CHAPTER 11

Flexible Budgeting and the Management of

Overhead and Support Activity Costs

ANSWERS TO REVIEW QUESTIONS

11-1 The advantage of a flexible budget is that it is responsive to changes in the activity level. It
enables a comparison between actual costs incurred at the actual level of activity and the
standard allowed costs that should have been incurred at the actual level of activity.

11-2 A static budget is based on only one level of activity. A flexible budget allows for several
different levels of activity.

11-3 Flexible overhead budgets are based on an input activity measure, such as process time, in
order to provide a meaningful measure of production activity. An output measure, such as
the number of units produced, could be used effectively only in a single-product enterprise.
If multiple, heterogeneous products are produced, it would not be meaningful to base the
flexible budget on an output measure aggregated across highly different types of products.

11-4 A columnar flexible budget has several columns listing the budgeted levels of cost at
different levels of activity. Each column is based on a different activity level. A formula
flexible budget is an equation expressed as follows: total cost equals fixed cost plus the
product of the activity measure and the variable cost per unit of activity. The formula flexible
budget allows for any level of activity, rather than only the activity levels for the various
columns used in the columnar flexible budget.

11-5 Manufacturing overhead is added to Work-in-Process Inventory under standard costing as

shown in the following T-accounts:
Work-in-Process Inventory Manufacturing Overhead
X* X*

*The amount of X is the following:

 predetermi ned   standard allowed 
   

X=  (standard)   amount of 
 overhead    cost driver (e.g., 
   
 rate   direct -labor hours) 
   

11-6 Computer-integrated manufacturing systems have resulted in a shift from variable toward
fixed costs. In addition, as automation increases, more and more firms are switching to
such measures of activity as machine hours or process time for their flexible overhead
budgets. Machine hours and process time are linked more closely than direct-labor hours to
the robotic technology and computer-integrated manufacturing systems becoming common
in today's manufacturing environment.
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Managerial Accounting, 5/e 11- 1
11-7 The interpretation of the variable-overhead spending variance is that a different total
amount was spent on variable overhead than should have been spent in accordance with
the variable-overhead rate, given the actual level of the cost driver upon which the variable-
overhead budget is based. For example, if direct labor hours are used to budget variable
overhead, an unfavorable spending variance means that a greater total amount was spent
on variable overhead than should have been spent, after adjusting for how much actual
direct-labor time was used. The spending variance is the control variance for variable
overhead.

11-8 An unfavorable variable-overhead spending variance does not imply that the company paid
more than the anticipated rate per kilowatt-hour for electricity. An unfavorable spending
variance could result from spending more per kilowatt-hour for electricity or from using
more electricity than anticipated, or some combination of these two causes.

11-9 The interpretation of the variable-overhead efficiency variance is related to the efficiency in
using the activity upon which variable overhead is budgeted. For example, if the basis for
the variable-overhead budget is direct-labor hours, an unfavorable variable-overhead
efficiency variance will result when the actual direct-labor hours exceed the standard
allowed direct-labor hours. Thus, the variable-overhead efficiency variance will disclose no
information about the efficiency with which variable-overhead items are used. Rather, it
results from inefficiency or efficiency, relative to the standards, in the usage of the cost
driver (such as direct-labor hours).

11-10 The interpretations of the direct-labor and variable-overhead efficiency variances are very
different. The direct-labor efficiency variance does convey information about the efficiency
with which direct labor was used, relative to the standards. In contrast, the variable-
overhead efficiency variance conveys no information about the efficiency with which
variable-overhead items were used.

11-11 The fixed overhead budget variance is defined as the difference between actual fixed
overhead and budgeted fixed overhead. It is the control variance for fixed overhead.

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11-2 Solutions Manual
11-12 The fixed-overhead volume variance is the difference between budgeted fixed overhead
and applied fixed overhead. The best interpretation for this variance is a means of
reconciling two disparate purposes of the standard-costing system: the control purpose and
the product-costing purpose. For the control purpose, budgeted fixed overhead recognizes
the fixed nature of this cost. Budgeted fixed overhead does not change as activity changes.
For product-costing purposes, budgeted fixed overhead is divided by a denominator activity
measure and applied to products on the basis of a fixed-overhead rate. The result of this
dual purpose for the standard-costing system is that budgeted fixed overhead and applied
fixed overhead will differ whenever the actual production activity differs from the budgeted
production activity.

11-13 A common but misleading interpretation of the fixed-overhead volume variance is that it is a
measure of the cost of underutilizing or overutilizing production capacity. For example,
when budgeted fixed overhead exceeds applied fixed overhead, the fixed-overhead volume
variance is positive. Some people interpret this positive variance to be unfavorable and
claim that it is a measure of the cost of not having utilized production capacity to the level
that was anticipated. However, this interpretation is misleading, because the real cost of
underutilizing capacity lies in the forgone contribution margins from the products that were
not produced and sold.

11-14 The following graph depicts budgeted and applied fixed overhead and displays a positive
volume variance.

Fixed overhead
Applied fixed
overhead

Budgeted
fixed overhead
Volume
variance

Cost driver
Standard Planned (e.g., machine hours)
allowed amount of
amount of cost driver
cost driver

11-15 All kinds of organizations use flexible budgets, including manufacturing firms, retail firms,
service-industry firms, and nonprofit organizations. For example, a hospital's flexible
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Managerial Accounting, 5/e 11- 3
 overhead budget might be based on different levels of activity expressed in terms of
patient-days.

11-16 The conceptual problem in applying fixed manufacturing overhead as a product cost is that
this procedure treats fixed overhead as though it were a variable cost. Fixed overhead is
applied as a product cost by multiplying the fixed overhead rate by the standard allowed
amount of the cost driver used to apply fixed overhead. For example, fixed overhead might
be applied to Work-in-Process Inventory by multiplying the fixed-overhead rate by the
standard allowed machine hours. As the number of standard allowed machine hours
increases, the amount of fixed overhead applied increases proportionately. This situation is
conceptually unappealing, because fixed overhead, although it is a fixed cost, appears
variable in the way that it is applied to work in process.

11-17 The control purpose of a standard-costing system is to provide benchmarks against which
to compare actual costs. Then management by exception is used to follow up on significant
variances and take corrective action. The product-costing purpose of the standard-costing
system is to determine the cost of producing goods and services. Product costs are needed
for a variety of purposes in both managerial and financial accounting.

11-18 Fixed-overhead costs sometimes are called capacity-producing costs because they are the
costs incurred in order to generate a place and environment in which production can take
place. For example, a common fixed-overhead cost is depreciation, which is the cost of
acquiring plant and equipment, allocated across time periods. Thus, depreciation is part of
the cost of acquiring and maintaining a place in which production can occur.

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11-4 Solutions Manual
11-19 The following graph depicts budgeted and applied variable overhead. Budgeted and
applied variable overhead are represented by the same line because variable overhead is a
variable cost. Both budgeted and applied variable overhead increase proportionately as
production activity increases.

Variable overhead

Budgeted and
applied
variable overhead
(same line)

Cost driver
(e.g., machine hours)

11-20 Plausible activity bases for a variety of organizations to use in flexible budgeting are as
follows:

(a) Insurance company: Insurance policies processed or insurance claims processed.

(b) Express delivery service: Number of items of express mail or weight of express mail
processed.

(c) Restaurant: Number of customers served.

(d) State tax-collection agency: Number of tax returns processed.

11-21 Conventional flexible budgets typically are based on a single cost driver, such as direct-
labor hours or machine hours. Costs are categorized as variable or fixed. The fixed costs
do not vary with respect to the single cost driver on which the flexible budget is based. An
activity-based flexible budget is based on multiple cost drivers. Cost drivers are selected on
the basis of how well they explain the behavior of the costs in the flexible budget. Costs that
are treated as fixed in a conventional flexible budget may vary with respect to an
appropriate cost driver in an activity-based flexible budget.

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Managerial Accounting, 5/e 11- 5
SOLUTIONS TO EXERCISES
EXERCISE 11-22 (20 MINUTES)

1. Variable-overhead spending variance = actual variable overhead – (AH  SVR)

= $320,000 – (50,000  $6.00)
= $20,000 U

2. Variable-overhead efficiency variance = SVR(AH – SH)

= $6.00(50,000 – 40,000*)
= $60,000 U

*SH = 40,000 hrs. = 20,000 units  2 hrs. per unit

3. Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead

= $97,000 – $100,000
= $3,000 F

4. Fixed-overhead volume variance = budgeted fixed overhead – applied fixed overhead

= $100,000 – $80,000†
= $20,000 (positive sign**)

 predetermi ned fixed   standard allowed 

    
†
Applied fixed overhead =  overhead rate   hours 

 $100,000 
   (20,000  2)
=  25,000  2 
= $80,000

**Consistent with the discussion in the text, we choose not to interpret the volume variance as
either favorable or unfavorable. Some accountants would designate a positive volume variance
as "unfavorable" and a negative volume variance as "favorable."

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11-6 Solutions Manual
EXERCISE 11-23 (40 MINUTES)

1. Variable overhead variances:

VARIABLE-OVERHEAD SPENDING AND EFFICIENCY VARIANCES

(1) (2) (3) (4)†
VARIABLE OVERHEAD
ACTUAL VARIABLE FLEXIBLE BUDGET: APPLIED TO
OVERHEAD VARIABLE OVERHEAD WORK-IN-PROCESS
Standard Standard
Actual Actual Actual Standard Allowed Standard Allowed Standard
Hours x Rate Hours x Rate x Rate x Rate
Hours Hours
(AH) (AVR) (AH) (SVR) (SH) (SVR) (SH) (SVR)
50,000 x $6.40 50,000 x $6.00 40,000 x $6.00 40,000 x $6.00
hours per hours per hours per hours per
hour* hour hour hour
$320,000 $300,000 $240,000 $240,000

$20,000 Unfavorable $60,000 Unfavorable

Variable-overhead Variable-overhead No difference
spending variance efficiency variance

actual variable overhead cost $320,000

*Actual variable-overhead rate (AVR)    $6.40 per hour
actual hours 50,000

†
Column (4) is not used to compute the variances. It is included to point out that the flexible-budget amount for  variable
overhead, $240,000, is the amount that will be applied to Work-in-Process inventory for product
 
costing purposes.

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Managerial Accounting, 5/e 11- 7
EXERCISE 11-23 (CONTINUED)

2. Fixed-overhead variances:

FIXED-OVERHEAD BUDGET AND VOLUME VARIANCES

(1) (2) (3)

ACTUAL BUDGETED FIXED OVERHEAD
FIXED FIXED APPLIED TO
OVERHEAD OVERHEAD WORK IN PROCESS

Standard
Standard Fixed-
Allowed  Overhead
Hours Rate
40,000 $2.00 per

hours hour*

$97,000 $100,000    $80,000

$3,000 Favorable $20,000 (Positive)†

Fixed-overhead Fixed-overhead
budget variance volume variance

$100,000
*Fixed overhead rate = $2.00 per hour = (25,000)(2 hrs per unit)

†
Consistent with the discussion in the text, we choose not to interpret the volume variance as either
favorable or unfavorable. Some accountants would designate a positive volume variance as
"unfavorable" and a negative volume variance as "favorable."

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11-8 Solutions Manual
EXERCISE 11-24 (35 MINUTES)

(a) Graphical analysis of variable-overhead variances*:

Rate

$6.40
(actual)
Spending variance: $20,000 U
$6.00
(standard)

Efficiency
variance:
$60,000 U

0 Hours
10,000 20,000 30,000 40,000 50,000
(standard) (actual)

*The graph is not drawn to scale, in order to make it easier to visualize the overhead variances.

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Managerial Accounting, 5/e 11- 9
EXERCISE 11-24 (CONTINUED)

(b) Graphical analysis of budgeted versus applied fixed overhead:

Fixed overhead

Applied fixed overhead:

$2.00 per hour

$100,000
Volume variance: $20,000
Budgeted fixed overhead
$75,000

$50,000

$25,000

0 Hours
40,000 50,000
(standard (budgeted
hours, hours, given
given budgeted
actual output)
output)

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11-10 Solutions Manual
EXERCISE 11-25 (30 MINUTES)

1. Answers will vary widely, depending on the governmental unit selected and the budget
items selected by the student. For example, fire fighting costs might be budgeted based
on cost drivers such as the number of structure fires, severity of the structure fires (e.g.,
one or two alarm, etc.), the number of car fires, and so forth.

2. Again, the cost drivers would depend on the governmental unit and budget items selected.

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Managerial Accounting, 5/e 11- 11
EXERCISE 11-26 (20 MINUTES)

1. Variable-overhead spending variance = actual variable overhead – (AH  SVR)

= $405,000 – (40,500  $9.00)
= $40,500 U

2. Variable-overhead efficiency variance = SVR(AH – SH)

= $9.00(40,500 – 36,000*)
= $40,500 U

*SH = 36,000 hrs. = 9,000 cases  4 hours per case

3. Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead

= $122,000 – $120,000
= $2,000 U

4. Fixed-overhead volume variance = budgeted fixed overhead – applied fixed overhead

= $120,000 – $108,000†
= $12,000 (positive)**

 predetermi ned fixed   standard allowed 

    
†
Applied fixed overhead =  overhead rate   hours 

 $120,000 
   (9,000  4)
=  10,000  4 
= $108,000

**Consistent with the discussion in the text, we choose not to interpret the volume variance
as either favorable or unfavorable. Some accountants would designate a positive volume
variance as "unfavorable" and a negative volume variance as "favorable."

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11-12 Solutions Manual
EXERCISE 11-27 (10 MINUTES)

1.
Standard Hours Number of Total Standard
Product per Unit Units Hours
Field .................................................. 3 200 600
Professional ...................................... 5 300 1,500
Total .................................................. 2,100

The total standard allowed direct-labor hours in May is 2,100 hours.

2. Basing the flexible budget on the number of binoculars produced would not be meaningful.
Production of 500 binoculars could mean 100 fields and 400 professionals, or 200 fields and
300 professionals, and so forth. Depending on the composition of the 500 units, in terms of
production type, different amounts of direct labor would be expected. More to the point,
different amounts of variable-overhead costs would be expected.

EXERCISE 11-28 (15 MINUTES)

1. Formula flexible budget:

Total budgeted monthly electricity cost = (3DM*  number of patient days) + 1,000DM

*3DM per patient day = 30 kwh per patient day  .10DM per kwh,
where DM denotes deutsch mark, the German national currency.

2. Columnar flexible budget:

Patient Days
30,000   40,000   50,000  
Variable electricity cost................................... 90,000DM 120,000D 150,000DM
M
Fixed electricity cost.......................................   1,000DM    1,000DM    1,000DM
Total electricity cost........................................ 91,000DM 121,000D 151,000DM
M

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Managerial Accounting, 5/e 11- 13
EXERCISE 11-29 (15 MINUTES)

Memorandum
Date: Today

To: I. Makit, Production Supervisor

From: I. M. Student, Controller

Subject: Variable-overhead efficiency variance

The variable-overhead efficiency variance has a misleading name. This variance does not convey
any information about the efficiency with which variable overhead items are used, such as
electricity, manufacturing supplies, and indirect labor. An unfavorable variable-overhead efficiency
variance occurs when there is inefficient usage of the cost driver (or activity base) upon which
variable overhead is budgeted. For example, when direct-labor time is the cost driver, the variable-
overhead efficiency variance is defined as SR(AH – SH). Thus, the difference between actual
direct-labor hours (AH) and standard allowed direct-labor hours (SH) causes the variance.

EXERCISE 11-30 (45 MINUTES)

Standard machine hours per unit of output.................................................................

      4 hours
Standard variable-overhead rate per machine hour....................................................
     $8.00
     $9.00b
Actual variable-overhead rate per machine hour........................................................
      3d
Actual machine hours per unit of output......................................................................
Budgeted fixed overhead............................................................................................
 $50,000  
 $65,000a
Actual fixed overhead ................................................................................................
Budgeted production in units......................................................................................
  25,000
  24,000c
Actual production in units ...........................................................................................
Variable-overhead spending variance ........................................................................
 $72,000 U
Variable-overhead efficiency variance........................................................................
$192,000 F
Fixed-overhead budget variance.................................................................................
 $15,000 U
  $2,000g (positive)
Fixed-overhead volume variance................................................................................
Total actual overhead.................................................................................................
$713,000
$818,000e
Total budgeted overhead (flexible budget)..................................................................
$850,000f
Total budgeted overhead (static budget)....................................................................
Total applied overhead...............................................................................................
$816,000

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11-14 Solutions Manual
EXERCISE 11-30 (CONTINUED)

Explanatory Notes:

a. Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead

$15,000 U = X – $50,000
X = $65,000 = actual fixed overhead

b. Total actual overhead = actual variable overhead + actual fixed overhead

$713,000 = X + $65,000
X = $648,000 = actual variable overhead
Variable-overhead spending variance = actual variable overhead – (AH  SR)
$72,000 U = $648,000 – (AH  $8)
$8AH = $576,000
AH = 72,000
Actual variable-overhead actual variable overhead
rate per machine hour = actual hours
$648,000
 $9 per hour
= 72,000

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Managerial Accounting, 5/e 11- 15
Exercise 11-30 (continued)

budgeted fixed overhead

c. Fixed-overhead rate = budgeted machine hours
$50,000
= (25,000 units)(4 hrs. per unit)

= $.50 per hr.

Total standard
overhead rate = standard variable overhead rate + fixed-overhead rate
$8.50 = $8.00 + $.50

Total applied overhead = total standard hours  total standard overhead rate
$816,000 = X  $8.50
X = 96,000 = total standard hrs.
total standard hrs.
Actual production = standard hrs. per unit

96,000
 24,000 units
= 4

total actual machine hrs.

d. Actual machine hrs. per unit of output = actual production
72,000 hrs.
 3 hrs. per unit
= 24,000 units

e. Total budgeted overhead (flexible budget)

= budgeted fixed overhead + (SVR  SH)
= $50,000 + ($8.00  24,000 units  4 hrs. per unit)
= $818,000

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11-16 Solutions Manual
EXERCISE 11-30 (CONTINUED)

f. Total budgeted overhead (static budget)

 total standard  budgeted  standard hrs. 
   
=  overhead rate  production  per unit 

= ($8.50)(25,000)(4)
= $850,000

g. Fixed overhead volume variance

= budgeted fixed overhead – applied fixed overhead
= $50,000 – ($.50)(24,000  4)
= $2,000 (positive)*

*Consistent with the discussion in the text, we choose not to interpret the volume variance as
either favorable or unfavorable. Some accountants would designate a positive volume
variance as "unfavorable" and a negative volume variance as "favorable."

EXERCISE 11-31 (10 MINUTES)

1. Flexible budgeted amounts, using activity-based flexible budget:

a. Indirect material: $27,500 ($15,000 + $2,500 + $2,500 + $7,500)

b. Utilities: $5,000 ($3,750 + $1,250)

c. Inspection: $4,400

d. Engineering: $1,800

e. Material handling: $4,000

f. Total overhead cost: $60,300 ($37,500 + $10,400 + $1,800 + $4,000 + $6,600)

2. Variance for setup cost:

a. Using the activity-based flexible budget: $3,000 F (actual cost minus flexible budget =
$3,000 – $6,000)

b. Using the conventional flexible budget: zero (actual cost minus flexible budget = $3,000
– $3,000)

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Managerial Accounting, 5/e 11- 17
EXERCISE 11-32 (15 MINUTES)

Variable-overhead spending variance = actual variable overhead – (AH  SVR)

= $2,340,000 – (275,000  $8.00)
= $140,000 U

Variable-overhead efficiency variance = SVR (AH – SH)

= $8.00 (275,000 – 280,000*)
= $40,000 F

*SH = 56,000 units  5 hours per unit

Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead

= $3,750,000 – $3,600,000*
= $150,000 U

*Budgeted fixed overhead = 300,000 hours  $12 per hour

Fixed-overhead volume variance = budgeted fixed overhead – applied fixed overhead

= $3,600,000 – $3,360,000*
= $240,000 (positive)†

*Applied fixed overhead = $12 per hour  5 hours per unit  56,000 units
†
Consistent with the discussion in the text, we choose not to interpret the volume variance as either
favorable or unfavorable. Some accountants would designate a positive volume variance as
“unfavorable” and a negative volume variance as “favorable.”

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11-18 Solutions Manual
EXERCISE 11-33 (15 MINUTES)

Manufacturing Overhead................................................................. 417,000*

Various Accounts................................................................... 417,000

To record actual overhead costs.

*$417,000 = $320,000 + $97,000

Work-in-Process Inventory............................................................... 320,000†

Manufacturing Overhead........................................................ 320,000

To record applied manufacturing overhead.

†
$320,000 = $240,000 + $80,000

Cost of Goods Sold.......................................................................... 97,000**

Manufacturing Overhead........................................................ 97,000

To close underapplied overhead into Cost of Goods Sold:

**$97,000 = $417,000 – $320,000 (Also, $97,000 = sum of the four overhead variances.)

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Managerial Accounting, 5/e 11- 19
EXERCISE 11-34 (10 MINUTES)

 actual expected 
 
Sales -price variance   sales  sales actual sales
 price price  volume
 
($11.50* – $12.00†)  9,000 = $4,500 Unfavorable
 actual budgeted 
 
Sales -volume variance   sales  sales  budgeted unit
 volume volume contribution margin
 
= (9,000 – 10,000)  $7.00** = $7,000 Unfavorable

*$11.50 = $103,500  9,000

†
$12.00 = $120,000 ÷ 10,000
**$7.00 = ($120,000 – $40,000 – $10,000) ÷ 10,000

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11-20 Solutions Manual
SOLUTIONS TO PROBLEMS
PROBLEM 11-35 (45 MINUTES)

VARIABLE-OVERHEAD SPENDING AND EFFICIENCY VARIANCES

FLEXIBLE BUDGET:
VARIABLE OVERHEAD
Standard Standard
Actual Actual Actual Standard Allowed x Standard Allowed x Standard
Hours x Rate Hours x Rate Rate
Hours Hours Rate
(AH) (AVR) (AH) (SVR) (SH) (SVR) (SH) (SVR)
165,000 x $3.10 165,000 x $3.00 160,000 x $3.00 160,000 x $3.00
hours per hours per hours per hours per
hour* hour hour hour
$511,500 $495,000 $480,000 $480,000

$16,500 Unfavorable $15,000 Unfavorable

Variable-overhead Variable-overhead No difference
spending variance efficiency variance

actual variable overhead cost $511,500

*Actual variable-overhead rate (AVR)    $3.10
actual hours 165,000

†
Column (4) is not used to compute the variances. It is included to point out that the flexible-budget amount for
 
variable overhead, $480,000, is the amount that will be applied to Work-in-Process inventory for product
 
costing purposes.

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Managerial Accounting, 5/e 11- 21
PROBLEM 11-35 (CONTINUED)

FIXED-OVERHEAD BUDGET AND VOLUME VARIANCES

(1) (2) (3)

ACTUAL BUDGETED FIXED OVERHEAD
FIXED FIXED APPLIED TO
OVERHEAD OVERHEAD WORK IN PROCESS
Standard
Standard Fixed-
Allowed  Overhead
Hours Rate
160,000 $5.00 per

hours hour

$860,000 $900,000* $800,000

$40,000 Favorable $100,000 (Positive)†

Fixed-overhead Fixed-overhead
budget variance volume variance

*Budgeted fixed overhead = 180,000 hrs.  $5 per hour.

†
Consistent with the discussion in the text, we choose not to interpret the volume variance as either
favorable or unfavorable. Some accountants would designate a positive volume variance as
"unfavorable" and a negative volume variance as "favorable."

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11-22 Solutions Manual
PROBLEM 11-36 (20 MINUTES)

1.
Policy Standard Hours Actual Activity Standard Hours
Type per Application Allowed

Automobile......................................... 1 250 250

Renter's ............................................. 1 200 200
Homeowner's .................................... 2 100 200
Health................................................. 2 400 800
Life..................................................... 5 200 1,000
Total................................................... 2,450

2. The different types of applications require different amounts of clerical time, and variable overhead
cost is related to the use of clerical time. Therefore, basing the flexible budget on the number of
applications would give a misleading estimate of overhead costs. For example, processing 100 life
insurance applications will entail much more overhead cost than processing 100 automobile
insurance applications.

3. Formula flexible budget:

 budgeted variable total 

Total budgeted   budgeted fixed-
monthly overhead =  overhead cost per  clerical+  overhead cost
 clerical hour hours 
cost   per month

Total budgeted monthly overhead cost = ($4.00  X) + $2,000

where X denotes total clerical time in hours.

4. Budgeted overhead cost for July = ($4.00  2,450) + $2,000

= $11,800

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
Managerial Accounting, 5/e 11- 23
PROBLEM 11-37 (30 MINUTES)

1. The graphs are shown on the next page. On the variable overhead graph, the slope of the line
is $4 per hour of production time ($4 = $40,000  10,000 hours). On the fixed overhead
graph, the slope of the applied fixed overhead line is $9 per hour of production time ($9 =
$90,000  10,000 hours).

2. Memorandum

Date: Today

To: C. D. Tune, General Manager of Countrytime Studios

From: I. M. Student

Subject: Overhead graphs

The graphs of flexible budgeted variable overhead and applied variable overhead are the
same line. Since this cost is truly variable, it is budgeted (for planning and control purposes)
and applied (for product costing purposes) at the rate of $4 per hour of production time.

The graphs of flexible budgeted fixed overhead and applied fixed overhead are two
different lines. The flexible budgeted overhead graph recognizes that fixed overhead does not
vary across activity levels measured in production hours. Budgeted fixed overhead is used for
planning and control purposes. The applied fixed overhead graph is used for product costing
purposes. Each recording done in the studio is assigned production costs, including fixed
overhead at the rate of $9 per hour of production time. The $9 rate is determined at the
budgeted level of activity ($90,000  10,000 hours).

The difference between the budgeted and applied fixed overhead line, at any level of
production activity, is called the volume variance.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
11-24 Solutions Manual
PROBLEM 11-37 (CONTINUED)

Variable overhead

$150,000

$100,000 Flexible budgeted variable overhead


$50,000 Applied variable overhead


Production time in hours
5,000 10,000 15,000

Fixed overhead

$150,000


Flexible budgeted fixed overhead

$100,000
  

$50,000
 Applied fixed overhead

Production time in hours

5,000 10,000 15,000

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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Managerial Accounting, 5/e 11- 25
PROBLEM 11-38 (40 MINUTES)

1. a. Units produced during May............................................................ 66,000

Overhead application rate per unit
(budgeted overhead per unit at expected level of output)............      $6
Applied overhead costs.................................................................. $396,000

b. Variable-overhead spending variance............................................ $     150   U*

c. Fixed-overhead budget variance.................................................... 6,000   U  
d. Variable-overhead efficiency variance........................................... 8,850   F  
e. Fixed-overhead volume variance................................................... 18,300†

*U denotes unfavorable; F denotes favorable.

†
Negative sign. Consistent with the discussion in the chapter, we choose not to designate the
volume variance as favorable or unfavorable. Some accountants would designate a negative
volume variance as "favorable."

Supporting calculations are presented in the following schedule:

Flexible
Budgeted Budget
Actual Spending Overhead at Efficiency (Applied
Variable Overhead Overhead Variance Actual Hours Variance Overhead)
Indirect material............... $111,000 $.34 $.34
Indirect labor...................   75,000       .25       .25
$.59 $.59
Machine hours.................  315,000  330,000
$186,000 $150 U  $185,850 $8,850 F  $194,700

Actual Budget Flexible Volume Applied

Fixed Overhead Overhead Variance Budget Variance Overhead
Supervision..................... $51,000 $54,000 $.18
Utilities............................. 54,000 45,000 .15
Depreciation....................   84,000   84,000 .28
$.61
Machine hours*...............  330,000
$189,000 $6,000 U $183,000 $18,300**  $201,300

*3,600,000 machine hrs / 72,000 units = 5 hrs per unit, and 5 x 66,000 units = 330,000 hrs
**Negative sign

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
11-26 Solutions Manual
PROBLEM 11-38 (CONTINUED)
2. Graphical analysis of variable-overhead variances:*
Rate

$.5905 Spending variance: $150 U

(rounded
actual)
$.59
(standard)

Efficiency
variance $8,850
F

Machine
100,000 200,000 300,000 hours

315,000 330,000
(actual) (standard)

* The graph is not drawn to scale, in order to make it easier to visualize the overhead variances.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies, Inc.

Managerial Accounting, 5/e 11- 27
PROBLEM 11-38 (CONTINUED)

3. The graph differs from the exhibit in the text, because in Newark Plastics’ case, the efficiency
variance is favorable. The example in the text included an unfavorable efficiency variance.

PROBLEM 11-39 (30 MINUTES)

1. A static budget is based on a single expected activity level. In contrast, a flexible budget
reflects data for several activity levels.

2. Given the focus on a range of activity, a flexible budget would be more useful because it
incorporates several different activity levels.

3. Static budget vs. actual experience:

Static
Budget: Actual:
24,000 20,000
Units Units Variance

Direct material used ($20.00)………………. $ 480,000 $432,500 $47,500 F

Direct labor ($5.00)…………………………… 120,000 110,600 9,400 F
Variable manufacturing overhead ($6.25).. 150,000 152,000 2,000 U
Depreciation…………………………………… 24,000 24,000 ----
Supervisory salaries…………………………. 36,000 37,800 1,800 U
Other fixed manufacturing overhead…….. 240,000 239,000 1,000 F
Total………………………………………… $1,050,000 $995,900 $54,100 F

Calculations:

Direct material used: $1,440,000 ÷ 72,000 units = $20.00 per unit

Direct labor: $360,000 ÷ 72,000 units = $5.00 per unit
Variable manufacturing overhead: $450,000 ÷ 72,000 units = $6.25
per
unit
Depreciation: $72,000 ÷ 3 months = $24,000 per month
Supervisory salaries: $108,000 ÷ 3 months = $36,000 per month
Other fixed manufacturing overhead: ($900,000 - $72,000 - $108,000) ÷ 3
months = $240,000 per month

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
11-28 Solutions Manual
PROBLEM 11-39 (CONTINUED)

4. Flexible budget vs. actual experience:

Flexible
Budget: Actual:
20,000 20,000
Units Units Variance

Direct material used ($20.00)……………….. $400,000 $432,500 $32,500 U

Direct labor ($5.00)…………………………….. 100,000 110,600 10,600 U
Variable manufacturing overhead ($6.25)…. 125,000 152,000 27,000 U
Depreciation…………………………………….. 24,000 24,000 ----
Supervisory salaries…………………………… 36,000 37,800 1,800 U
Other fixed manufacturing overhead………. 240,000 239,000 1,000 F
Total…………………………………………... $925,000 $995,900 $70,900 U

5. A performance report based on flexible budgeting is preferred. The report compares

budgeted and actual performance at the same volume level, eliminating any variations in
activity. In essence, everything is placed on a “level playing field.”

The general manager’s warning is appropriate because of the sizable variances that
have arisen. With the static budget, performance appears favorable, especially with
respect to variable costs. Bear in mind, though, that volume was below the original monthly
expectation of 24,000 units, presumably because of the plant closure. A reduced volume
will likely lead to lower variable costs than anticipated (and resulting favorable variances).

When the volume differential is removed, variable cost variances total $70,100U
($32,500U + $10,600U + $27,000U), or 11.2% of budgeted variable costs ($400,000 +
$100,000 + $125,000). Variable cost incurrence appears excessive with respect to all of
the total’s components: direct material, direct labor, and variable manufacturing overhead.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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Managerial Accounting, 5/e 11- 29
PROBLEM 11-40 (30 MINUTES)

1. Performance report:
Budget: Actual:
1,580 1,580
Patients Patients Variance

Medical assistants…………... $ 11,060 $ 13,020 $ 1,960 U

Clinic supplies……………….. 9,480 9,150 330 F
Lab tests………………………. 308,100 318,054 9,954 U
Total $328,640 $340,224 $11,584 U

Calculations:

Medical assistants:
Budget: 1,580 patients x .5 hours x $14.00 = $11,060
Actual: 840 hours x $15.50 = $13,020
Clinic supplies:
Budget: 1,580 patients x .5 hours x $12.00 = $9,480
Actual: $9,150 (given)
Lab tests:
Budget: 1,580 patients x 3 tests x $65.00 = $308,100
Actual: $318,054 (given)

2. The variances do not reveal any significant problems. The $330 variance for clinic supplies
is only 3.48% of the budgeted amount ($330 ÷ $9,480) and favorable. Similarly, the lab-
test variance, while unfavorable, is only 3.23% of the budget ($9,954 ÷ $308,100).

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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11-30 Solutions Manual
PROBLEM 11-40 (CONTINUED)

3. Variances for lab tests:

Spending variance:
Actual tests conducted x actual cost
5,214 tests* x $61**………………………………………….. $318,054
Actual tests conducted x standard cost
5,214 tests x $65…………………………………………….. 338,910
Variable-overhead spending variance……………………….. $ 20,856 F

* 1,580 patients x 3.3 tests

** $318,054 ÷ 5,214 tests

Efficiency variance:
Actual tests conducted x standard cost
5,214 tests x $65…………………………………………….. $338,910
Standard tests allowed x standard cost
4,740 tests* x $65……………………………………………. 308,100
Variable-overhead efficiency (quantity) variance………….. $ 30,810 U

* 1,580 patients x 3 tests

Yes, Fall City does appear to have some problems. The two variances computed are fairly
sizable in relation to the $308,100 budget. The efficiency variance is of particular concern,
given that it is 10% of budget ($30,810 ÷ $308,100) and unfavorable. This variance arises
because the assistants are conducting an average of 3.3 tests per patient when the
standard calls for only 3 tests. The standard may be set too low or perhaps the assistants
are somewhat sloppy, having to re-do tests that were done improperly.

4. The spending and efficiency variances add up to equal the flexible-budget variance
($20,856F + $30,810U = $9,954U). The flexible-budget variance reflects the total of the
individual standard-cost variances.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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Managerial Accounting, 5/e 11- 31
PROBLEM 11-41 (25 MINUTES)

1. Let X = budgeted fixed overhead

X ÷ 20,000 machine hours = $4.00 per hour
X = $80,000

2. Variable-overhead spending variance:

Actual hours x actual rate
23,100 hours x $2.40*…………………... $55,440
Actual hours x standard rate
23,100 hours x $2.50……………………. 57,750
Variable-overhead spending variance…... $ 2,310 Favorable

* $55,440 ÷ 23,100 hours

3. Fixed-overhead volume variance:

Budgeted fixed overhead……………………………….. $80,000
Standard hours allowed x standard rate
5,350 hours* x $4.00………………………………….. 21,400
Fixed-overhead volume variance………………………. $58,600

* 10,700 units x .5 hours per unit

The fixed-overhead volume variance is positive; some

managerial accountants would interpret it as an
unfavorable variance.

4. Maxwell spent more than anticipated. Actual fixed overhead amounted to $100,460
($155,900 - $55,440) when the budget was set at $80,000. The fixed-overhead budget
variance is $20,460 unfavorable ($100,460 - $80,000).

5. Variable overhead is underapplied by $42,065:

Actual overhead: Actual hours x actual rate
23,100 hours x $2.40………………………………………….. $55,440
Applied overhead: Standard hours allowed x standard rate
5,350 hours x $2.50……………………………………………. 13,375
Underapplied variable overhead………………………………... $42,065

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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11-32 Solutions Manual
PROBLEM 11-41 (CONTINUED)

6. Without having complete information, it is difficult to be 100% certain. However, by an

analysis of data related to the volume variance, a lengthy strike appears to be a strong
possibility. Maxwell had planned to work 20,000 machine hours during the period, giving
the company the capability of producing 40,000 finished units (20,000 hours x 2 units per
hour). Actual production amounted to only 10,700 units, leaving the firm far shy of its
manufacturing goal. A strike is a plausible explanation.

PROBLEM 11-42 (40 MINUTES)

1. Susan Porter recommended that SoftGro use flexible budgeting in this situation because a
flexible budget would allow Mark Fletcher to compare SoftGro's actual selling expenses
(based on current month's actual activity) with budgeted selling expenses. In general, flexible
budgets:

 Provide management with the tools to evaluate the effects of varying levels of activity on
costs, revenues, and profits.

 Enable management to improve planning and decision making.

 Improve the analysis of actual results.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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Managerial Accounting, 5/e 11- 33
PROBLEM 11-42 (CONTINUED)

2. SOFTGRO, INC.
REVISED MONTHLY SELLING EXPENSE REPORT FOR NOVEMBER

Flexible
Budget Actual Variance
Advertising....................................................... $1,650,000 $1,660,000 $10,000 (U)
Staff salaries.................................................... 125,000 125,000
Sales salariesa................................................. 115,200 115,400 200 (U)
Commissionsb.................................................. 496,000 496,000
Per diem expensec........................................... 158,400 162,600 4,200 (U)
Office expensesd.............................................. 366,000 358,400 7,600 (F)
Shipping expensese..........................................    992,500    976,500   16,000 (F)
Total expenses................................................. $3,903,100 $3,893,900 $  9,200 (F)

Supporting calculations:
a
Monthly salary for salesperson
$108,000  90 = $1,200.

Budgeted amount
$1,200  96 = $115,200.
b
Commission rate
$448,000  $11,200,000 = .04.

Budgeted amount
$12,400,000  .04 = $496,000.
c
($148,500  90)  15 days = $110 per day.
($110  15)  96 = $158,400.
d
($4,080,000 – 3,000,000)  54,000 = $20 per order.
($3,000,000  12) + ($20  5,800) = $366,000.
e
[$6,750,000 – ($3  2,000,000)]  12 = $62,500
monthly fixed expense.

$62,500 + ($3  310,000) = $992,500.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
11-34 Solutions Manual
PROBLEM 11-43 (40 MINUTES)

1. The flexible budget for LawnMate Company for the month of May, based on 4,800 units,
showing separate variable cost budgets is as follows:

LAWNMATE COMPANY
FLEXIBLE BUDGET
FOR THE MONTH OF MAY

Revenue [4,800  ($1,200,000/5,000)].................................. $ 1,152,000

Deduct: Variable costs:

Direct material (4,800  $60)............................................ $  288,000
Direct labor (4,800  $44)................................................. 211,200
Variable overhead (4,800  $36)...................................... 172,800
Variable selling (4,800  $12)...........................................     57,600
Total variable costs.....................................................   729,600

Contribution margin................................................................ $ 422,400

Deduct: Fixed costs:

Fixed overhead................................................................. $  180,000
Fixed general and administrative......................................    120,000   300,000
Operating income................................................................... $ 122,400

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Managerial Accounting, 5/e 11- 35
PROBLEM 11-43 (CONTINUED)

2. For the month of May, the company's flexible/budget variances are as follows:

LAWNMATE COMPANY
FLEXIBLE-BUDGET VARIANCES
FOR THE MONTH OF MAY
Flexible-
Flexible Budget
Actual Budget Variance
Units..................................................................... 4,800 4,800 0
Revenue............................................................... $1,152,000 $1,152,000 $     0
Variable costs:
Direct material................................................. $  320,000 $  288,000 $32,000 U
Direct labor..................................................... 192,000 211,200 19,200 F
Variable overhead........................................... 176,000 172,800 3,200 U
Variable selling...............................................     92,000     57,600  34,400 U
Deduct: Total variable costs.................................. $  780,000 $  729,600 $50,400 U
Contribution margin............................................... $  372,000 $  422,400 $50,400 U

Fixed costs:
Fixed overhead............................................... $  180,000 $  180,000 $ 0   
Fixed general and administrative....................    115,000    120,000   5,000 F
Deduct: Total fixed costs....................................... $  295,000 $  300,000 $ 5,000 F
Operating income................................................. $   77,000 $  122,400 $45,400 U

3. The revised budget and variance data are likely to have the following impact on Al
Richmond's behavior:

 Richmond is likely to be encouraged by the revised data, since the major portion of the
variable-cost variance (direct material and variable selling expense) is the responsibility of
others.

 The detailed report of variable costs shows that the direct-labor variance is favorable.
Richmond should be motivated by this report because it indicates that the cost-cutting
measures that he implemented in the manufacturing area have been effective.

 The report shows unfavorable variances for direct material and variable selling expense.
Richmond may be encouraged to work with those responsible for these areas to control
costs.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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11-36 Solutions Manual
PROBLEM 11-44 (45 MINUTES)

Missing amounts for case A:

2. $7.00a per hour

3. $9.50b per hour

6. $98,050c

9. $2,500 Ud

10. $3,000 Fe

11. $(42,000) (Negative)f (The negative sign means that applied fixed overhead
exceeded budgeted fixed overhead.)

12. $8,050 underappliedg

13. $45,000 overappliedh

16. 6,000 unitsi

19. $90,000j

20. $252,000k

Explanatory notes for case A:

a
Budgeted direct-labor hours
= budgeted production  standard direct-labor hours per unit

= 5,000 units  6 hrs. = 30,000 hrs.

budgeted fixed overhead
Fixed overhead rate = budgeted direct -labor hours
$210,000
 $7 per hr.
= 30,000 hrs.

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Managerial Accounting, 5/e 11- 37
Problem 11-44 (continued)

b
Total standard overhead rate
= variable overhead rate + fixed overhead rate
= $2.50 + $7.00 = $9.50
c
Variable-overhead spending variance
= actual variable overhead – (actual direct-labor hours 
standard variable overhead rate)
$5,550 U = actual variable overhead – (37,000  $2.50)
Actual variable overhead = $98,050
d
Variable-overhead efficiency variance
= SVR(AH – SH)
= $2.50(37,000 – 36,000)
= $2,500 U
e
Fixed-overhead budget variance
= actual fixed overhead – budgeted fixed overhead
= $207,000 – $210,000
= $3,000 F

f
Fixed-overhead volume variance
= budgeted fixed overhead – applied fixed overhead
= $210,000 – (36,000  $7)
= $42,000 (negative sign)
g
Underapplied variable overhead
= actual variable overhead – applied variable overhead
= $98,050 – (36,000  $2.50)
= $8,050 underapplied

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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11-38 Solutions Manual
PROBLEM 11-44 (CONTINUED)
h
Overapplied fixed overhead
= actual fixed overhead – applied fixed overhead
= $207,000 – (36,000  $7)
= $45,000 overapplied

standard allowed direct -labor hours

i
Actual production = standard hrs. per unit

36,000
 6,000 units
= 6

j
Applied variable overhead
= SH  SVR
= 36,000  $2.50
= $90,000
k
Applied fixed overhead
= SH  fixed overhead rate
= 36,000  $7
= $252,000

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
Managerial Accounting, 5/e 11- 39
PROBLEM 11-44 (CONTINUED)

Missing amounts for case B:

1. $4.00a per hour

2. $9.00b per hour

4. $6,400c

5. $18,000d

6. $8,000e

7. $19,080f

12. $1,600 underappliedg

13. $4,680 underappliedh

14. 1,000 unitsi

16. 800 unitsj

19. $6,400k

20. $14,400l

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
11-40 Solutions Manual
PROBLEM 11-44 (CONTINUED)

Explanatory notes for case B:

a
To find the standard variable overhead rate:
Variable-overhead efficiency variance

= SVR(AH – SH)
$400 F = SVR(1,500 – 1,600)
SVR = $4
b
Standard fixed-overhead rate
= total standard overhead rate – SVR
= $13 – $4 = $9
c
Flexible budget for variable overhead
= SH  SVR
= 1,600  $4 = $6,400
d
Flexible budget for fixed overhead
= applied fixed overhead + volume variance
= (1,600  $9) + $3,600
= $18,000
e
Actual variable overhead
= applied variable overhead + spending variance + efficiency variance
= (1,600  $4) + $2,000 U – $400 F
= $8,000
f
Actual fixed overhead
= budgeted fixed overhead + fixed-overhead budget variance
= $18,000 + $1,080 U
= $19,080

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Managerial Accounting, 5/e 11- 41
PROBLEM 11-44 (CONTINUED)
g
Underapplied variable overhead
= spending variance + efficiency variance
= $2,000 U* + $400 F*
= $1,600 underapplied

*Note that the signs cancel when adding variances of different signs.
h
Underapplied fixed overhead
= fixed-overhead budget variance + volume variance

= $1,080 U + $3,600 (positive)

= $4,680 underapplied

budgeted fixed overhead

i
Budgeted direct-labor hours = fixed -overhead rate
= $18,000
$9

= 2,000
budgeted direct -labor hours
Budgeted production = standard hours per unit

2,000
 1,000 units
= 2

standard allowed hours

j
Actual production = standard hours per unit

1,600
 800 units
= 2

k
Applied variable overhead
= SH  SVR = 1,600  $4
= $6,400

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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11-42 Solutions Manual
PROBLEM 11-44 (CONTINUED)
l
Applied fixed overhead
= SH  standard fixed-overhead rate
= 1,600  $9
= $14,400

PROBLEM 11-45 (55 MINUTES)

1.
Activity Level (Air Miles)
32,000 35,000 38,000
Variable expenses:
Fuel .......................................................... $ 16,000 $ 17,500 $ 19,000   
Aircraft maintenance................................. 24,000 26,250 28,500   
Flight crew salaries................................... 12,800 14,000 15,200   
Selling and administrative.........................   25,600   28,000   30,400   
Total variable expenses.................... $ 78,400 $ 85,750 $ 93,100   

Fixed expenses:
Depreciation on aircraft............................. $  2,900 $  2,900 $   2,900   
Landing fees............................................. 900 900 900   
Supervisory salaries.................................. 9,000 9,000 9,000   
Selling and administrative.........................   11,000   11,000   11,000   
Total fixed expenses......................... $ 23,800 $ 23,800 $ 23,800   
Total expenses............................................... $102,200 $109,550 $116,900   

2. First, there is a large unfavorable variance in passenger revenue, reflecting the fact that the
company's actual activity level was considerably below the planned level. Second, there are
unfavorable variances in fixed expenses. Finally, the favorable cost variances shown are
misleading, as explained in requirement (3).

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Managerial Accounting, 5/e 11- 43
Problem 11-45 (Continued)

3. Memorandum

Date: Today

To: Red Leif, Manager of Aircraft Operations

From: I. M. Student

Subject: Variance Report

The variance report is misleading because the expenses in the budget, which was prepared
for an activity level of 35,000 air miles, are compared with actual expenses incurred at the
actual activity level, which is considerably lower (32,000 air miles). Management should
expect variable expenses to be lower at the lower activity level. The variance report should
compare actual expenses with flexible budgeted expenses, given the actual activity level.

4.
Formula Flexible
Flexible Actual Budget
Budget (32,000 (32,000
(per air air air
mile) miles) miles) Variance
Variable expenses:
Fuel......................................... $   .50 $ 17,000 $ 16,000 $1,000 U
Aircraft maintenance............... .75 23,500 24,000 500 F
Flight crew salaries.................. .40 13,100 12,800 300 U
Selling and administrative........     .80   24,900   25,600    700 F
Total variable expenses..... $  2.45 $ 78,500 $ 78,400 $  100 U

Per
Fixed expenses: Month
Depreciation on aircraft............ $ 2,900 $  2,900 $  2,900 $  -0-   
Landing fees............................ 900 1,000 900 100 U
Supervisory salaries................. 9,000 8,600 9,000 400 F
Selling and administrative........ 11,000   12,400   11,000  1,400 U
Total fixed expenses.......... $23,800 $ 24,900 $ 23,800 $1,100 U

Total expenses.............................. $103,400 $102,200 $1,200 U

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
11-44 Solutions Manual
PROBLEM 11-45 (CONTINUED)

5. Jacqueline Frost has acted properly in every way. She noticed a major conceptual error in
the way Red Leif had prepared his performance report. She pointed this out to him, and she
also provided him with a correct analysis of September's performance. Leif, however, insists
on taking his original (and faulty) report to the company's owner. It sounds as though Leif
resents the expertise that Frost has brought to the firm, and he is willing to mislead the
owner.

If Leif carries through with his stated intention to present his original report to the owner,
Frost has an ethical obligation to make the owner aware that it is a faulty analysis. Frost
should show the owner her memo to Leif as well as the revised expense variance report.

Several ethical standards for managerial accountants apply in this situation. (See Chapter
1 for a listing of these standards.) Among the relevant standards are the following:

Competence

 Prepare complete and clear reports and recommendations after appropriate analyses of
relevant and reliable information.

Integrity

 Communicate unfavorable as well as favorable information and professional judgments

or opinions.

Objectivity

 Communicate information fairly and objectivity.

 Disclose fully all relevant information that could reasonably be expected to influence an
intended user's understanding of the reports, comments, and recommendations
presented.

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Inc.
Managerial Accounting, 5/e 11- 45
PROBLEM 11-46 (20 MINUTES)

The purchase of the FMS could have caused the following variances:

(a) Favorable direct-material quantity variance, due to a decrease in material waste.

(b) Unfavorable direct-labor rate variance, due to the need for a more highly skilled labor force.

(c) Favorable direct-labor efficiency variance, due to increased automation and lower labor-time
requirements.

(d) Unfavorable variable-overhead spending variance, due to additional production equipment

requiring such support costs as electricity and maintenance.

(e) Favorable variable-overhead efficiency variance, due to the decreased usage of direct labor.
(See point (c) in this list.)

(f) Unfavorable fixed-overhead budget variance, due to increased depreciation on the new
production equipment.

(g) Fixed overhead volume variance:

The sign of the variance is negative, which means that applied fixed overhead exceeded the
budgeted amount. It is likely that introduction of the new equipment enabled the company to
operate at a higher level of production than was anticipated, due to the increased
automation.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
11-46 Solutions Manual
PROBLEM 11-47 (40 MINUTES)

1. a. Three weaknesses in WoodCrafts Inc.'s monthly Bookcase Production Performance

Report are as follows:

 The report is based on a static budget. WoodCrafts should use a flexible budget that
compares the same level of activity, calculating variances between the actual results
and the flexible budget. Also, WoodCrafts might consider implementing an activity-
based costing system.

 Costs over which the supervisors have no control, such as fixed production costs
and allocated overhead costs, are included in the report.

 The report uses a single plant-wide rate to allocate fixed production costs. Square
footage may not drive the fixed production costs, and there may be a more
appropriate base such as number of units produced. It may be more appropriate to
use different cost drivers for each of the different product lines.

b. Due to Sara McKinley's remarks Steve Clark is likely to:

 Feel tense and apprehensive. The timing of McKinley's remarks, immediately before
the meeting, without an opportunity for discussion and feedback, will leave Clark
feeling tense and probably inattentive throughout the meeting.

 Be frustrated and confused by the conflicting signals of the report and what is
occurring in his department and in the market. This confusion about the
department's results and, consequently, the uncertainty of his job will lead to stress
which may negatively affect his performance.

2. a. To improve the monthly performance report, WoodCrafts Inc. should:

 Use a flexible budget.

 Hold supervisors responsible for only those costs over which they have control by
using a contribution approach.

 Include footnotes to make the report more understandable.

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Managerial Accounting, 5/e 11- 47
PROBLEM 11-47 (CONTINUED)

A revised monthly performance report based on a flexible budget is as follows:

WOODCRAFTS INC.
BOOKCASE PRODUCTION PERFORMANCE REPORT FOR NOVEMBER

Flexible
Actual Budget Variance
Units........................................................................    3,000     3,000
Revenue.................................................................. $161,000 $165,000a $ 4,000 U  
Variable production costs:........................................
Direct material..................................................... $ 23,100 $ 24,000b $  900 F  
Direct labor.......................................................... 18,300 18,000c 300 U  
Machine time....................................................... 19,200 19,500d 300 F  
Manufacturing overhead......................................   41,000   42,000e   1,000 F  
Total variable costs............................................. $101,600 $103,500   $ 1,900 F  
Contribution margin.................................................. $ 59,400 $ 61,500   $ 2,100 U  
a
($137,500 budget ÷ 2,500 budgeted units)  3,000 actual units
b
($ 20,000 budget ÷ 2,500 budgeted units)  3,000 actual units
c
($ 15,000 budget ÷ 2,500 budgeted units)  3,000 actual units
d
($ 16,250 budget ÷ 2,500 budgeted units)  3,000 actual units
e
($ 35,000 budget ÷ 2,500 budgeted units)  3,000 actual units

b. Steve Clark should be more motivated by the revised report since it clearly shows that the
variable cost variances for his product line were better than Sara McKinley had thought,
despite the fact that there is an unfavorable contribution margin variance. Clark is not
responsible for the revenue variance which resulted from a decrease in the sales price.

In addition, the separation of costs into controllable and noncontrollable categories allows
Clark to devote full effort to those costs which he can influence. Clark will probably exhibit a
positive attitude and will continue looking for ways to improve his operation.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
11-48 Solutions Manual
PROBLEM 11-48 (60 MINUTES)
budgeted machine hours 30,000
1. Standard machine hours per unit = budgeted production = 6,000

= 5 hours per unit

$270,000  $83,000
2. Actual cost of direct material per unit = 6,200 units

= $56.94 per unit (rounded)

$252,000  $78,000
3. Standard direct-material cost per machine hour = 30,000

= $11 per machine hour

$273,000  $234,000
 $84.50 per unit
4. Standard direct-labor cost per unit = 6,000 units

5. Standard variable-overhead rate per machine hour =

$647,200 - $627,000 $20,200

32,000 - 30,000 2,000 hours = $10.10 per machine hour

6. First, continue using the high-low method to determine total budgeted fixed overhead as
follows:

Total budgeted overhead at 30,000 hours...................................................... $627,000

Total budgeted variable overhead at 30,000 hours (30,000  $10.10)...........  303,000
Total budgeted fixed overhead....................................................................... $324,000

The key here is to realize that fixed overhead includes not only insurance and depreciation
but also the fixed component of the semivariable-overhead costs (including maintenance,
supplies, supervision, and inspection).

Now, we can compute the standard fixed-overhead rate per machine hour, as follows:

$324,000
Standard fixed-overhead rate per machine hour = 30,000 hours

= $10.80 per hour

PROBLEM 11-48 (CONTINUED)

7. First, compute actual variable overhead as follows:

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Managerial Accounting, 5/e 11- 49
 Total actual overhead..................................................................................... $633,000
Total fixed overhead (given)...........................................................................  324,000
Total variable overhead.................................................................................. $309,000

Variable-overhead spending variance = Actual variable overhead – (AH  SVR)

= $309,000 – (32,000  $10.10)
= $14,200 Favorable

8. Variable-overhead efficiency variance

= (AH  SVR) – (SH  SVR)
= (32,000  $10.10) – (31,000*  $10.10) = $10,100 Unfavorable

*Standard allowed machine hours = 6,200 units  5 hours per unit

9. Fixed-overhead budget variance

= actual fixed overhead – budgeted fixed overhead
= $324,000 – $324,000 = 0

10. Fixed-overhead volume variance

= budgeted fixed overhead – applied fixed overhead
= $324,000 – (31,000  $10.80) = $10,800 (negative sign)*

*Consistent with the discussion in the text, we choose not to interpret the volume variance as
either favorable or unfavorable. Some accountants would designate a positive volume
variance as "unfavorable" and a negative volume variance as "favorable."

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
11-50 Solutions Manual
PROBLEM 11-48 (CONTINUED)

11. Flexible budget formula, using the high-low method of cost estimation:
$1,540,000  $1,464,000
Variable cost per machine hour =  $38 per hour
32,000  30,000

Total budgeted cost at 30,000 hours.............................................................. $1,464,000

Total variable cost at 30,000 hours (30,000  $38)........................................  1,140,000
Fixed overhead cost....................................................................................... $  324,000

Thus, the flexible budget formula is as follows:

Total production cost = $38X + $324,000

where X = number of machine hours allowed.

Therefore, the total budgeted production cost for 6,050 units is:

($38  30,250*) + $324,000 = $1,473,500

*Standard allowed machine hours = 6,050 units  5 hours per unit

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Managerial Accounting, 5/e 11- 51
PROBLEM 11-49 (35 MINUTES)

Direct-material price variance = PQ(AP – SP)

= 30,000($2.20* – $2.00)
= $6,000 Unfavorable

*$2.20 = $66,000  30,000

Direct-material quantity variance = SP(AQ – SQ)

= $2.00(30,000 – 29,000*)
= $2,000 Unfavorable

*29,000 lbs. = 1,450  20 lbs. per unit

Direct-labor rate variance = AH(AR – SR)

= 8,000($18.90* – $18.00)
= $7,200 Unfavorable

*$18.90 = $151,200  8,000

Direct-labor efficiency variance = SR(AH – SH)

= $18.00(8,000 – 7,250*)
= $13,500 Unfavorable

*7,250 hours = 1,450 units  5 hours per unit

Variable-overhead spending variance

= actual variable overhead – (AH  SVR)
= $11,000 – (8,000)($1.50)
= $1,000 Favorable

Variable-overhead efficiency variance = SVR(AH – SH)

= $1.50(8,000 – 7,250)
= $1,125 Unfavorable

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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11-52 Solutions Manual
PROBLEM 11-49 (CONTINUED)

Fixed-overhead budget variance

= actual fixed overhead – budgeted fixed overhead
= $26,000 – $25,000*
= $1,000 Unfavorable

*$25,000 = $300,000 (annual)  12 months

Fixed-overhead volume variance = budgeted fixed overhead – applied fixed overhead

= $25,000 – $21,750* = $3,250 (positive)†

*$21,750 = 1,450 units  $15.00 per unit

†
Consistent with the discussion in the text, we choose not to interpret the volume variance as
either favorable or unfavorable. Some accountants would designate a positive volume
variance as "unfavorable" and a negative volume variance as "favorable."

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Managerial Accounting, 5/e 11- 53
PROBLEM 11-50 (30 MINUTES)

1. Variances:

a. Variable-overhead spending variance

= Actual variable overhead – (AH  SVR)
= $1,701,000 – (764,000  $2) = $173,000 Unfavorable

b. Variable-overhead efficiency variance

= (AH  SVR) – (SH  SVR)
= (764,000  $2) – (750,000*  $2) = $28,000 Unfavorable

*Standard hours = 250,000 units  3 hours per unit = 750,000 hours, where 3 hours
per unit = $6 per unit  $2 per hour

c. Fixed-overhead budget variance

= Actual fixed overhead – budgeted fixed overhead
= $392,000 – $400,000* = $8,000 Favorable

*Budgeted fixed overhead = budgeted overhead – budgeted variable overhead

= $2,000,000 – (800,000  $2) = $400,000

d. Fixed-overhead volume variance

= budgeted fixed overhead – applied fixed overhead
= $400,000 – (750,000*  $.50†) = $25,000 (positive)**

*Standard allowed hours = 250,000 units  3 hours per unit

†
Predetermined fixed overhead rate = $400,000  800,000 budgeted machine hours
= $.50 per machine hour
**Consistent with the discussion in the text, we choose not to interpret the volume
variance as either favorable or unfavorable. Some accountants would designate a
positive volume variance as "unfavorable" and a negative volume variance as
"favorable."

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11-54 Solutions Manual
PROBLEM 11-50 (CONTINUED)

2. Manufacturing Overhead........................................................ 2,093,000*

Various Accounts........................................................... 2,093,000

To record actual manufacturing overhead.

*$2,093,000 = $1,701,000 + $392,000

Work-in-Process Inventory..................................................... 1,875,000†

Manufacturing Overhead............................................... 1,875,000

To add manufacturing overhead to work in process.

†
750,000 standard allowed hours  $2.50 per hour = $1,875,000, where $2.50 per hour is the
sum of the variable and fixed predetermined overhead rates.

Cost of Goods Sold................................................................ 218,000**

Manufacturing Overhead............................................... 218,000

To close underapplied overhead into Cost of Goods Sold.

**$218,000 = $2,093,000 – $1,875,000 (Also, $218,000 = sum of the four overhead

variances.)

PROBLEM 11-51 (60 MINUTES)

1. Formula flexible overhead budget:

Total monthly overhead = $20,000 + $9X*

where X denotes activity measured in direct-labor hours

*The $9 standard variable-overhead rate is computed as follows: $9 = $13,500  1,500

hours.

2. Variable-overhead spending and efficiency variances: See the diagram on the next page.

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Managerial Accounting, 5/e 11- 55
PROBLEM 11-51 (CONTINUED)

VARIABLE-OVERHEAD SPENDING AND EFFICIENCY VARIANCES

(1) (2) (3) (4)†
VARIABLE OVERHEAD
ACTUAL VARIABLE FLEXIBLE BUDGET: APPLIED TO
OVERHEAD VARIABLE OVERHEAD WORK-IN-PROCESS
Standard Standard
Actual Actual Actual x Standard Allowed x Standard Allowed x Standard
Hours x Rate Hours Rate Hours Rate Hours Rate
(AH) (AVR) (AH) (SVR) (SH) (SVR) (SH) (SVR)
2,100 $9.30 2,100 $9.00 2,000 $9.00 2,000 $9.00
hours x per hours x per hours x per hours x per
hour* hour hour hour
$19,530 $18,900 $18,000 $18,000

$630 Unfavorable $900 Unfavorable

Variable-overhead Variable-overhead No difference
spending variance efficiency variance

actual variable overhead cost $19,530

*Actual variable-overhead rate (AVR) =   $9.30
actual hours 2,100

†
Column (4) is not used to compute the variances. It is included to point out that the flexible-budget amount
 
for variable overhead, $18,000, is the amount that will be applied to Work-in-Process inventory for product
 
costing purposes.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies, Inc.

11-56 Solutions Manual
PROBLEM 11-51 (CONTINUED)

3. Graphical analysis of variable-overhead variances:*

Rate

$9.30
(actual)
Spending variance: $630 U
$9.00
(standard)

Efficiency
variance:
$900 U

0 Hours
2,000 2,100
(standard) (actual)

*The graph is not drawn to scale, in order to make it easier to visualize the overhead variances.

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Managerial Accounting, 5/e 11- 57
PROBLEM 11-51 (CONTINUED)

4. Interpretation of variable-overhead variances:

(a) The $630 unfavorable spending variance means that the company spent more money
on variable overhead in February than should have been spent, given that 2,100 direct-
labor hours were used. This is the control variance for variable overhead.

(b) The $900 unfavorable efficiency variance results from the fact that February's actual
direct-labor usage exceeded the standard amount. Direct labor is the cost driver used to
budget and apply variable overhead. The variance does not convey any information
about the efficiency with which variable-overhead items, such as electricity, were used.

5. FIXED-OVERHEAD BUDGET AND VOLUME VARIANCES

(1) (2) (3)

ACTUAL BUDGETED FIXED OVERHEAD
FIXED FIXED APPLIED TO
OVERHEAD OVERHEAD WORK IN PROCESS
Standard
Standard Fixed-
Allowed  Overhead
Hours Rate
2,000 $12.50 per

hours hour*

$37,600 $20,000 $25,000

$17,600 Unfavorable $(5,000)†

Fixed-overhead Fixed-overhead
budget variance volume variance

$20,000
* Standard fixed overhead rate  $12.50 
(6,400)(.25)

†
Negative sign. Consistent with the discussion in the text, we choose not to designate the volume
variance as favorable or unfavorable. Some accountants would designate a negative volume
variance as "favorable."

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11-58 Solutions Manual
PROBLEM 11-51 (CONTINUED)

6. Budgeted versus applied fixed overhead:

Fixed overhead

$30,000 Applied fixed overhead

$25,000

Volume variance: $5,000

$20,000 

$15,000 Budgeted fixed overhead

$10,000

$5,000

Hours
500 1,000 1,500 2,000 2,500

Planned monthly activity Standard hours allowed,

(1,600 hours = 6,400 x .25) given actual output
(2,000 hours = 8,000 x .25)

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Managerial Accounting, 5/e 11- 59
PROBLEM 11-51 (CONTINUED)

7. Interpretation of fixed-overhead variances:

(a) The $17,600 unfavorable budget variance means that actual fixed overhead exceeded
the budget by $17,600. This is the control variance for fixed overhead.

(b) The ($5,000) negative volume variance is a means of reconciling the control purpose
and the product costing purpose of the cost accounting system. The volume variance is
the difference between budgeted monthly fixed overhead of $20,000, which is
determined for control purposes, and the applied fixed overhead of $25,000, which is
computed for product costing purposes. The negative sign of the volume variance
results from the fact that the company's actual production activity in February exceeded
planned activity.

8. Journal entries:

(a) Manufacturing Overhead............................................... 57,130*

Various Accounts.................................................. 57,130

To record February's actual manufacturing overhead.

*$57,130 = $19,530 + $37,600

(b) Work-in-Process Inventory............................................ 43,000†

Manufacturing Overhead...................................... 43,000

To add applied manufacturing overhead to work in process.

†
$43,000 = $18,000 + $25,000

(c) Cost of Goods Sold....................................................... 14,130**

Manufacturing Overhead...................................... 14,130

To close underapplied manufacturing overhead into cost of goods sold:

**$14,130 = $57,130 – $43,000

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11-60 Solutions Manual
PROBLEM 11-51 (CONTINUED)

9. Posting of journal entries:

Manufacturing Overhead Various Accounts

57,130 43,000 57,130
14,130

Work-in-Process Inventory Cost of Goods Sold

43,000 14,130

PROBLEM 11-52 (20 MINUTES)

1. Sales price variance

= (Actual sales price – expected sales price)  actual sales volume
= ($48* – $50†)  5,000 = $10,000 Unfavorable

*Actual sales price = $240,000/5,000

†
Expected sales price = $300,000/6,000

2. Sales volume variance

= (Actual sales volume – budgeted sales volume)  budgeted unit contribution margin
= (5,000 – 6,000)  $20* = $20,000 Unfavorable

*Budgeted unit contribution margin = $120,000/6,000

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Managerial Accounting, 5/e 11- 61
PROBLEM 11-53 (45 MINUTES)

1. Sales-price variances and sales-volume variances:

Actual Budgeted Actual Sales-

Sales-Price Sales Sales Price Sales Price
Variance Price Price Difference Volume Variance

Business........................ $115 $120 $5 74,000 $370,000 U

Residential..................... 59 60 1 86,000 86,000 U
Total.............................. $456,000 U

Budgeted
Actual Budgeted Contribution Sales-
Sales-Volume Sales Sales Volume Margin Volume
Variance Volume Volume Difference Per Unit* Variance

Business........................ 74,000 80,000 6,000 $40 $240,000 U

Residential..................... 86,000 120,000 34,000 10 340,000 U
Total.............................. $580,000 U

*Since no other variable costs are associated directly with either product line, the gross
margin is equal to the contribution margin:

Business Residential

Budgeted contributi on m arg in $3,200,000 $1,200,000

Budgted sales volume 80,000 120,000

= $40 per unit = $10 per unit

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11-62 Solutions Manual
 PROBLEM 11-53 (CONTINUED)

2. The effectiveness of the marketing program is difficult to judge in the absence of actual
industry-wide performance data. If the industry estimate of a 10% decline in the market for
these products is used as a basis for comparison, then CCAC's gross margin should have
fallen to $3,960,000 ($4,400,000 x .9) as follows (in thousands):

Business Residential Total

Budgeted gross margin........................................ $3,200 $1,200 $4,400

Budgeted adjusted for 10% industry decline......... $2,880 $1,080 $3,960
Actual gross margin.............................................. 2,442 774 3,216
Variance (unfavorable)......................................... $ 438 $ 306 $ 744

CCAC's gross margin actually fell to $3,216,000, which is $744,000 lower than might have
been expected. To have been considered a success, the marketing program should have
generated a gross margin above $4,020,000 (the original budget minus the projected
industry decline plus the incremental cost of the special marketing program: $4,400,000 -
$440,000 + $60,000). The $60,000 cost of the special marketing program is assumed
equal to the unfavorable variance in the advertising cost shown in the performance report.

CCAC hoped to do better than the industry average by giving dealer discounts and
increasing direct advertising. However, to be successful, the discounts and advertising
must be offset by an increase in volume. The company was not successful in this regard;
sales volume dropped 7.5 percent in the business line as compared to a 28.3 percent
decline in residential volume. Note that the price of business-grade products was dropped
by 4.2 percent, whereas residential-grade products declined in price by only 1.7 percent.
Apparently the discounts and advertising did not generate enough sales volume to offset
and compensate for the program.

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Managerial Accounting, 5/e 11- 63
SOLUTIONS TO CASES

CASE 11-54 (50 MINUTES)

1. Planned production = 5,000 units.

The reasoning is as follows:

budgeted fixed overhead

(a) Fixed-overhead rate per direct-labor hour = planned direct -labor hours

$40,000
$4 per hr. = X

Therefore, planned direct-labor hours (X) equals 10,000 hours.

(b) Planned direct-labor hours = planned production  standard hours per unit
10,000 hr. = X  2 hr. per unit
Therefore, planned production (X) equals 5,000 units.

2. Actual production = planned production – 500 units

= 5,000 units – 500 units
= 4,500 units

3. Actual fixed overhead = $43,250.

Fixed overhead = actual fixed overhead – budgeted fixed overhead

budget variance
$3,250 U = X – $40,000

Therefore, actual fixed overhead (X) equals $43,250.

4. Total standard allowed direct-labor hours

= 4,500 units produced  2 hr. per unit
= 9,000 hr.

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11-64 Solutions Manual
CASE 11-54 (CONTINUED)

5. Actual direct-labor rate = $15 per hour.

Direct-labor rate variance = AH(AR – SR)
$8,800 U = 8,800(AR – $14)

Therefore, AR = $15.

6. Standard variable-overhead rate = $6 per direct-labor hour.

Variable-overhead efficiency variance = SVR(AH – SH)
$1,200 F = SVR(8,800 – 9,000)

Therefore, SVR = $6 per hr.

7. Actual variable-overhead rate = $6.30 per direct-labor hour.

Variable-overhead spending
variance = AH(AVR – SVR)
$2,640 U = 8,800(AVR – $6)

Therefore, AVR = $6.30 per hr.

total standard direct -material quatity allowed

8. Standard direct-material quantity per = actual production in units
unit
13,500 kg. *
= 4,500 units

= 3 kg.

*Direct-material quantity variance = SP(AQ – SQ)

$6,000 U = $12(14,000 – SQ)
SQ = 13,500 kg.

9. Direct-material price variance = PQ(AP – SP)

= 14,000($13.50 – $12.00)
= $21,000 U

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Managerial Accounting, 5/e 11- 65
CASE 11-54 (CONTINUED)

Applied fixed
10. overhead = standard fixed-overhead rate  standard allowed hours
= $4 per hr.  9,000 hr.
= $36,000

Fixed-overhead
11. volume variance = budgeted fixed overhead – applied fixed overhead

= $40,000 – $36,000
= $4,000 (Positive)*

*Consistent with the discussion in the text, we choose not to interpret the volume variance as
either favorable or unfavorable. Some managerial accountants would classify this as an
unfavorable variance, because planned production exceeded actual production.

CASE 11-55 (50 MINUTES)

1. The $44,000 unfavorable variance between the budgeted and actual contribution margin for
the chocolate nut supreme cookie product line during April is explained by the following
variances:

a. Direct-material price variance:

Type of Material PQ*(AP+ - SP) Variance

Cookie mix............................ 4,650,000($.02-$.02).............. $ 0
Milk chocolate....................... 2,660,000($.20-$.15).............. 133,000 U
Almonds................................ 480,000($.50-$.50)................. 0
Total............................................................................................ $133,000 U

*PQ = AQ, because all materials were used during the month of purchase.
+
AP = actual total cost (given) ¸ actual quantity

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11-66 Solutions Manual
 CASE 11-55 (CONTINUED)

b. Direct-material quantity variance:

Type of Material SP(AQ - SQ*) Variance

Cookie mix............................ $.02(4,650,000-4,500,000)..... $ 3,000 U
Milk chocolate....................... $.15(2,660,000-2,250,000)..... 61,500 U
Almonds................................ $.50(480,000-450,000)........... 15,000 U
Total............................................................................................ $79,500 U

*SQ = standard ounces of input per pound of cookies ´ actual pounds of cookies
produced.

c. Direct-labor rate variance = AH(AR - SR) = 0.

Dividing the total actual labor cost by the actual labor time used, for each type of
labor, shows that the actual rate and the standard rate are the same (i.e., AR = SR).
Thus, this variance is zero.

d. Direct-labor efficiency variance:

Type of Labor SR*(AH - SH+) Variance

Mixing................................... $.24(450,000-450,000)........... $ 0
Baking................................... $.30(800,000-900,000)........... 30,000 F
Total............................................................................................ $30,000 F

*Standard rate per minute = standard rate per hour ¸ 60 minutes

+
Standard minutes per unit (pound) ´ actual units (pounds) produced

e. Variable-overhead spending variance

= actual variable overhead - (AH ´ SVR)
= $750,000 - [(1,250,000*/60) ´ $32.40]
= $75,000 U

*Total actual minutes of direct labor.

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 CASE 11-55 (CONTINUED)

f. Variable-overhead efficiency variance

= SVR(AH - SH*)
 1,250,00 3  450,000 
= $32.40   
 60 60 
= $54,000 F

*SH = (3 minutes per unit, or pound ´ 450,000 units, or pounds) ¸ 60 minutes

actual exp ected actual

g. Sales-price variance =  sales price  sales price   sales volume
 
= ($7.90* - $8.00) ´ 450,000
= $45,000 U

*Actual sales price = $3,555,000 ¸ 450,000 units sold

h. Sales-volume variance
actual budgeted budgeted unit
=  sales volume  sales volume   contributi on m arg in
 
= (450,000 - 400,000) ´ $4.09*
= $204,500 F

*Budgeted unit contribution margin = $1,636,000 ¸ 400,000 units

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
11-68 Solutions Manual
CASE 11-55 (CONTINUED)

Summary of variances:

Direct-material price variance............................................................. $133,000 U

Direct-material quantity variance........................................................ 79,500 U
Direct-labor rate variance................................................................... 0
Direct-labor efficiency variance.......................................................... 30,000 F
Variable-overhead spending variance................................................ 75,000 U
Variable-overhead efficiency variance................................................ 54,000 F
Sales-price variance........................................................................... 45,000 U
Sales-volume variance....................................................................... 204,500 F
Total................................................................................................... $ 44,000 U

2. a. One problem may be that direct labor is not an appropriate cost driver for Aunt
Molly’s Old Fashioned Cookies because it may not be the activity that drives
variable overhead. A good indication of this situation is shown in the variance
analysis. The direct-labor efficiency variance is favorable, while the variable-
overhead spending variable is unfavorable. Another problem is that baking
requires considerably more power than mixing does; this difference could distort
product costs.

b. Activity-based costing (ABC) may solve the problems described in requirement 2(a)
and therefore is an alternative that Aunt Molly’s should consider. Since direct labor
does not seem to have a direct cause-and-effect relationship with variable
overhead, the company should try to identify the activity or activities that drive
variable overhead. If the same proportion of these activities is used in all of Aunt
Molly’s products, then ABC may not be beneficial. However, if the products require
a different mix of these activities, then ABC could be beneficial.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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Managerial Accounting, 5/e 11- 69
CURRENT ISSUES IN MANAGERIAL ACCOUNTING

ISSUE 11-56
"XEROX PLEDGES TO CUT $1 BILLION IN COSTS, REPORTS A QUARTERLY LOSS OF $167
MILLION," THE WALL STREET JOURNAL, OCTOBER 25, 2000, JOHN HECHINGER AND
LAURA JOHANNES. "GE SAYS EARNING ROSE 20% IN 3 RD PERIOD: RESULTS REFLECT
NET GROWTH IN EVERY MAJOR UNIT, THE FRUIT OF COST CUTS," THE WALL STREET
JOURNAL, OCTOBER 12, 2000, MATT MURRAY.
1. Xerox plans to cut costs and raise capital by selling various assets such as its stake in Fuji
Xerox, several business units, its China operations and its business equipment financing
operations. Xerox gave scant details about how it would achieve projected savings or a
timetable for asset sales. As many as 5000 layoffs could result.

2. Standard costing provides a benchmark against which management can judge the cost of
producing a product or service. Large variances above the standard cost should be
investigate, and can help management in cutting costs.

ISSUE 11-57

"USING ENHANCED COST MODELS IN VARIANCE ANALYSIS FOR BETTER CONTROL AND
DECISION MAKING," MANAGEMENT ACCOUNTING QUARTERLY, WINTER 2000, KENNARD
T. WING.

Student answers will vary. The instructor should point out that variance analysis is based on
overly simplistic cost models in which every cost has to be treated as either fixed or variable. In
the real world, many costs do not behave according to those idealized models, which means
that managers can always legitimately point to shortcomings in the variance analysis.
According to the article, variance reports may fail to help managers identify cost issues, and
managers can use the limitations of the variance reports to reduce their own financial
accountability.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
11-70 Solutions Manual
ISSUE 11-58
"STANDARD COSTING IS ALIVE AND WELL AT PARKER BRASS," MANAGEMENT
ACCOUNTING QUARTERLY, WINTER 2000, DAVID JOHNSEN AND PARVEZ SOPARIWALA.

If production variances exceed 5 percent of sales, the FBU managers are required to provide
an explanation for the variances and to put together a plan of action to correct the detected
problems. In the past, variances were reported only at month-end, but often a particular job
already would have been off the shop floor for three or more weeks. When management
questioned the variances, it was too late to review the job. Now, exception reports are
generated the day after a job is closed. Any job with variances greater than $1,000 is displayed
on this report. These reports are distributed to the managers, planners or schedulers, and
plant accountants, which permits people to ask questions while the job is still fresh in
everyone's mind.

ISSUE 11-59
"FORGET THE HUDDLED MASSES: SEND NERDS," BUSINESS WEEK, JULY 21, 1997,
STEPHEN BAKER AND GARY MCWILLIAMS.

1. Failure to satisfy computer programming needs could lead to: (a) down-time; (b) production
inefficiencies; (c) increased training costs; (d) high employee turnover; and (e) low
employee satisfaction.

2. Similar to the flexible overhead budgets shown in the text.

ISSUE 11-60
"MANAGEMENT CONTROL SYSTEMS: HOW SPC ENHANCES BUDGETING AND STANDARD
COSTING," MANAGEMENT ACCOUNTING QUARTERLY, FALL 2000, HARPER A. ROEHM,
LARRY WEINSTEIN, AND JOSEPH F. CASTELLANO.

1. Organizations that use statistical process control (SPC) create processes and systems to
achieve their mission and objectives. Control is about creating conditions that will improve
the probability that desired outcomes will be achieved. A control system is comprised of a
set of measures for defined entities, criteria for evaluating these measures, and processes
for obtaining these measures and the criteria for evaluating them.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

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Managerial Accounting, 5/e 11- 71
 2. SPC adds value as a cost management technique in budgeting and standard costing
systems by determining the ability of a system to achieved desired outcomes and
determining if the system is accomplishing them.

ISSUE 11-61
"MANAGED CARE IS STILL A GOOD IDEA," THE WALL STREET JOURNAL, NOVEMBER 17,
1999, UWE REINHART.

Managed care simply means that those who pay for health care have some say over what
services they will pay for and at what price. Periodic, statistical profiles of individual physicians'
practices promise to be a more productive approach to cost and quality control. This is a
common method of cost control in other countries. The method grants the physician clinical
autonomy within some range of pre-established norms and intervenes only when physicians
deviate substantially from them. In industry, this approach is known as management by
exception. The development and updating of these practice norms is a perpetual search for
the best clinical practices. To be effective, that search should be conducted in close
cooperation with the practicing physicians to whom the norms apply.

ISSUE 11-62
"PERFORMANCE MEASUREMENT IN A TELEPHONE CALL CENTRE," MANAGEMENT
ACCOUNTING, JANUARY 1999, GORDON BROWN, JOHN INNES, AND NOEL TAGOE.

The budgeting process includes predicting how many calls will be made and the duration of
each call. The budgeted cost includes not only the cost of the telephone call but also the cost
of the telephone operators and appropriate overhead costs. An important financial
performance measure is the cost per call, which varies by country and by month.

The predicted level of telephone calls is very significant, because this anticipated level of usage
determines the number of telephone operators at the call center. In addition to the actual
number of telephone calls received, the following significant non-financial performance
measures are reported via the system: call dropout rate, customer satisfaction measures, and
average response time to answer calls. The call drop-out rate is the percentage of all callers
who are put in a telephone queue and decide to hang up rather than wait in this queue for an
operator to become free. These non-financial performance measures can provide information
in terms of an international comparison of different call centers, which can lead to further
investigation and resulting action.
ISSUE 11-63

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
11-72 Solutions Manual
"THE SATELLITE BIZ BLASTS OFF," BUSINESS WEEK, JANUARY 27, 1997, ERIC SCHINE
AND PETER ELSTROM.

1. Overhead costs:

Launch vehicle testing

System setup

Supervisors' salaries

Insurance

Launch costs

2. Increased volume could reduce prices. If a firm is able to cover its fixed costs and the
marginal cost of providing an additional unit of service is low, it may be able to provide
service at a much lower cost.

McGraw-Hill/Irwin  2002 The McGraw-Hill Companies,

Inc.
Managerial Accounting, 5/e 11- 73