7,500 F
Total variable costs .......................
1,782,000
1,785,000
3,000 U
Contribution margin .........................
1,818,000
1,863,000
45,000 F
Depreciation—Plant equip. ...........
300,000
300,000
0
Utilities ............................................
150,000
147,500
2,500 F
Plant management salaries ..........
200,000
210,000
10,000 U
Sales salary ....................................
250,000
268,000
18,000 U
Advertising expense ......................
125,000
132,000
7,000 U
Salaries ...........................................
241,000
241,000
0
Entertainment expense .................
90,000
93,500
3,500 U
Total fixed costs.............................
1,356,000
1,392,000
36,000 U
Income from operations .................. $ 462,000
$ 471,000
$ 9,000 F
Fixed costs
*F = Favorable variance; and U = Unfavorable variance.
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Solutions Manual, Chapter 21
1203
Problem 21-4A (Continued)
Part 2
(a) Analysis of sales variance
Total
Budgeted sales ..............................................................
$3,600,000
Per unit
$200.00
Actual sales ....................................................................
3,648,000
Sales variance (favorable) ............................................
$ 48,000
202.67*
$
2.67
Interpretation: The sales variance is favorable because the actual price was
higher than planned.
* (rounded)
(b) Analysis of direct materials variance
Total
Per unit
Budgeted materials........................................................
$1,170,000
$ 65.00
Actual materials used ....................................................
1,185,000
65.83
Direct materials variance (unfavorable) ......................
$ 15,000
$ 0.83
Interpretation: The direct materials variance is unfavorable for two
possible reasons. (1) The quantity of materials used may have been more
than the quantity budgeted, and/or (2) the amount paid for the materials
might have been more than the budgeted purchase price.
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1204
Financial & Managerial Accounting, 5th Edition
Problem 21-5A (60 minutes)
Part 1
Per unit
Amount
Variable or Fixed Classification
Variable costs (total divided by 15,000 units)
Indirect materials ............................................................................. $
Indirect labor ....................................................................................
Power ................................................................................................
Repairs and maintenance ...............................................................
Total variable costs ......................................................................... $
3.00
12.00
3.00
6.00
24.00
Fixed costs (per month)
Depreciation—Building ................................................................... $ 24,000
Depreciation—Machinery ................................................................
80,000
Taxes and insurance .......................................................................
12,000
Supervision ......................................................................................
79,000
Total fixed costs............................................................................... $195,000
Part 2
ANTUAN COMPANY
Flexible Overhead Budgets
For Month Ended October 31
Flexible Budget
Variable
Total
Amount
Fixed
per Unit
Cost
Variable overhead costs
Indirect materials ............... $ 3.00
Indirect labor ...................... 12.00
Power .................................. 3.00
Repairs and maint. ............. 6.00
Total variable costs............ $24.00
Fixed overhead costs
Depreciation—Building .....
$ 24,000
Depreciation—Mach...........
80,000
Taxes and insurance..........
12,000
Supervision ........................
79,000
Total fixed costs .................
$195,000
Total overhead costs ...........
Flexible
Budget for
Unit Sales
of 13,000
Flexible
Budget for
Unit Sales
of 15,000
Flexible
Budget for
Unit Sales
of 17,000
$ 39,000
156,000
39,000
78,000
312,000
$ 45,000
180,000
45,000
90,000
360,000
$ 51,000
204,000
51,000
102,000
408,000
24,000
80,000
12,000
79,000
195,000
$507,000
24,000
80,000
12,000
79,000
195,000
$555,000
24,000
80,000
12,000
79,000
195,000
$603,000
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Solutions Manual, Chapter 21
1205
Problem 21-5A (Continued)
Part 3
Direct Materials Variances
Preliminary computations
Actual material used:
Standard quantity of materials:
Actual price:
Standard price:
91,000 lbs. (given)
15,000 units x 6 lb./unit = 90,000 lb.
$5.10/lb. (given)
$5.00/lb. (given)
Direct material cost variances
Actual units at actual cost [91,000 lbs. @ $5.10] .....................................
$464,100
Standard units at standard cost [90,000 lbs. @ $5.00] ...........................450,000
Direct material cost variance ....................................................................
$ 14,100 U
Direct Materials Price and Quantity Variances
Actual Costs
Standard Costs
AQ x AP
AQ x SP
SQ x SP
91,000 x $5.10
lbs.
per lb.
91,000 x $5.00
lbs.
per lb.
90,000 x $5.00
Lbs.
per lb.
$464,100
$455,000
$450,000
$9,100 U
(Price variance)
$5,000 U
(Quantity variance)
$14,100 U
(Total materials variance)
Alternate solution format
Price variance
=
=
=
=
Quantity variance
=
=
=
=
AQ x (AP – SP)
91,000 lb. x ($5.10 - $5.00) per lb.
91,000 lb. x ($0.10) per lb.
$9,100 U
(AQ - SQ) x SP
(91,000 – 90,000) lb. x $5.00 per lb.
1,000 lb. x $5.00 per lb.
$5,000 U
Price variance .....................
$ 9,100 U
Quantity variance ................ 5,000 U
Total variance ......................
$14,100 U
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1206
Financial & Managerial Accounting, 5th Edition
Problem 21-5A (Continued)
Part 4
Direct labor variances
Preliminary computations
Actual hours used:
Standard hours:
Actual rate:
Standard rate:
30,500 hours (given)
15,000 units x 2 hrs./unit = 30,000 hours
$17.25/hr. (given)
$17.00/hr. (given)
Direct labor cost variances
Actual units at actual cost [30,500 hrs. @ $17.25] .............................................
$526,125
Standard units at standard cost [30,000 hrs. @ $17.00] ....................................
510,000
Direct labor cost variance ....................................................................................
$ 16,125 U
Direct Labor Rate and Efficiency Variances
Standard Costs
AH x SR
SH x SR
Actual Costs
AH x AR
30,500 x $17.25
hours
per hr.
30,500 x $17.00
hours
per hr.
$526,125
$518,500
$7,625 U
(Rate variance)
30,000 x $17.00
hours
per hr.
$510,000
$8,500 U
(Efficiency variance)
$16,125 U
(Total labor variance)
Alternate solution format
Rate variance
=
=
=
=
Efficiency variance
=
=
=
=
AH x (AR - SR)
30,500 hours x ($17.25 - $17.00) per hour
30,500 x $0.25 per hour
$7,625 U
(AH - SH) x SR
(30,500 – 30,000) hours x $17.00 per hour
500 hours x $17.00 per hour
$8,500 U
Rate variance ...................... $ 7,625 U
Efficiency variance ............. 8,500 U
Total ..................................... $16,125 U
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Solutions Manual, Chapter 21
1207
Problem 21-5A (Concluded)
Part 5
ANTUAN COMPANY
Overhead Variance Report
For Month Ended October 31
Volume Variance
Expected production level .......................................................75% of capacity
Production level achieved .......................................................75% of capacity
Volume variance .......................................................................none
Controllable Variance
Flexible
Budget
Actual
Results
Variances*
Variable overhead costs
Indirect materials ......................................
$ 45,000
$ 44,250
$
750 F
Indirect labor .............................................
180,000
177,750
2,250 F
Power .........................................................45,000
43,000
2,000 F
Repairs and maintenance ........................90,000
96,000
6,000 U
Total variable costs ..................................
360,000
361,000
1,000 U
Depreciation—Building ............................24,000
24,000
0
Depreciation—Machinery ........................80,000
75,000
5,000 F
Taxes and insurance ................................12,000
11,500
500 F
Supervision ...............................................79,000
89,000
10,000 U
Total fixed costs .......................................
195,000
199,500
4,500 U
Total overhead costs .................................
$555,000
$560,500
$ 5,500 U
Fixed overhead costs
*F = Favorable variance; and U = Unfavorable variance.
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1208
Financial & Managerial Accounting, 5th Edition
Problem 21-6AA (80 minutes)
Part 1 Direct Materials Variances
Preliminary computations
Actual quantity of materials used:
Standard quantity of materials:
Actual price:
Standard price:
138,000 lb. (given)
9,000 units x 15 lbs./unit = 135,000 lb.
$3.75 (given)
$4.00 (given)
Direct materials cost variances
Actual units at actual cost [138,000 lbs. @ $3.75] ........................ $517,500
Standard units at standard cost [135,000 lbs. @ $4.00] .............. 540,000
Direct material cost variance ......................................................... $ 22,500 F
Direct Materials Price and Quantity Variances
Actual Cost
Standard Cost
AQ x AP
AQ x SP
SQ x SP
138,000 x $3.75
lbs.
per lb.
138,000 x $4.00
lbs.
per lb.
135,000 x $4.00
lbs.
per lb.
$552,000
$540,000
$517,500
$34,500 F
(Price variance)
$12,000 U
(Quantity variance)
$22,500 F
(Total materials variance)
Alternate solution format
Price variance
=
=
=
=
Quantity variance
=
=
=
=
AQ x (AP - SP)
138,000 lb. x ($3.75 - $4.00) per lb.
138,000 x (-$0.25 per lb.)
$34,500 F
(AQ – SQ) x SP
(138,000 - 135,000) x $4.00 per lb.
3,000 lb. x $4.00 per lb.
$12,000 U
Price variance ..................... $34,500 F
Quantity variance ............... 12,000 U
Total variance ..................... $22,500 F
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 21
1209
Problem 21-6AA (Continued)
Part 2 Direct Labor Variances
Preliminary computations
Actual hours:
Standard hours:
Actual rate:
Standard rate per hour:
31,000 hrs. (given)
9,000 units x 3 hrs./unit = 27,000 hrs.
$15.10/hr. (given)
$15.00 (given)
Direct labor cost variances
Actual units at actual cost [31,000 hrs. @ $15.10] ..................................
$468,100
Standard units at standard cost [27,000 hrs. @ $15.00] .........................
405,000
Direct labor cost variance .........................................................................
$ 63,100 U
Actual Costs
AH x AR
Direct Labor Rate and Efficiency Variances
Standard Costs
AH x SR
SH x SR
31,000 x $15.10
hours
per hr.
31,000 x $15.00
hours
per hr.
$468,100
$465,000
$3,100 U
(Rate variance)
27,000 x $15.00
hours
per hr.
$405,000
$60,000 U
(Efficiency variance)
$63,100 U
(Total labor variance)
Alternate solution format
Rate variance
=
=
=
=
Efficiency variance
=
=
=
=
AH x (AR - SR)
31,000 hours x ($15.10 - $15.00) per hour
31,000 x $0.10 per hour
$ 3,100 U
(AH - SH) x SR
(31,000 - 27,000) hours x $15.00 per hour
4,000 hours x $15.00 per hour
$60,000 U
Rate variance ...................... $ 3,100 U
Efficiency variance ............. 60,000 U
Total..................................... $63,100 U
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1210
Financial & Managerial Accounting, 5th Edition
Problem 21-6AA (Continued)
Part 3 Overhead Variances
(a)
Variable overhead
Preliminary computations
Actual variable overhead (given):
Indirect materials .........................................................
$15,000
Indirect labor................................................................
26,500
Power ........................................................................... 6,750
Maintenance ................................................................ 4,000
Total .............................................................................
$52,250
Actual hours:
31,000 (given)
Standard hours:
27,000 (from part 2)
Standard rate: Budgeted variable overhead
Budgeted direct labor hours
=
$48,000
=$2.00/hr
24,000 hours
Variable overhead cost variances
Variable overhead cost incurred [given] .......................................
$52,250
Variable overhead cost applied [27,000 hrs. @ $2/hr.] .................
54,000
Variable overhead cost variance ....................................................
$ 1,750 F
Variable Overhead Spending and Efficiency Variances
Actual Overhead
Applied Overhead
AH x AVR
AH x SVR
SH x SVR
31,000 x $2.00
hours
per hr.
$52,250
$62,000
$9,750 F
(Spending variance)
27,000 x $2.00
hours
per hr.
$54,000
$8,000 U
(Efficiency variance)
$1,750 F
(Total variable overhead variance)
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Solutions Manual, Chapter 21
1211
Problem 21-6AA (Continued)
(b)
Fixed overhead
Preliminary computations
Actual fixed overhead (given):
Rent of factory building ............................................... $15,000
Depreciation, machinery .............................................. 10,000
Supervisory salaries .................................................... 22,000
Total ............................................................................. $47,000
Budgeted fixed overhead:
Standard rate:
$44,400 (given)
Budgeted fixed overhead
Budgeted direct labor hours
=
$44,400
24,000 hours
= $1.85/hr
Fixed overhead cost variances
Fixed overhead cost incurred [given] ............................................
$47,000
Fixed overhead cost applied [27,000 hrs. @ $1.85] ......................
49,950
Fixed overhead cost variance ........................................................
$ 2,950 F
Fixed Overhead Spending and Volume Variances
Actual Overhead
Budgeted Overhead
Fixed Overhead
Applied
27,000 x $1.85
hours
per hr.
$47,000
$44,400
$2,600 U
(Spending variance)
$49,950
$5,550 F
(Volume variance)
$2,950 F
(Total fixed overhead variance)
(c)
Total overhead controllable variance
Variable overhead spending variance .............................................
$9,750 F
Variable overhead efficiency variance .............................................
8,000 U
Fixed overhead spending variance ..................................................
2,600 U
Total overhead controllable variance ..............................................
$ 850 U
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1212
Financial & Managerial Accounting, 5th Edition
Problem 21-6AA (Continued)
Part 4
KEGLER COMPANY
Overhead Variance Report
For Month Ended May 31
Volume Variance
Expected production level....................................................80% of capacity
Production level achieved ....................................................90% of capacity
Volume variance ....................................................................
$5,550 (favorable)
Controllable Variance
Flexible
Budget
Actual
Results
Variances*
Variable overhead costs
Indirect materials .....................................
$16,875
$15,000
$1,875 F
Indirect labor ............................................
27,000
26,500
500 F
Power ........................................................ 6,750
6,750
0
Maintenance ............................................. 3,375
4,000
625 U
Total variable costs .................................
54,000
52,250
1,750 F
Rent of factory building ..........................
15,000
15,000
0
Depreciation—Machinery ........................
10,000
10,000
0
Supervisory salaries ................................
19,400
22,000
2,600 U
Total fixed costs.......................................
44,400
47,000
2,600 U
Total overhead costs .................................
$98,400
$99,250
$ 850 U
Fixed overhead costs
* F = Favorable variance; and U = Unfavorable variance.
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Solutions Manual, Chapter 21
1213
Problem 21-7AA (45 minutes)
Part 1
Dec. 31*
Goods in Process Inventory....................................................
100,000
Direct Materials Quantity Variance .........................................
3,000
Direct Materials Price Variance ..................................... 500
Raw Materials Inventory .................................................
102,500
To record materials costs, including
the unfavorable quantity and
favorable price variances.
Dec. 31
Goods in Process Inventory....................................................
95,800
Direct Labor Rate Variance .....................................................
1,200
Direct Labor Efficiency Variance ................................... 7,000
Factory Payroll ................................................................90,000
To record direct labor costs, including
the favorable efficiency variance and
unfavorable rate variance.
Dec. 31
Goods in Process Inventory....................................................
354,000
Controllable Variance ..............................................................
9,000
Volume Variance ......................................................................
12,000
Factory Overhead ...........................................................
375,000
To record overhead costs, including
the unfavorable volume and unfavorable
controllable variances.
* Alternatively, some companies compute and record the price variance
when materials are purchased. This would yield two separate entries:
(1) Purchase of materials
Raw Materials Inventory ..........................................................................
103,000
Direct Materials Price Variance .........................................................
500
Accounts Payable...............................................................................
102,500
(2) Issuance of materials into production
Goods in Process Inventory ....................................................................
100,000
Direct Materials Quantity Variance..........................................................
3,000
Raw Materials Inventory.....................................................................
103,000
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1214
Financial & Managerial Accounting, 5th Edition
Problem 21-7AA (Continued)
Part 2
Under management by exception, the manager would first identify the largest
variances, attempt to uncover their causes, and then implement actions aimed
at correcting them. The smaller variances would be tackled after the major
problems were dealt with, if at all.
The largest variance amounts occur for the material quantity variance, the
direct labor efficiency variance, and the two overhead variances. The manager
should go to the production department to find out why the process used
more materials and less labor hours than expected. The controllable variance
would need to be broken down into its components for individual cost items
to see which ones deviated most from expected results.* Based on these
findings, lower-level managers would be called on to explain what happened.
After the relatively larger amounts are explained and actions taken, the
manager can seek explanations of the less significant material price variance
from the purchasing department and the direct labor rate variance from the
personnel department.
* The unfavorable volume variance indicates that the company produced fewer
items than expected. Managers would need to determine whether this was
because of declining sales, idle time, breakdowns, or other reasons.
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Solutions Manual, Chapter 21
1215
PROBLEM SET B
Problem 21-1B (50 minutes)
Part 1 Direct Materials Variances
Direct materials cost variances
Actual units at actual cost [1,000,000 lbs. @ $4.25] ..........................................
$4,250,000
Standard units at standard cost [1,050,000 lbs. @ $4.00] .................................
4,200,000
Direct material cost variance ...............................................................................
$ 50,000 U
Direct Materials Price and Quantity Variances
Actual Cost
Standard Cost
AQ x AP
AQ x SP
SQ x SP
1,000,000 x $4.25
1,000,000 x $4.00
$4,250,000
1,050,000 x $4.00
$4,000,000
$250,000 U
(Price variance)
$4,200,000
$200,000 F
(Quantity variance)
$50,000 U
(Total materials variance)
Part 2 Direct Labor Variances
Direct labor cost variances
Actual units at actual cost [250,000 hrs. @ $7.75] .............................................
$1,937,500
Standard units at standard cost [252,000 hrs. @ $8.00] ....................................
2,016,000
Direct labor cost variance ....................................................................................
$ 78,500 F
Actual Cost
AH x AR
250,000 x $7.75
Direct Labor Rate and Efficiency Variances
Standard Cost
AH x SR
SH x SR
250,000 x $8.00
$1,937,500
252,000 x $8.00
$2,000,000
$62,500 F
(Rate variance)
$2,016,000
$16,000 F
(Efficiency variance)
$78,500 F
(Total labor variance)
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1216
Financial & Managerial Accounting, 5th Edition
Problem 21-1B (Continued)
Part 3 Overhead Variances
Overhead controllable variance
Actual overhead incurred [$1,960,000 + $1,200,000] ................
$ 3,160,000
Budgeted overhead [from flexible budget] ...............................
3,276,000
Controllable overhead cost variance .........................................
$
116,000 F
Fixed overhead volume variance
Budgeted fixed overhead cost [at 80% capacity] .....................
$ 2,016,000
Fixed overhead cost applied [252,000 hrs. @ $7] .....................
1,764,000
Fixed overhead cost variance ....................................................
$
252,000 U
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Solutions Manual, Chapter 21
1217
Problem 21-2BA (15 minutes)
(a) Variable Overhead Spending and Efficiency Variances
Actual Overhead
Applied Overhead
AH x AVR
AH x SVR
SH x SVR
250,000 x $5
$1,200,000
252,000 x $5
$1,250,000
$50,000 F
(Spending variance)
$1,260,000
$10,000 F
(Efficiency variance)
$60,000 F
(Total variable overhead variance)
(b) Fixed Overhead Spending and Volume Variances
Actual Overhead
Budgeted Overhead
Applied Overhead
252,000 x $7
$1,960,000
$2,016,000
$56,000 F
(Spending variance)
$1,764,000
$252,000 U
(Volume variance)
$196,000 U
(Total fixed overhead variance)
(c)
Controllable variance
Variable overhead spending variance ...................................
Variable overhead efficiency variance ...................................
Fixed overhead spending variance ........................................
Total overhead controllable variance ....................................
$ 50,000 F
10,000 F
56,000 F
$116,000 F
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1218
Financial & Managerial Accounting, 5th Edition
Problem 21-3B (60 minutes)
Part 1
Variable or Fixed Classification
Per Unit
Amount
Variable sales (total divided by 20,000 units)
Sales .................................................................................................. $
150.00
Variable costs (total divided by 20,000 units)
Direct materials ................................................................................ $
60.00
Direct labor .......................................................................................
13.00
Machinery repairs .............................................................................
2.85
Utilities (25% variable) .....................................................................
2.50
Packaging .........................................................................................
4.00
Shipping ............................................................................................
5.80
Total variable costs .......................................................................... $
88.15
Fixed costs
Depreciation—Machinery ................................................................ $ 250,000
Utilities (75% fixed) ..........................................................................
150,000
Plant management salaries .............................................................
140,000
Sales salary .......................................................................................
160,000
Advertising expense ........................................................................
81,000
Salaries ..............................................................................................
241,000
Entertainment expense ....................................................................
90,000
Total fixed costs ................................................................................. $1,112,000
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Solutions Manual, Chapter 21
1219
Problem 21-3B (Continued)
Part 2
TOHONO COMPANY
Flexible Budgets
For Year Ended December 31, 2013
Flexible Budget
Variable
Total
Amount
Fixed
per Unit
Cost
Sales ..................................... $150.00
Flexible
Budget for
Unit Sales
of 18,000
Flexible
Budget for
Unit Sales
of 24,000
$2,700,000
$3,600,000
Variable costs
Direct materials .................
60.00
1,080,000
1,440,000
Direct labor ........................
13.00
234,000
312,000
Machinery repairs .............
2.85
51,300
68,400
Utilities ...............................
2.50
45,000
60,000
Packaging ..........................
4.00
72,000
96,000
Shipping .............................
5.80
104,400
139,200
Total variable .....................
88.15
1,586,700
2,115,600
Contribution margin ............ $ 61.85
1,113,300
1,484,400
Fixed costs
Depreciation—Mach. ..........
$ 250,000
250,000
250,000
Utilities ...............................
150,000
150,000
150,000
Plant mgmt. salaries .........
140,000
140,000
140,000
Sales salary. ......................
160,000
160,000
160,000
Advertising expense .........
81,000
81,000
81,000
Salaries ..............................
241,000
241,000
241,000
Entertainment expense ....
90,000
90,000
90,000
Total fixed costs................
$1,112,000
1,112,000
1,112,000
Income from operations .......
$
1,300
$ 372,400
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1220
Financial & Managerial Accounting, 5th Edition
Problem 21-3B (Continued)
Part 3
Operating income increase for a 20,000 to 28,000 unit sales increase
Potential sales (units) ..............................................................
28,000 Units
Contribution margin per unit...................................................x
$61.85
Total contribution margin ........................................................$1,731,800
Less: Fixed costs ....................................................................(1,112,000)
Potential operating income .....................................................$ 619,800
vs. Budgeted income for 2013 ................................................
125,000
Potential increase in income ...................................................$
494,800*
*Alternate solution format
Unit increase .............................................................................
8,000 Units
Contribution margin per unit.................................................... x $61.85
Increase in contribution margin............................................... $494,800
Since there is no increase in fixed costs, the expected increase in operating
income is the same $494,800.
Part 4
Operating income (loss) at 14,000 units
Potential sales (units) ..............................................................
14,000
Contribution margin per unit...................................................
x
$61.85
Total contribution margin ........................................................
$
865,900
Less: Fixed costs ....................................................................(1,112,000)
Potential operating loss ...........................................................
$ (246,100)
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Solutions Manual, Chapter 21
1221
Problem 21-4B (60 minutes)
Part 1
TOHONO COMPANY
Flexible Budget Performance Report
For Year Ended December 31, 2013
Flexible
Budget
Sales (24,000 units) .......................... $3,600,000
Actual
Results
Variances*
$3,648,000
$48,000 F
Variable costs
Direct materials ..............................
1,440,000
1,400,000
40,000 F
Direct labor .....................................
312,000
360,000
48,000 U
Machinery repairs ..........................
68,400
60,000
8,400 F
Utilities ............................................
60,000
64,000
4,000 U
Packaging .......................................
96,000
90,000
6,000 F
Shipping .........................................
139,200
124,000
15,200 F
Total variable costs .......................
2,115,600
2,098,000
17,600 F
Contribution margin .........................
1,484,400
1,550,000
65,600 F
Depreciation—Machinery ..............
250,000
250,000
0
Utilities ............................................
150,000
154,000
4,000 U
Plant management salaries ..........
140,000
155,000
15,000 U
Sales salary ....................................
160,000
162,000
2,000 U
Advertising expense ......................
81,000
104,000
23,000 U
Salaries ...........................................
241,000
232,000
9,000 F
Entertainment expense .................
90,000
100,000
10,000 U
Total fixed costs.............................
1,112,000
1,157,000
45,000 U
Income from operations .................. $ 372,400
$ 393,000
$20,600 F
Fixed costs
*F = Favorable variance; and U = Unfavorable variance
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1222
Financial & Managerial Accounting, 5th Edition
Problem 21-4B (Continued)
Part 2
(a) Analysis of sales variance
Total
Per unit
Budgeted sales ..............................................................
$3,600,000
$150.00
Actual sales ....................................................................3,648,000
152.00
Sales variance (favorable) ............................................
$
48,000
$
2.00
Interpretation: The sales variance is favorable because the actual price was
higher than planned.
(b) Analysis of direct materials variance
Total
Budgeted materials........................................................
$1,440,000
Actual materials used ....................................................1,400,000
Direct materials variance (favorable) ...........................
$
40,000
Per unit
$ 60.00
58.33*
$ 1.67
Interpretation: The direct materials variance is favorable for two possible
reasons. (1) The quantity of materials used might have been less than the
quantity budgeted, and/or (2) the amount paid for the materials might have
been less than the budgeted purchase price.
* (rounded)
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Solutions Manual, Chapter 21
1223
Problem 21-5B (60 minutes)
Part 1
Variable or Fixed Classification
Per Unit
Amount
Variable costs (total divided by 15,000 units)
Indirect materials …………………………………
$ 1.50
Indirect labor………………………………… ……
6.00
Power………………………………………………
1.50
Repairs and maintenance………………………
3.00
Total variable costs………………………………
$12.00
Fixed costs (per month)
Depreciation—Building…………………………
$ 24,000
Depreciation—Machinery………………………
72,000
Taxes and insurance……………………………
18,000
Supervision………………………………………
66,000
Total fixed costs…………………………………
$180,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
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1224
Financial & Managerial Accounting, 5th Edition
Problem 21-5B (Continued)
Part 2
SUNCOAST COMPANY
Flexible Overhead Budgets
For Month Ended December 31
Flexible Budget
Variable
Total
Amount
Fixed
per Unit
Cost
Flexible
Budget for
Unit Sales
of 13,000
Flexible
Budget for
Unit Sales
of 15,000
Flexible
Budget for
Unit Sales
of 17,000
Variable overhead costs
Indirect materials ...................$ 1.50
$ 19,500
$ 22,500
$ 25,500
Indirect labor .......................... 6.00
78,000
90,000
102,000
Power ...................................... 1.50
19,500
22,500
25,500
Repairs and maintenance...... 3.00
39,000
45,000
51,000
Total variable costs................$12.00
156,000
180,000
204,000
Fixed overhead costs
Depreciation—Building .........
$ 24,000
24,000
24,000
24,000
Depreciation—Machinery ......
72,000
72,000
72,000
72,000
Taxes and insurance..............
18,000
18,000
18,000
18,000
Supervision ............................
66,000
66,000
66,000
66,000
Total fixed costs .....................
$180,000
180,000
180,000
180,000
$336,000
$360,000
$384,000
Total overhead .........................
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Solutions Manual, Chapter 21
1225
Problem 21-5B (Continued)
Part 3
Direct Materials Variances
Preliminary computations
Actual material used:
Standard quantity of materials:
Actual price:
Standard price:
69,000 lbs. (given)
15,000 units x 4.5 lb./unit = 67,500 lb.
$6.10/lb. (given)
$6.00/lb. (given)
Direct material cost variances
Actual units at actual cost [69,000 lbs. @ $6.10] .......................... $420,900
Standard units at standard cost [67,500 lbs. @ $6.00] ................ 405,000
Direct material cost variance ......................................................... $ 15,900 U
Direct Materials Price and Quantity Variances
Actual Costs
Standard Costs
AQ x AP
AQ x SP
SQ x SP
69,000 x $6.10
lbs.
per lb.
69,000 x $6.00
lbs.
per lb.
67,500 x $6.00
lbs.
per lb.
$420,900
$414,000
$405,000
$ 6,900 U
(Price variance)
$9,000 U
(Quantity variance)
$15,900 U
(Total materials variance)
Alternate solution format
Price variance
=
=
=
=
Quantity variance
=
=
=
=
AQ x (AP - SP)
69,000 lb. x ($6.10 - $6.00) per lb.
69,000 lb. x ($0.10) per lb.
$ 6,900 U
(AQ – SQ) x SP
(69,000 – 67,500) lb. x $6.00 per lb.
1,500 lb. x $6.00 per lb.
$ 9,000 U
Price variance ..................... $ 6,900 U
Quantity variance ...............
9,000 U
Total variance ..................... $15,900 U
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
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1226
Financial & Managerial Accounting, 5th Edition
Problem 21-5B (Continued)
Part 4
Direct labor variances
Preliminary computations
Actual hours used:
Standard hours:
Actual rate:
Standard rate:
22,800 hours (given)
15,000 units x 1.5 hrs./unit = 22,500 hours
$12.30/hr. (given)
$12.00/hr. (given)
Direct labor cost variances
Actual units at actual cost [22,800 hrs. @ $12.30] .............................................
$280,440
Standard units at standard cost [22,500 hrs. @ $12.00] ....................................
270,000
Direct labor cost variance ....................................................................................
$ 10,440 U
Actual Costs
AH x AR
Direct Labor Rate and Efficiency Variances
Standard Costs
AH x SR
SH x SR
22,800 x $12.30
hours
per hr.
22,800 x $12.00
hours
per hr.
$280,440
$273,600
$6,840 U
(Rate variance)
22,500 x $12.00
hours
per hr.
$270,000
$3,600 U
(Efficiency variance)
$10,440 U
(Total labor variance)
Alternate solution format
Rate variance
=
=
=
=
Efficiency variance
=
=
=
=
AH x (AR - SR)
22,800 hours x ($12.30 - $12.00) per hour
22,800 x $0.30 per hour
$ 6,840 U
(AH - SH) x SR
(22,800 – 22,500) hours x $12.00 per hour
300 hours x $12.00 per hour
$ 3,600 U
Rate variance ...................... $ 6,840 U
Efficiency variance .............
3,600 U
Total .................................... $10,440 U
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 21
1227
Problem 21-5B (Concluded)
Part 5
SUNCOAST COMPANY
Overhead Variance Report
For Month Ended December 31
Volume Variance
Expected production level .......................................................75% of capacity
Production level achieved .......................................................75% of capacity
Volume variance ....................................................................... 0
Controllable Variance
Flexible
Budget
Actual
Results
Variances*
Variable overhead costs
Indirect materials .....................................
$ 22,500
$ 21,600
$ 900 F
Indirect labor ............................................ 90,000
82,260
7,740 F
Power ........................................................ 22,500
23,100
600 U
Repairs and maintenance ....................... 45,000
46,800
1,800 U
Total variable costs .................................180,000
173,760
6,240 F
Depreciation—Building ........................... 24,000
24,000
0
Depreciation—Machinery ........................ 72,000
75,000
3,000 U
Taxes and insurance ............................... 18,000
16,500
1,500 F
Supervision .............................................. 66,000
66,000
0
Total fixed costs.......................................180,000
181,500
1,500 U
Total overhead costs .................................
$360,000
$355,260
$4,740 F
Fixed overhead costs
*F = Favorable variance; and U = Unfavorable variance
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1228
Financial & Managerial Accounting, 5th Edition
Problem 21-6BA (80 minutes)
Part 1
Direct Materials Variances
Preliminary computations
Actual quantity of materials used:
Standard quantity of materials:
Actual price:
Standard price:
92,000 lb. (given)
9,000 units x 10 lbs./unit = 90,000 lb.
$2.95/lb. (given)
$3.00/lb. (given)
Direct materials cost variances
Actual units at actual cost [92,000 lbs. @ $2.95/lb.] .....................
$271,400
Standard units at standard cost [90,000 lbs. @ $3.00/lb.] ............
270,000
Direct material cost variance ..........................................................
$ 1,400 U
Direct Materials Price and Quantity Variances
Actual Cost
Standard Cost
AQ x AP
AQ x SP
SQ x SP
92,000 x $2.95
lbs.
per lb.
92,000 x $3.00
lbs.
per lb.
$271,400
$276,000
$4,600 F
(Price variance)
90,000 x $3.00
lbs.
per lb.
$270,000
$6,000 U
(Quantity variance)
$1,400 U
(Total materials variance)
Alternate solution format
Price variance
=
=
=
=
Quantity variance
=
=
=
=
AQ x (AP - SP)
92,000 lb. x ($2.95 - $3.00) per lb.
92,000 x (-$0.05 per lb.)
$4,600 F
(AQ - SQ) x SP
(92,000 - 90,000) x $3.00 per lb.
2,000 lb. x $3.00 per lb.
$6,000 U
Price variance ..................... $4,600 F
Quantity variance ............... 6,000 U
Total variance ..................... $1,400 U
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 21
1229
Problem 21-6BA (Continued)
Part 2 Direct Labor Variances
Preliminary computations
Actual hours:
Standard hours:
Actual rate:
Standard rate per hour:
37,600 hrs. (given)
9,000 units x 4 hrs./unit = 36,000 hrs.
$6.05/hr. (given)
$6.00/hr. (given)
Direct labor cost variances
Actual units at actual cost [37,600 hrs. @ $6.05/hr.] .................... $227,480
Standard units at standard cost [36,000 hrs. @ $6.00/hr.] .......... 216,000
Direct labor cost variance .............................................................. $ 11,480 U
Direct Labor Rate and Efficiency Variances
Standard Costs
AH x SR
SH x SR
Actual Costs
AH x AR
37,600 x $6.05
hours per hr.
$227,480
37,600 x $6.00
hours per hr.
36,000 x $6.00
hours
per hr.
$225,600
$216,000
$1,880 U
(Rate variance)
$9,600 U
(Efficiency variance)
$11,480 U
(Total labor variance)
Alternate solution format
Rate variance
=
=
=
=
Efficiency variance
=
=
=
=
AH x (AR - SR)
37,600 hours x ($6.05 - $6.00) per hour
37,600 x ($0.05) per hour
$ 1,880 U
(AH – SH) x SR
(37,600 – 36,000) hours x $6.00 per hour
1,600 hours x $6.00 per hour
$ 9,600 U
Rate variance ...................... $ 1,880 U
Efficiency variance .............
9,600 U
Total .................................... $11,480 U
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1230
Financial & Managerial Accounting, 5th Edition
Problem 21-6BA (Continued)
Part 3 Overhead Variances
(a)
Variable overhead
Preliminary computations
Actual variable overhead (given):
Indirect materials ........................................................
$10,000
Indirect labor ..............................................................16,000
Power ......................................................................... 4,500
Maintenance ............................................................... 3,000
Total ...........................................................................
$33,500
Actual hours:
37,600 (given)
Standard hours:
36,000 (from part 2)
Standard rate:
Budgeted variable overhead
Budgeted direct labor hours
=
$32,000
= $1.00/hr
32,000 hours
Variable overhead cost variances
Variable overhead cost incurred [given] .......................................
$33,500
Variable overhead cost applied [36,000 hrs. @ $1.00] .................
36,000
Variable overhead cost variance....................................................
$ 2,500 F
Variable Overhead Spending and Efficiency Variances
Actual Overhead
Applied Overhead
AH x AVR
AH x SVR
SH x SVR
37,600 x $1.00
hours per hr.
36,000 x $1.00
hours
per hr.
$37,600
$36,000
$33,500
$4,100 F
(Spending variance)
$1,600 U
(Efficiency variance)
$2,500 F
(Total variable overhead variance)
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Solutions Manual, Chapter 21
1231
Problem 21-6BA (Continued)
(b)
Fixed overhead
Preliminary computations
Actual fixed overhead (given):
Rent of factory building ...............................................
Depreciation, machinery ..............................................
Taxes and insurance ....................................................
Supervisory salaries ....................................................
Total .............................................................................
$12,000
19,200
3,000
14,000
$48,200
Budgeted fixed overhead:
$48,000 (given)
Standard rate:
Budgeted fixed overhead
Budgeted direct labor hours
=
$48,000
= $1.50 / hr
32,000 hours
Fixed overhead cost variances
Fixed overhead cost incurred [given] ............................................
$48,200
Fixed overhead cost applied [36,000 hrs. @ $1.50] ......................
54,000
Fixed overhead cost variance ........................................................
$ 5,800 F
Fixed Overhead Spending and Volume Variances
Actual Overhead
Budgeted Overhead
Fixed Overhead
Applied
36,000 x $1.50
hours
per hr.
$48,200
$48,000
$200 U
(Spending variance)
$54,000
$6,000 F
(Volume variance)
$5,800 F
(Total fixed overhead variance)
(c)
Total overhead controllable variance
Variable overhead spending variance ........................................
$4,100 F
Variable overhead efficiency variance ........................................1,600 U
Fixed overhead spending variance ............................................. 200 U
Total overhead controllable variance .........................................
$2,300 F
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1232
Financial & Managerial Accounting, 5th Edition
Problem 21-6BA (Concluded)
Part 4
GUADELUPE COMPANY
Overhead Variance Report
For Month Ended March 31
Volume Variance
Expected production level..........................................
80% of capacity
Production level achieved ..........................................
90% of capacity
Volume variance ..........................................................
$6,000 (favorable)
Controllable Variance
Flexible
Budget
Actual
Results
Variances*
Variable overhead costs
Indirect materials ...........................
$11,250
$10,000
$1,250 F
Indirect labor ..................................18,000
16,000
2,000 F
Power .............................................. 4,500
4,500
0
Maintenance ................................... 2,250
3,000
750 U
Total variable costs .......................36,000
33,500
2,500 F
Rent of factory building ................12,000
12,000
0
Depreciation—Machinery ..............20,000
19,200
800 F
Taxes and insurance ..................... 2,400
3,000
600 U
Supervisory salaries ......................13,600
14,000
400 U
Total fixed costs.............................48,000
48,200
200 U
Total overhead costs .......................
$84,000
$81,700
$2,300 F
Fixed overhead costs
* F = Favorable variance; and U = Unfavorable variance.
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Solutions Manual, Chapter 21
1233
Problem 21-7BA (45 minutes)
Part 1
June 30*
Goods in Process Inventory....................................................
130,000
Direct Materials Quantity Variance ................................ 5,000
Direct Materials Price Variance ..................................... 1,500
Raw Materials Inventory .................................................
123,500
To record materials costs, including
the favorable quantity and
favorable price variances.
June 30
Goods in Process Inventory....................................................
67,500
Direct Labor Rate Variance .....................................................
500
Direct Labor Efficiency Variance ................................... 3,000
Factory Payroll ................................................................65,000
To record direct labor costs, including
the favorable efficiency variance and
unfavorable rate variance.
June 30
Goods in Process Inventory....................................................
230,000
Controllable Variance ..............................................................
8,000
Volume Variance ......................................................................
12,000
Factory Overhead ...........................................................
250,000
To record overhead costs, including
the unfavorable volume and unfavorable
controllable variances.
* Alternatively, some companies compute and record the price variance
when materials are purchased. This would yield two separate entries:
(1) Purchase of materials
Raw Materials Inventory...........................................................................
125,000
Direct Materials Price Variance .........................................................
1,500
Accounts Payable ...............................................................................
123,500
(2) Issuance of materials into production
Goods in Process Inventory ....................................................................
130,000
Direct Materials Quantity Variance ....................................................
5,000
Raw Materials Inventory .....................................................................
125,000
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1234
Financial & Managerial Accounting, 5th Edition
Problem 21-7BA (Concluded)
Part 2
Under management by exception, the manager would first identify the largest
variances, attempt to uncover their causes, and then implement actions aimed
at correcting them. The smaller variances would be tackled after the major
problems were dealt with, if at all.
The largest variance amounts occur for the materials quantity variance, the
materials price variance, the direct labor efficiency variance, and the volume
and controllable overhead variances. The manager should go to the
purchasing department to determine why materials were acquired at a lower
price, and to the production department to find out why the process used less
materials and less labor hours than expected. The controllable variance would
need to be broken down into its components for individual cost items to see
which ones deviated most from expected results.* Based on these findings,
lower-level managers would be called on to explain what happened.
After the relatively larger amounts are explained and actions taken, the
manager can seek explanations of the less significant direct labor rate
variance from the personnel department.
* The unfavorable volume variance indicates that the company produced fewer items
than expected. Managers would need to determine whether this was because of
declining sales, idle time, breakdowns, or other reasons.
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Solutions Manual, Chapter 21
1235
SERIAL PROBLEM — SP 21
Serial Problem, Success Systems (30 minutes)
Success Systems
Flexible Budget Performance Report
For Quarter Ended June 30
Flexible
Budget
Actual
Results
Variances
Desk sales (150 units) ...............................
$187,500
$186,000
$1,500 U
Chair sales (80 units) ................................. 40,000
41,200
1,200 F
Variable expenses .....................................
132,500
132,880
380 U
Contribution margin .................................. 95,000
94,320
680 U
Fixed expenses .......................................... 30,000
31,000
1,000 U
Income from operations ............................
$ 65,000
$ 63,320
$1,680 U
Supporting computations
Total budgeted desk sales ..........................................................$180,000
Total units budgeted....................................................................
144
Budgeted selling price ................................................................
$1,250 per unit
Flexible budget units ...................................................................
150
Flexible budget sales...................................................................$187,500
Total budgeted chair sales..........................................................$ 36,000
Total units budgeted....................................................................
72
Budgeted selling price ................................................................
$500 per unit
Flexible budget units ...................................................................
80
Flexible budget sales...................................................................$ 40,000
Total budgeted variable costs for desks ...................................$108,000
Total units budgeted....................................................................
144
Budgeted variable expenses per desk ......................................
$750
Flexible budget units ...................................................................
150
Flexible budget variable expenses for desks ...........................$112,500
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1236
Financial & Managerial Accounting, 5th Edition
Serial Problem, Success Systems (concluded)
Total budgeted variable costs for chairs ...................................$18,000
Total units budgeted....................................................................
72
Budgeted variable expenses per chair ......................................
$250
Flexible budget units ...................................................................
80
Flexible budget variable expenses for chairs ...........................$20,000
Total budgeted variable expenses* ............................................
$132,500
*($112,500 + $20,000), from calculation above
Total actual expenses ..................................................................
$163,880
Actual fixed expenses ................................................................. 31,000
Actual variable expenses ............................................................
$132,880
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Solutions Manual, Chapter 21
1237
Reporting in Action
— BTN 21-1
1. Polaris reports the annual adjustment (remeasurement adjustment or
translation gains and losses) as a component of Accumulated Other
Comprehensive Income in the shareholders’ equity section of its
consolidated balance sheet.
2. As reported in its footnote, the assets and liabilities of foreign subsidiaries
(e.g. cash and property, plant and equipment) are translated at exchange
rates in effect at the balance sheet date and revenues and expenses are
translated at the average foreign exchange rate in effect for each month of
the quarter.
In addition, transaction gains and losses including
intercompany transactions denominated in a currency other than the
functional currency of the entity involved are included in “Other income
(expense), net” on Polaris’s consolidated statements of income.
Comparative Analysis
1.
Polaris and Arctic Cat sales figures for the most recent 3 years—data
available from Appendix A—are shown below ($ thousands):
Two Years
Prior
Polaris
Arctic Cat
2.
— BTN 21-2
One Year
Prior
$1,565,887 $ 1,991,139
$563,613
Current
Year
One
Year
Ahead
Two
Years
Ahead
$2,656,949
_______
_______
_______
_______
27% incr.
33% incr.
$450,728
$464,651
20% decr.
3% incr.
Predictions will vary among students. Generally, predictions should
reflect both the trend in the company’s sales data and current industry
and economy-wide conditions. Polaris’s sales increased in each of the
past two years and the rate of increase was higher in the most recent year.
Students may project this increase in sales growth rate as a continuing
trend. Arctic Cat’s sales declined from two years prior to one year prior
and increased slightly from the prior year to the current year. Students
may project that Arctic Cat’s sales will increase slightly over the next two
years.
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1238
Financial & Managerial Accounting, 5th Edition
Ethics Challenge
— BTN 21-3
A typical answer might include four individuals selected from the following
specialty areas (answers will vary among students):
Specialty
Information Input and Explanation
Engineer..................................
Scientific support for quantity standard.
Production manager ..............
Actual amount or quantity used in production.
Supplier ...................................
Identify reasonable price of inputs.
Purchasing manager .............
Identify reasonable price of inputs.
Market research analyst ........
Market research to support quantity and price
standards.
The ethical challenge for a manager responsible for setting and/or revising
standards is to select the right individuals for the team and to purposely avoid
biases in establishing the standards.
Communicating in Practice
— BTN 21-4
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
Variance
Cost of Goods Sold
Gross Margin
Part 1.
Favorable
Decrease
Increase
Part 2.
Unfavorable
Increase
Decrease
Part 3. A favorable (unfavorable) variance means that actual costs are
lower (higher) than the budgeted or expected amounts. It also
helps to point out the link between a favorable (unfavorable)
variance and an increase (decrease) in gross margin and net
income.
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Solutions Manual, Chapter 21
1239
Taking It to the Net
— BTN 21-5
1. Benchmarking is a method whereby organizations try to look to other
organizations to identify “best practices” so as to improve and attain
superior performance. A benchmark can also be considered as a standard
that an organization wishes to achieve in the future. It is important to note
that the actual standard may be increasing (i.e., the bar becomes higher
and higher) as firms improve their processes.
2. Given that a benchmark can be considered as a standard, companies
should analyze the costs associated with achieving the benchmark figure.
Firms can then compare their current cost levels with the benchmark cost
so as to identify the potential for cost savings.
Teamwork in Action
— BTN 21-6
Answers will vary depending on the two industries selected. Two examples
are identified and briefly described below:
i. Overnight delivery services: 10 a.m. delivery, late-day drop-off, pick-up
service, tracking systems, fast-moving workforce.
ii. Hotel services: clean rooms, fast check-in, fast/in-room check-out, luggage
delivered to room quickly, immediate room service.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1240
Financial & Managerial Accounting, 5th Edition
Entrepreneurial Decision
To:
Re:
— BTN 21-7
Mike McCabe, President
Folsom Custom Skis
Management Accounting Quote Interpretations
Quote 1: “Variances are not explanations”
The author of this quote is emphasizing that variances are only a starting
point in controlling production operations. Management must look beyond
the variances to understand why they occurred.
Quote 2: “Management’s goal is not to minimize variances.”
The author of this quote understands that the real objective of management is
to maximize the value of the firm for the stakeholders. For example, it might
not be wise to focus solely on minimizing the direct material price variance if
such a focus would impair product quality. Usually, it is not advisable to trade
off product quality in order to reduce costs.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 21
1241
Hitting The Road
— BTN 21-8
1. A typical cheese pizza has three main raw materials: dough, sauce, and
cheese.
2. Observe that the national chain probably follows specific measurement
rules for each of the three items. In contrast, the local business is usually
less strict in these guidelines, especially for the sauce and cheese
components.
3. These observations reflect an important issue for pizza businesses and for
smaller, local businesses in particular. Excess raw materials applied to
food products may not be desirable to many customers. Also, materials
such as cheese increase the costs of products. These simple observations
often capture the most important components that determine the profits of
a business and its ultimate survival.
Global Decision
— BTN 21-9
1. Piaggio’s sales figures for the most recent 2 years — data available from its
Website — are shown below (€ thousands)
Sales
One Year
Prior
Piaggio .......................... €1,485,351
Current
Year
One Year
Ahead
Two Years
Ahead
€1,516,463
_______
_______
2.1% increase
from prior year
2. Predictions will vary among students. Generally, predictions should reflect
both the trend in the company’s sales data and current industry and
economy-wide conditions. Piaggio’s sales increased at a rate of 2.1%
relative to the prior year. Students may predict this sales growth rate to
continue.
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Financial & Managerial Accounting, 5th Edition