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CHAPTER 8
FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND
MANAGEMENT CONTROL

8-1 Effective planning of variable overhead costs involves:
1. Planning to undertake only those variable overhead activities that add value for
customers using the product or service, and
2. Planning to use the drivers of costs in those activities in the most efficient way.

8-2 At the start of an accounting period, a larger percentage of fixed overhead costs are
locked-in than is the case with variable overhead costs. When planning fixed overhead costs, a
company must choose the appropriate level of capacity or investment that will benefit the
company over a long time. This is a strategic decision.

8-3 The key differences are how direct costs are traced to a cost object and how indirect costs
are allocated to a cost object:

Actual Costing Standard Costing
Direct costs Actual prices Standard prices
× Actual inputs used × Standard inputs allowed for actual output
Indirect costs Actual indirect rate Standard indirect cost-allocation rate
× Actual inputs used × Standard quantity of cost-allocation base
allowed for actual output

8-4 Steps in developing a budgeted variable-overhead cost rate are:
1. Choose the period to be used for the budget,
2. Select the cost-allocation bases to use in allocating variable overhead costs to the
output produced,
3. Identify the variable overhead costs associated with each cost-allocation base, and
4. Compute the rate per unit of each cost-allocation base used to allocate variable
overhead costs to output produced.

8-5 Two factors affecting the spending variance for variable manufacturing overhead are:
a. Price changes of individual inputs (such as energy and indirect materials) included in
variable overhead relative to budgeted prices.
b. Percentage change in the actual quantity used of individual items included in variable
overhead cost pool, relative to the percentage change in the quantity of the cost driver
of the variable overhead cost pool.

8-6 Possible reasons for a favorable variable-overhead efficiency variance are:
• Workers more skillful in using machines than budgeted,
• Production scheduler was able to schedule jobs better than budgeted, resulting in
lower-than-budgeted machine-hours,
• Machines operated with fewer slowdowns than budgeted, and
• Machine time standards were overly lenient.

8-1

8-7 A direct materials efficiency variance indicates whether more or less direct materials
were used than was budgeted for the actual output achieved. A variable manufacturing overhead
efficiency variance indicates whether more or less of the chosen allocation base was used than
was budgeted for the actual output achieved.

8-8 Steps in developing a budgeted fixed-overhead rate are
1. Choose the period to use for the budget,
2. Select the cost-allocation base to use in allocating fixed overhead costs to output
produced,
3. Identify the fixed-overhead costs associated with each cost-allocation base, and
4. Compute the rate per unit of each cost-allocation base used to allocate fixed overhead
costs to output produced.

8-9 The relationship for fixed-manufacturing overhead variances is:
Flexible-budget variance

Efficiency variance
Spending variance (never a variance)

There is never an efficiency variance for fixed overhead because managers cannot be
more or less efficient in dealing with an amount that is fixed regardless of the output level. The
result is that the flexible-budget variance amount is the same as the spending variance for fixed-
manufacturing overhead.

8-10 For planning and control purposes, fixed overhead costs are a lump sum amount that is
not controlled on a per-unit basis. In contrast, for inventory costing purposes, fixed overhead
costs are allocated to products on a per-unit basis.

8-11 An important caveat is what change in selling price might have been necessary to attain
the level of sales assumed in the denominator of the fixed manufacturing overhead rate. For
example, the entry of a new low-price competitor may have reduced demand below the
denominator level if the budgeted selling price was maintained. An unfavorable production-
volume variance may be small relative to the selling-price variance had prices been dropped to
attain the denominator level of unit sales.

8-2

8-12 A strong case can be made for writing off an unfavorable production-volume variance to
cost of goods sold. The alternative is prorating it among inventories and cost of goods sold, but
this would “penalize” the units produced (and in inventory) for the cost of unused capacity, i.e.,
for the units not produced. But, if we take the view that the denominator level is a “soft” number
—i.e., it is only an estimate, and it is never expected to be reached exactly, then it makes more
sense to prorate the production volume variance—whether favorable or not—among the
inventory stock and cost of goods sold. Prorating a favorable variance is also more conservative:
it results in a lower operating income than if the favorable variance had all been written off to
cost of goods sold. Finally, prorating also dampens the efficacy of any steps taken by company
management to manage operating income through manipulation of the production volume
variance. In sum, a production-volume variance need not always be written off to cost of goods
sold.

8-13 The four variances are:
• Variable manufacturing overhead costs
− spending variance
− efficiency variance
• Fixed manufacturing overhead costs
− spending variance
− production-volume variance

8-14 Interdependencies among the variances could arise for the spending and efficiency
variances. For example, if the chosen allocation base for the variable overhead efficiency
variance is only one of several cost drivers, the variable overhead spending variance will include
the effect of the other cost drivers. As a second example, interdependencies can be induced when
there are misclassifications of costs as fixed when they are variable, and vice versa.

8-15 Flexible-budget variance analysis can be used in the control of costs in an activity area by
isolating spending and efficiency variances at different levels in the cost hierarchy. For example,
an analysis of batch costs can show the price and efficiency variances from being able to use
longer production runs in each batch relative to the batch size assumed in the flexible budget.

8-3

8-16 (20 min.) Variable manufacturing overhead, variance analysis.

1. Variable Manufacturing Overhead Variance Analysis for Esquire Clothing for June 2012

Actual Costs Flexible Budget: Allocated:
Incurred Budgeted Input Budgeted Input
Actual Input Actual Input Quantity Allowed Quantity Allowed
Quantity Quantity for Actual Output for Actual Output
× Actual Rate × Budgeted Rate × Budgeted Rate × Budgeted Rate
(1) (2) (3) (4)
(4,536 × $11.50) (4,536 × $12) (4 × 1,080 × $12) (4 × 1,080 × $12)
$52,164 $54,432 $51,840 $51,840

$2,268 F $2,592 U
Spending variance Efficiency variance Never a variance

$324 U
Flexible-budget variance Never a variance

2. Esquire had a favorable spending variance of $2,268 because the actual variable overhead
rate was $11.50 per direct manufacturing labor-hour versus $12 budgeted. It had an unfavorable
efficiency variance of $2,592 U because each suit averaged 4.2 labor-hours (4,536 hours ÷ 1,080
suits) versus 4.0 budgeted labor-hours.

8-4

8-17 (20 min.) Fixed-manufacturing overhead, variance analysis (continuation of 8-16).

Budgeted fixed overhead $62,400
1 & 2. rate per unit of = 1,040 ×4
allocation base
$62,400
= 4,160
= $15 per hour

Fixed Manufacturing Overhead Variance Analysis for Esquire Clothing for June 2012

Flexible Budget:
Same Budgeted Same Budgeted Allocated:
Lump Sum Lump Sum Budgeted Input
(as in Static Budget) (as in Static Budget) Quantity Allowed
Actual Costs Regardless of Regardless of for Actual Output
Incurred Output Level Output Level × Budgeted Rate
(1) (2) (3) (4)
(4 × 1,080 × $15)
$63,916 $62,400 $62,400 $64,800

$1,516 U $2,400 F
Spending variance Never a variance Production-volume variance

$1,516 U $2,400 F
Flexible-budget variance Production-volume variance

The fixed manufacturing overhead spending variance and the fixed manufacturing
flexible budget variance are the same––$1,516 U. Esquire spent $1,516 above the $62,400
budgeted amount for June 2012.
The production-volume variance is $2,400 F. This arises because Esquire utilized its
capacity more intensively than budgeted (the actual production of 1,080 suits exceeds the
budgeted 1,040 suits). This results in overallocated fixed manufacturing overhead of $2,400 (4 ×
40 × $15). Esquire would want to understand the reasons for a favorable production-volume
variance. Is the market growing? Is Esquire gaining market share? Will Esquire need to add
capacity?

8-5

8-18 (30 min.) Variable manufacturing overhead variance analysis.

1. Denominator level = (3,200,000 × 0.02 hours) = 64,000 hours

2. Actual Flexible
Results Budget Amounts
1. Output units (baguettes) 2,800,000 2,800,000
2. Direct manufacturing labor-hours 50,400 56,000a
3. Labor-hours per output unit (2 ÷1) 0.018 0.020
4. Variable manuf. overhead (MOH) costs $680,400 $560,000
5. Variable MOH per labor-hour (4 ÷2) $13.50 $10
6. Variable MOH per output unit (4 ÷1) $0.243 $0.200
a
2,800,000 × 0.020= 56,000 hours

Variable Manufacturing Overhead Variance Analysis for French Bread Company for 2012

(1) (2) (3) (4)
(50,400 × $13.50) (50,400 × $10) (56,000 × $10) (56,000 × $10)
$680,400 $504,000 $560,000 $560,000

$176,400 U $56,000 F

$120,400 U

3. Spending variance of $176,400 U. It is unfavorable because variable manufacturing overhead
was 35% higher than planned. A possible explanation could be an increase in energy rates
relative to the rate per standard labor-hour assumed in the flexible budget.
Efficiency variance of $56,000 F. It is favorable because the actual number of direct
manufacturing labor-hours required was lower than the number of hours in the flexible budget.
Labor was more efficient in producing the baguettes than management had anticipated in the
budget. This could occur because of improved morale in the company, which could result from
an increase in wages or an improvement in the compensation scheme.
Flexible-budget variance of $120,400 U. It is unfavorable because the favorable
efficiency variance was not large enough to compensate for the large unfavorable spending
variance.

8-6

8-19 (30 min.) Fixed manufacturing overhead variance analysis (continuation of 8-18).

1. Budgeted standard direct manufacturing labor used = 0.02 per baguette
Budgeted output = 3,200,000 baguettes
Budgeted standard direct manufacturing labor-hours
= 3,200,000 × 0.02
= 64,000 hours
Budgeted fixed manufacturing overhead costs
= 64,000 × $4.00 per hour
= $256,000
Actual output = 2,800,000 baguettes
Allocated fixed manufacturing overhead
= 2,800,000 × 0.02 × $4
= $224,000

Fixed Manufacturing Overhead Variance Analysis for French Bread Company for 2012

Flexible Budget:
(1) (2) (3) (4)
(2,800,000 × 0.02 × $4)
$272,000 $256,000 $256,000 $224,000

$16,000 U $32,000 U
Spending variance Never a variance Production-volume
variance

$16,000 U $32,000 U
Flexible-budget variance Production-volume
variance
$48,000 U
Underallocated fixed overhead
(Total fixed overhead variance)

2. The fixed manufacturing overhead is underallocated by $48,000.

3. The production-volume variance of $32,000U captures the difference between the budgeted
3,200,0000 baguettes and the lower actual 2,800,000 baguettes produced—the fixed cost
capacity not used. The spending variance of $16,000 unfavorable means that the actual
aggregate of fixed costs ($272,000) exceeds the budget amount ($256,000). For example,
monthly leasing rates for baguette-making machines may have increased above those in the
budget for 2012.

8-7

8-20 (30–40 min.) Manufacturing overhead, variance analysis.

1. The summary information is:

Flexible Static
The Solutions Corporation (June 2012) Actual Budget Budget
Outputs units (number of assembled units) 216 216 200
Hours of assembly time 411 432c 400a
Assembly hours per unit 1.90b 2.00 2.00
Variable mfg. overhead cost per hour of assembly time $ 31.00d $ 30.00 $ 30.00
Variable mfg. overhead costs $12,741 $12,960e $12,000f
Fixed mfg. overhead costs $20,550 $19,200 $19,200
Fixed mfg. overhead costs per hour of assembly time $ 50.00g $ 48.00h
a
200 units × 2 assembly hours per unit = 400 hours
b
411 hours ÷ 216 units = 1.90 assembly hours per unit
c
216 units × 2 assembly hours per unit = 432 hours
d
$12,741 ÷ 411 assembly hours = $31.00 per assembly hour
e
432 assembly hours × $30 per assembly hour = $12,960
f
400 assembly hours × $30 per assembly hour = $12,000
g
$20,550 ÷ 411 assembly hours = $50 per assembly hour
h
$19,200 ÷ 400 assembly hours = $48 per assembly hour

8-8

Flexible Budget: Allocated:
Budgeted Input Budgeted Input
Actual Costs Actual Input Quantity × Quantity Allowed Budgeted Quantity Allowed Budgeted
Incurred Budgeted Rate for Actual Output × Rate for Actual Output × Rate
Variable 411 × $30.00 432 × $30.00 432 × $30.00
Manufacturin
g assy. hrs. per assy. hr. assy. hrs. per assy. hr. assy. hrs. per assy. hr.
Overhead $12,741 $12,330 $12,960 $12,960

$411 U $630 F
$219 F

$219 F
Overallocated variable overhead

Budgeted Input
Actual Costs Static Budget Lump Sum Static Budget Lump Sum Allowed Budgeted
Incurred Regardless of Output Level Regardless of Output Level for Actual Output × Rate
Fixed 432 × $48.00
Manufacturin
g assy. hrs. per assy. hr.
Overhead $20,550 $19,200 $19,200 $20,736

$1,350 U $1,536 F
Spending Variance Never a Variance Production-volume variance

$1,350 U $1,536 F

$186 F
Overallocated fixed overhead

8-9

The summary analysis is:

Spending Efficiency Production-Volume
Variance Variance Variance
Variable
Manufacturing
Overhead $ 411 U $630 F Never a variance
Fixed Manufacturing
Overhead $1,350 U Never a variance $1,536 F

2. Variable Manufacturing Costs and Variances

a. Variable Manufacturing Overhead Control 12,741
Accounts Payable Control and various other accounts 12,741
To record actual variable manufacturing overhead costs incurred

b. Work-in-Process Control 12,960
Variable Manufacturing Overhead Allocated 12,96
To record variable manufacturing overhead allocated.

c. Variable Manufacturing Overhead Allocated 12,960
Variable Manufacturing Overhead Spending Variance 411
Variable Manufacturing Overhead Control 12,74
Variable Manufacturing Overhead Efficiency Variance 630
To isolate variances for the accounting period.

d. Variable Manufacturing Overhead Efficiency Variance 630
Variable Manufacturing Overhead Spending Variance 41
Cost of Goods Sold 2
To write off variable manufacturing overhead variances to cost of goods sold.

8-11

Fixed Manufacturing Costs and Variances

a. Fixed Manufacturing Overhead Control 20,550
Salaries Payable, Acc. Depreciation, various other accounts 20,550
To record actual fixed manufacturing overhead costs incurred.

b. Work-in-Process Control 20,736
Fixed Manufacturing Overhead Allocated 20,736
To record fixed manufacturing overhead allocated.

c. Fixed Manufacturing Overhead Allocated 20,736
Fixed Manufacturing Overhead Spending Variance 1,350
Fixed Manufacturing Overhead Production-Volume Variance 1,536
Fixed Manufacturing Overhead Control 20,550
To isolate variances for the accounting period.

d. Fixed Manufacturing Overhead Production-Volume Variance 1,536
Cost of Goods Sold 186
To write off fixed manufacturing overhead variances to cost of goods sold.

3. Planning and control of variable manufacturing overhead costs has both a long-run and a
short-run focus. It involves Solutions planning to undertake only value-added overhead activities
(a long-run view) and then managing the cost drivers of those activities in the most efficient way
(a short-run view). Planning and control of fixed manufacturing overhead costs at Solutions have
primarily a long-run focus. It involves undertaking only value-added fixed-overhead activities
for a budgeted level of output. Solutions makes most of the key decisions that determine the
level of fixed-overhead costs at the start of the accounting period.

8-12

8-21 (10−15 min.) 4-variance analysis, fill in the blanks.

Variable Fixed
1. Spending variance $200 U $4,600 U
2. Efficiency variance 2,200 F NEVER
3. Production-volume variance NEVER 1,200 F
4. Flexible-budget variance 2,000 F 4,600 U
5. Underallocated (overallocated) MOH 2,000 F 3,400 U

These relationships could be presented in the same way as in Exhibit 8-4.

Actual Input Quantity Allowed Quantity Allowed
Actual Costs Quantity for Actual Output for Actual Output
Incurred × Budgeted Rate × Budgeted Rate × Budgeted Rate
(1) (2) (3) (4)
Variable
MOH $31,000 $30,800 $33,000 $33,000

$200 U $2,200 F

$2,000 F
$2,000 F
(Total variable overhead variance)

Flexible Budget:
(1) (2) (3) (4)
Fixed
MOH $18,000 $13,400 $13,400 $14,600
$4,600 U $1,200 F

$4,600 U $1,200 F

$3,400 U
Underallocated fixed overhead

8-13

An overview of the 4 overhead variances is:

Production-
4-Variance Spending Efficiency Volume
Analysis Variance Variance Variance
Variable
Overhead $200 U $2,200 F Never a variance
Fixed

8-22 (20–30 min.) Straightforward 4-variance overhead analysis.

1. The budget for fixed manufacturing overhead is 4,000 units × 6 machine-hours × $15
machine-hours/unit = $360,000.

An overview of the 4-variance analysis is:

4-Variance Spending Efficiency Production-
Analysis Variance Variance Volume Variance
Variable
Manufacturing
Overhead $17,800 U $16,000 U Never a Variance

Fixed
Manufacturing
Overhead $13,000 U Never a Variance $36,000 F

Solution Exhibit 8-22 has details of these variances.

A detailed comparison of actual and flexible budgeted amounts is:

Actual Flexible Budget
Output units (auto parts) 4,400 4,400
Allocation base (machine-hours) 28,400 26,400a
Allocation base per output unit 6.45b 6.00
Variable MOH $245,000 $211,200c
Variable MOH per hour $8.63d $8.00
Fixed MOH $373,000 $360,000e
Fixed MOH per hour $13.13f –
a
4,400 units × 6.00 machine-hours/unit = 26,400 machine-hours
b
28,400 ÷ 4,400 = 6.45 machine-hours per unit
c
4,400 units × 6.00 machine-hours per unit × $8.00 per machine-hour = $211,200
d
$245,000 ÷ 28,400 = $8.63
e
4,000 units × 6.00 machine-hours per unit × $15 per machine-hour = $360,000
f
$373,000 ÷ 28,400 = $13.13
2. Variable Manufacturing Overhead Control 245,000
Accounts Payable Control and other accounts 245,000

8-14

Work-in-Process Control 211,200

Variable Manufacturing Overhead Spending Variance 17,800
Variable Manufacturing Overhead Efficiency Variance 16,000

Wages Payable Control, Accumulated Depreciation
Control, etc. 373,000



3. Individual fixed manufacturing overhead items are not usually affected very much by
day-to-day control. Instead, they are controlled periodically through planning decisions and
budgeting procedures that may sometimes have horizons covering six months or a year (for
example, management salaries) and sometimes covering many years (for example, long-term
leases and depreciation on plant and equipment).

4. The fixed overhead spending variance is caused by the actual realization of fixed costs
differing from the budgeted amounts. Some fixed costs are known because they are
contractually specified, such as rent or insurance, although if the rental or insurance contract
expires during the year, the fixed amount can change. Other fixed costs are estimated, such as
the cost of managerial salaries which may depend on bonuses and other payments not known at
the beginning of the period. In this example, the spending variance is unfavorable, so actual
FOH is greater than the budgeted amount of FOH.
The fixed overhead production volume variance is caused by production being over or
under expected capacity. You may be under capacity when demand drops from expected levels,
or if there are problems with production. Over capacity is usually driven by favorable demand
shocks or a desire to increase inventories. The fact that there is a favorable volume variance
indicates that production exceeded the expected level of output (4,400 units actual relative to a
denominator level of 4,000 output units).

8-15

SOLUTION EXHIBIT 8-22

(1) (2) (3) (4)
Variable (28,400 × $8) (4,400 × 6 × $8) (4,400 × 6 × $8)
MOH $245,000 $227,200 $211,200 $211,200

$17,800 U $16,000 U

$33,800 U
$33,800 U
Underallocated variable overhead

Flexible Budget:
(1) (2) (3) (4)
Fixed (4,000 × 6 × $15) (4,000 × 6 × $15) (4,400 × 6 × $15)
MOH $373,000 $360,000 $360,000 $396,000

$13,000 U $36,000 F
variance
$13,000 U $36,000 F
$23,000 F

8-16

8-23 (30−40 min.) Straightforward coverage of manufacturing overhead, standard-
costing system.

1. Solution Exhibit 8-23 shows the computations. Summary details are:

Actual Flexible Budget
Output units 65,500 65,500
Allocation base (machine-hours) 76,400 78,600a
Allocation base per output unit 1.17b 1.2
Variable MOH $618,840 $628,800c
Variable MOH per hour $8.92d $8.00
Fixed MOH $145,790 $144,000
Fixed MOH per hour $1.91e –
a d
65,500 × 1.2 = 78,600 $618,840 ÷ 76,400 = $8.10
b e
76,400 ÷ 65,500 = 1.17 $145,790 ÷ 76,400 = $1.91
c
65,500 × 1.2 × $8 = $628,800

An overview of the 4-variance analysis is:

4-Variance Spending Efficiency Production−
Variable
Manufacturing
Overhead $7,640 U $17,600 F Never a variance

Fixed
Manufacturing

8-17

2. Variable Manufacturing Overhead Control 618,840
Accounts Payable Control and other accounts 618,840


Variable Manufacturing Overhead Spending Variance 7,640
Variable Manufacturing Overhead Efficiency Variance 17,600

Wages Payable Control, Accumulated
Depreciation Control, etc. 145,790



3. The control of variable manufacturing overhead requires the identification of the cost
drivers for such items as energy, supplies, and repairs. Control often entails monitoring
nonfinancial measures that affect each cost item, one by one. Examples are kilowatt-hours used,
quantities of lubricants used, and repair parts and hours used. The most convincing way to
discover why overhead performance did not agree with a budget is to investigate possible causes,
line item by line item.

4. The variable overhead spending variance is unfavorable. This means the actual rate
applied to the manufacturing costs is higher than the budgeted rate. Since variable overhead
consists of several different costs, this could be for a variety of reasons, such as the utility rates
being higher than estimated or the indirect materials costs per unit of denominator activity being
more than estimated.
The variable overhead efficiency variance is favorable, which implies that the estimated
denominator activity was too high. Since the denominator activity is machine hours, this could
be the result of efficient use of machines, better scheduling of production runs, or machines that
are well maintained and thus are working at more than the expected level of efficiency.

8-18


(1) (2) (3) (4)
Variable (76,400 × $8) (78,600 × $8) (78,600 × $8)
Manufacturing $618,840 $611,200 $628,800 $628,800
Overhead

$7,640 U $17,600 F

$9,960 F
$9,960 F

Flexible Budget:
(1) (2) (3) (4)
Fixed (78,600 × $2)
Manufacturing $145,790 $144,000 $144,000 $157,200
Overhead

$1,790 U $13,200 F

$1,790 U $13,200 F
$11,410 F

=$144,000 / 72,000 machine-hours = $2 per machine-hour.

8-24 (20–25 min.) Overhead variances, service sector.

8-19

1.
Meals on Wheels Actual Flexible Static
(May 2012) Results Budget Budget
Output units (number of deliveries) 8,800 8,800 10,000
Hours per delivery 0.65a 0.70 0.70
Hours of delivery time 5,720 6,160b 7,000b
Variable overhead costs per delivery hour $1.80c $1.50 $1.50
Variable overhead (VOH) costs $10,296 $9,240d $10,500d
Fixed overhead costs $38,600 $35,000 $35,000
Fixed overhead cost per hour $5.00e

a
5,720 hours ÷ 8,800 deliveries = 0.65 hours per delivery
b
hrs. per delivery × number of deliveries = 0.70 × 10,000 = 7,000 hours
c
$10,296 VOH costs ÷ 5,720 delivery hours = $1.80 per delivery hour
d
Delivery hours × VOH cost per delivery hour = 7,000 × $1.50 = $10,500
e
Static budget delivery hours = 10,000 units × 0.70 hours/unit = 7,000 hours;
Fixed overhead rate = Fixed overhead costs ÷ Static budget delivery hours = $35,000 ÷ 7,000 hours = $5 per hour

VARIABLE OVERHEAD
Flexible Budget:
Budgeted Input
Quantity Allowed for
Actual Costs Actual Input Quantity Actual Output
Incurred × Budgeted Rate × Budgeted Rate
5,720 hrs × $1.50 per hr. 6,160 hrs × $1.50 per hr.
$10,296 $8,580 $9,240

$1,716 U $660 F
Spending variance Efficiency variance

2.
FIXED OVERHEAD

Flexible Budget:
Same Budgeted Allocated:
Lump Sum Budgeted Input
(as in Static Budget) Quantity Allowed for
Actual Costs Regardless of Output Actual Output
Incurred Level × Budgeted Rate
8,800 units × 0.70 hrs./unit × $5/hr.
6,160 hrs. × $5/hr.
$38,600 $35,000 $30,800

$3,600 U $4,200 U
Spending variance Production-volume variance

8-20

3. The spending variances for variable and fixed overhead are both unfavorable. This means
that MOW had increases over budget in either or both the cost of individual items (such as
telephone calls and gasoline) in the overhead cost pools, or the usage of these individual items
per unit of the allocation base (delivery time). The favorable efficiency variance for variable
overhead costs results from more efficient use of the cost allocation base––each delivery takes
0.65 hours versus a budgeted 0.70 hours.
MOW can best manage its fixed overhead costs by long-term planning of capacity rather
than day-to-day decisions. This involves planning to undertake only value-added fixed-overhead
activities and then determining the appropriate level for those activities. Most fixed overhead
costs are committed well before they are incurred. In contrast, for variable overhead, a mix of
long-run planning and daily monitoring of the use of individual items is required to manage costs
efficiently. MOW should plan to undertake only value-added variable-overhead activities (a
long-run focus) and then manage the cost drivers of those activities in the most efficient way (a
short-run focus).
There is no production-volume variance for variable overhead costs. The unfavorable
production-volume variance for fixed overhead costs arises because MOW has unused fixed
overhead resources that it may seek to reduce in the long run.

8-21

8-25 (40−50 min.) Total overhead, 3-variance analysis.

1. This problem has two major purposes: (a) to give experience with data allocated on a total
overhead basis instead of on separate variable and fixed bases and (b) to reinforce distinctions
between actual hours of input, budgeted (standard) hours allowed for actual output, and
denominator level.
An analysis of direct manufacturing labor will provide the data for actual hours of input
and standard hours allowed. One approach is to plug the known figures (designated by asterisks)
into the analytical framework and solve for the unknowns. The direct manufacturing labor
efficiency variance can be computed by subtracting $512 from $3,512. The complete picture is
as follows:

Flexible Budget:
Budgeted Input
Quantity Allowed
Actual Costs Actual Input Quantity for Actual Output
(5,120 hrs. × $25.10) (5,120hrs. × $25.00*) (5,000 hrs. × $25.00*)
$128,512* $128,000 $125,000

$512 U* $3,000 U
Price variance Efficiency variance
$3,512 U*
*
Given

Direct Labor calculations
Actual input × Budgeted rate = Actual costs – Price variance
= $128,512 – $512 = $128,000
Actual input = $128,000 ÷ Budgeted rate = $128,000 ÷ $25 = 5,120 hours
Budgeted input × Budgeted rate = $128,000 – Efficiency variance
= $128,000 – $3,000 = $125,000
Budgeted input = $125,000 ÷ Budgeted rate = $125,000 ÷ 25 = 5,000 hours

Production Overhead

Variable overhead rate = $43,200* ÷ 3,600* hrs. = $12.00 per standard labor-hour
= $103,400* – (4,000* × $12.00) = $55,400

If total overhead is allocated at 120% of direct labor-cost, the single overhead rate must
be 120% of $25.00, or $30.00 per hour. Therefore, the fixed overhead component of the rate
must be $30.00 – $12.00, or $18.00 per direct labor-hour.

8-22

Let D = denominator level in input units

Budgeted fixed
overhead rate =
per input unit

$18.00 = $55,400 ÷ D

D = 3,077 direct labor-hours
A summary 3-variance analysis for October follows:
Quantity Allowed Quantity Allowed
Actual Costs Actual Input Quantity for Actual Output for Actual Output
($55,400 + (5,120 × $12.00) $55,400 + ($12 × 5,000) (5,000 hrs. × $30.00)
$120,700* $116,840 $115,400 $150,000

$3,860 U $1,440 U $34,600 F*
Spending variance Efficiency variance Production-volume variance

$5,300 U $34,600 F*
*
Known figure

An overview of the 3-variance analysis using the block format in the text is:

3-Variance Spending Efficiency Production−

Total Overhead $3,860 U $1,440U $34,600 F

2. The control of variable manufacturing overhead requires the identification of the cost
drivers for such items as energy, supplies, equipment, and maintenance. Control often entails
monitoring nonfinancial measures that affect each cost item, one by one. Examples are kilowatts
used, quantities of lubricants used, and equipment parts and hours used. The most convincing
way to discover why overhead performance did not agree with a budget is to investigate possible
causes, line item by line item.
Individual fixed manufacturing overhead items are not usually affected very much by day-
to-day control. Instead, they are controlled periodically through planning decisions and
budgeting that may sometimes have horizons covering six months or a year (for example,
management salaries) and sometimes covering many years (for example, long-term leases and
depreciation on plant and equipment).

8-23

8-26 (30 min.) Overhead variances, missing information.

1. In the columnar presentation of variable overhead variance analysis, all numbers shown in
bold are calculated from the given information, in the order (a) – (e).

VARIABLE MANUFACTURING OVERHEAD
Flexible Budget:
Budgeted Input
Actual Costs Actual Input Quantity Quantity Allowed Budgeted
Incurred × Budgeted Rate for Actual Output × Rate
(b) (a) (c)
15,000 × $6.00 14,850 × $6.00
mach. hrs. per mach. hr. mach. hrs. per mach. hr.
$89,625 $90,000 $89,100

$375 F $900 U (d)

$525 U (e)

a. 15,000 machine-hours × $6 per machine-hour = $90,000

b. Actual VMOH = $90,000 – $375F (VOH spending variance) = $89,625

c. 14,850 machine-hours × $6 per machine-hour = $89,100

d. VOH efficiency variance = $90,000 – $89,100 = $900 U

e. VOH flexible budget variance = $900U – $375F = $525 U

Allocated variable overhead will be the same as the flexible budget variable overhead of
$89,100. The actual variable overhead cost is $89,625. Therefore, variable overhead is
underallocated by $525.

8-24

2. In the columnar presentation of fixed overhead variance analysis, all numbers shown in
bold are calculated from the given information, in the order (a) – (e).

FIXED MANUFACTURING OVERHEAD
Static Budget Lump Sum Budgeted Input
Actual Costs Regardless of Output Quantity Allowed Budgeted
Incurred Level for Actual Output × Rate
(a) (b)
14,850 × $1.60* (c)
mach. hrs. per mach. hr.
$30,375 $28,800 $23,760

$1,575 U $5,040 U (d)

$1,575 U (e)

a. Actual FOH costs = $120,000 total overhead costs – $89,625 VOH costs = $30,375

b. Static budget FOH lump sum = $30,375 – $1,575 spending variance = $28,800

c. *FOH allocation rate = $28,800 FOH static-budget lump sum ÷ 18,000 static-budget machine-hours
= $1.60 per machine-hour
Allocated FOH = 14,850 machine-hours × $1.60 per machine-hour = $23,760

d. PVV = $28,800 – $23,760 = $5,040 U

e. FOH flexible budget variance = FOH spending variance = $1,575 U

Allocated fixed overhead is $23,760. The actual fixed overhead cost is $30,375. Therefore, fixed
overhead is underallocated by $6,615.

8-25

8-27 (15 min.) Identifying favorable and unfavorable variances.

VOH VOH FOH FOH
Spending Efficiency Spending Production-
Scenario Variance Variance Variance Volume Variance
Production output is Cannot be Cannot be Unfavorable: Unfavorable:
4% less than budgeted, determined: no determined: no actual fixed output is less than
and actual fixed information on information on costs are more budgeted causing
manufacturing actual versus actual versus than budgeted FOH costs to be
overhead costs are 5% budgeted VOH flexible-budget fixed costs underallocated
more than budgeted rates machine-hours

Production output is Cannot be Unfavorable: actual Cannot be Unfavorable:
12% less than determined: no machine-hours determined: no output is less than
budgeted; actual information on more than flexible- information on budgeted causing
machine-hours are 7% actual versus budget machine- actual versus FOH costs to be
more than budgeted budgeted VOH hours budgeted FOH underallocated
rates costs

Production output is Cannot be Cannot be Cannot be Favorable: output
9% more than determined: no determined: no determined: no more than
budgeted information on information on information on budgeted will
actual versus actual machine- actual versus cause FOH costs to
budgeted VOH hours versus budgeted FOH be overallocated
rates flexible-budget costs
machine-hours
Actual machine-hours Cannot be Favorable: less Cannot be Cannot be
are 20% less than determined: no machine-hours used determined: no determined: no
flexible-budget information on relative to flexible information on information on
machine-hours actual versus budget actual versus flexible-budget
budgeted VOH budgeted FOH machine-hours
rates costs relative to static-
budget machine-
hours
Relative to the flexible Unfavorable: Favorable: actual Cannot be Cannot be
budget, actual actual VOH rate machine-hours less determined: no determined: no
machine-hours are 12% greater than than flexible- information on information on
less, and actual budgeted VOH budget machine- actual versus actual output
variable manufacturing rate hours budgeted FOH relative to
overhead costs are 20% costs budgeted output
greater

8-26

8-28 (35 min.) Flexible-budget variances, review of Chapters 7 and 8.

1. Solution Exhibit 8-28 contains a columnar presentation of the variances for Doorknob Design
Company (DDC) for April 2012.

Flexible Budget:
Actual Costs Budgeted Input
Incurred: Actual Input Quantity Quantity Allowed
Actual Input Quantity × Budgeted Price for Actual Output
× Actual Rate Purchases Usage × Budgeted Price
Direct (12,000 × $11) (12,000 × $10) (10,450 × $10) (10,500 × $10)
Materials $132,000 $120,000 $104,500 $105,000

$12,000 U $500 F

a. Price variance b. Efficiency variance

Direct
Manufacturing (38,500 × $20) (42,000 × $20)
Labor $808,500 $770,000 $840,000

$38,500 U $70,000 F

c. Price variance d. Efficiency variance

Budgeted Input (Budgeted Input
Incurred × Budgeted Rate × Budgeted Rate × Budgeted Rate)
Variable
Manufacturing (10,450 × $6) (10,500 × $6) (10,500 × $6)
Overhead $64,150 $62,700 $63,000 $63,000

$1,450U $300 F

e. Spending variance f. Efficiency variance Never a variance

Fixed (10,500 × $15)
Manufacturing $152,000 $150,000* $150,000 $157,500
Overhead
$2,000 U $7,500 F

h. Spending variance Never a variance g. Production volume variance

Denominator level (Annual) in pounds of material: 400,000 × .3 = 120,000 pounds
*

Annual Budgeted Fixed Overhead: 120,000 × $15/lb = $1,800,000
Monthly budgeted FOH: $1,800,000 / 12 = $150,000

8-27

2. The direct materials price variance indicates that DDC paid more for brass than they had
planned. If this is because they purchased a higher quality of brass, it may explain why they
used less brass than expected (leading to a favorable material efficiency variance). In turn, since
variable manufacturing overhead is assigned based on pounds of materials used, this directly led
to the favorable variable overhead efficiency variance. The purchase of a better quality of brass
may also explain why it took less labor time to produce the doorknobs than expected (the
favorable direct labor efficiency variance). Finally, the unfavorable direct labor price variance
could imply that the workers who were hired were more experienced than expected, which could
also be related to the positive direct material and direct labor efficiency variances.

8-28

8-29 (30 min.) Comprehensive variance analysis.

1. Budgeted number of machine-hours planned can be calculated by multiplying the number
of units planned (budgeted) by the number of machine-hours allocated per unit:

888 units × 2 machine-hours per unit = 1,776 machine-hours.

2. Budgeted fixed MOH costs per machine-hour can be computed by dividing the flexible
budget amount for fixed MOH (which is the same as the static budget) by the number of
machine-hours planned (calculated in (a.)):
$348,096 ÷ 1,776 machine-hours = $196.00 per machine-hour

3. Budgeted variable MOH costs per machine-hour are calculated as budgeted variable
MOH costs divided by the budgeted number of machine-hours planned:
$71,040 ÷ 1,776 machine-hours = $40.00 per machine-hour.

4. Budgeted number of machine-hours allowed for actual output achieved can be calculated
by dividing the flexible-budget amount for variable MOH by budgeted variable MOH
costs per machine-hour:
$76,800 ÷ $40.00 per machine-hour= 1,920 machine-hours allowed

5. The actual number of output units is the budgeted number of machine-hours allowed for
actual output achieved divided by the planned allocation rate of machine hours per unit:
1,920 machine-hours ÷ 2 machine-hours per unit = 960 units.

6. The actual number of machine-hours used per output unit is the actual number of
machine hours used (given) divided by the actual number of units manufactured:
1,824 machine-hours ÷ 960 units = 1.9 machine-hours used per output unit.

8-29

8-30 (60 min.) Journal entries (continuation of 8-29).

1. Key information underlying the computation of variances is:
Actual Flexible-Budget Static-Budget
Results Amount Amount
1. Output units (food processors) 960 960 888
2. Machine-hours 1,824 1,920 1,776
3. Machine-hours per output unit 1.90 2.00 2.00

4. Variable MOH costs $ 76,608 $ 76,800 $ 71,040
5. Variable MOH costs per machine-
hour (Row 4 ÷ Row 2) $ 42.00 $ 40.00 $ 40.00
6. Variable MOH costs per unit
(Row 4 ÷ Row 1) $ 79.80 $ 80.00 $ 80.00

7. Fixed MOH costs $350,208 $348,096 $348,096
8. Fixed MOH costs per machine-
hour (Row 7 ÷ Row 2) $ 192.00 $ 181.30 $ 196.00
9. Fixed MOH costs per unit (7 ÷ 1) $ 364.80 $ 362.60 $ 392.00

Solution Exhibit 8-30 shows the computation of the variances.

Journal entries for variable MOH, year ended December 31, 2012:

Variable MOH Control 76,608
Accounts Payable Control and Other Accounts 76,608

Variable MOH Allocated 76,800

Variable MOH Allocated 76,800
Variable MOH Spending Variance 3,648
Variable MOH Control 76,608
Variable MOH Efficiency Variance 3,840

Journal entries for fixed MOH, year ended December 31, 2012:

Fixed MOH Control 350,208
Wages Payable, Accumulated Depreciation, etc. 350,208

Fixed MOH Allocated 376,320

Fixed MOH Allocated 376,320
Fixed MOH Spending Variance 2,112
Fixed MOH Control 350,208
Fixed MOH Production-Volume Variance 28,224

8-30

2. Adjustment of COGS

Variable MOH Efficiency Variance 3,840
Fixed MOH Production-Volume Variance 28,224
Variable MOH Spending Variance 3,648
Fixed MOH Spending Variance 2,112
Cost of Goods Sold 26,304


Variable Manufacturing Overhead

(1) (2) (3) (4)
(1,824 × $42) (1,824 × $40) (1,920 × $40) (1,920 × $40)
$76,608 $72,960 $76,800 $76,800

$3,648 U $3,840 F

Fixed Manufacturing Overhead

Flexible Budget:
Actual Costs Regardless Of Regardless of for Actual Output
(1) (2) (3) (4)
(1,920 × $196)
$350,208 $348,096 $348,096 $376,320

$2,112 U $28,224 F

8-31

8-31 (30−40 min.) Graphs and overhead variances.

1. Variable Manufacturing Overhead Costs

Total
Variable Graph for planning
Manuf. and control and inventory
Overhead costing
Costs purposes at $10
per machine-hour
$17,000,000

$8,500,000

1,000,000
Machine-Hours

Fixed Manufacturing Overhead Costs
Total
Fixed
Manuf.
Overhead Graph for planning
Costs and control purpose

$17,000,000 Graph for inventory
costing purpose
($17 per machine-hour)
$8,500,000

1,000,000
Machine-Hours

=
= $17,000,000/ 1,000,000 machine hours
= $17 per machine-hour

8-32

2. (a) Variable Manufacturing Overhead Variance Analysis for Best Around, Inc. for 2012

(1) (2) (3) (4)
(1,150,000 × $10) (1,125,000 × $10) (1,125,000 × $10)
$12,075,000 $11,500,000 $11,250,000 $11,250,000

$575,000 U $250,000 U

$,825,000 U

$825,000 U
Underallocated variable overhead

(b) Fixed Manufacturing Overhead Variance Analysis for Best Around, Inc. for 2012

Flexible Budget:
(1) (2) (3) (4)
(1,125,000 × $17)
$17,100,000 $17,000,000 $17,000,000 $19,125,000

$100,000 U $2,125,000 F*

$100,000 U $2,125,000 F*

$2,025,000 F
*
Alternative computation: 1,125,000 budgeted hrs. allowed – 1,000,000 denominator hrs. = 125,000 hrs.
125,000 × $17 = $2,125,000 F

8-33

3. The underallocated variable manufacturing overhead was $825,000 and overallocated
fixed overhead was $2,025,000. The flexible-budget variance and underallocated overhead are
always the same amount for variable manufacturing overhead, because the flexible-budget
amount of variable manufacturing overhead and the allocated amount of variable manufacturing
overhead coincide. In contrast, the budgeted and allocated amounts for fixed manufacturing
overhead only coincide when the budgeted input of the allocation base for the actual output level
achieved exactly equals the denominator level.

4. The choice of the denominator level will affect inventory costs. The new fixed
manufacturing overhead rate would be $17,000,000 ÷ 1,360,000 = $12.50 per machine-hour. In
turn, the allocated amount of fixed manufacturing overhead and the production-volume variance
would change as seen below:

Actual Budget Allocated
1,125,000 × $12.50 =
$17,100,000 $17,000,000 $14,062,500

$100,000 U $2,937,500 U*
Flexible-budget variance Prodn. volume variance
$3,037,500 U
Total fixed overhead variance
*
Alternate computation: (1,360,000 – 1,125,000) × $12.50 = $2,937,500 U

The major point of this requirement is that inventory costs (and, hence, income determination)
can be heavily affected by the choice of the denominator level used for setting the fixed
manufacturing overhead rate.

8-34

8-32 (30 min.) 4-variance analysis, find the unknowns.

Known figures denoted by an *

Case A:


Variable
Manufacturing (6,230 × $20) (6,200* × $20) (6,200* × $20)
Overhead $120,000* $124,600 $124,000* $124,000*
$4,600* F $600 U

Fixed
Manufacturing (Lump sum) (Lump sum) (6,200* × $14a)
Overhead $84,920* $88,200* $88,200* $86,800*
$3,280 F $1,400 U
variance

Total budgeted manufacturing overhead = $124,000 + $88,200 = $212,200

Case B:

Quantity Quantity
Actual Input Allowed for Allowed for
Actual Costs Quantity Actual Output Actual Output

Variable
Manufacturing (1,141 × $42.00*) (1,200 × $42.00*) (1,200 × $42.00*)
Overhead $45,640 $47,922 $50,400b $50,400
$2,282 F* $2,478 F*

8-35

Fixed
Manufacturing (Lump sum) (Lump sum)
Overhead $23,180* $20,000* $20,000* $24,000c
$3,180 U $4,000 F*
variance

Total budgeted manufacturing overhead = $50,400 + $20,000 = $70,400
aBudgeted FMOH rate = Standard fixed manufacturing overhead allocated ÷ Standard machine-hours allowed for
actual output achieved = $86,800 ÷ 6,200 = $14
b
Budgeted hours allowed for actual output achieved must be derived from the output level variance before this
figure can be derived, or, since the fixed manufacturing overhead rate is $20,000 ÷ 1,000 = $20, and the allocated
amount is $24,000, the budgeted hours allowed for the actual output achieved must be 1,200 ($24,000 ÷ $20).
c
1,200 × ($20,000* ÷ 1,000*) = $24,000

8-36

8-33 (15−25 min.) Flexible budgets, 4-variance analysis.

1. =
3,600,000
= = 5 hours per unit
720,000

Budgeted DLH allowed for May output = 66,000 units × 5 hrs./unit = 330,000 hrs.
Allocated total MOH = 330,000 × Total MOH rate per hour
= 330,000 × $1.20 = $396,000

2, 3, 4, 5. See Solution Exhibit 8-33
Variable manuf. overhead rate per DLH = $0.25 + $0.34 = $0.59
Fixed manuf. overhead rate per DLH = $0.18 + $0.15 + $0.28 = $0.61
Fixed manuf. overhead budget for May = ($648,000 + $540,000 + $1,008,000) ÷ 12
= $2,196,000 ÷ 12 = $183,000
or,

Fixed manuf. overhead budget for May = $54,000 + $45,000 + $84,000 = $183,000

Using the format of Exhibit 8-5 for variable manufacturing overhead and then fixed
manufacturing overhead:
Actual variable manuf. overhead: $75,000 + $111,000 = $186,000
Actual fixed manuf. overhead: $51,000 + $54,000 + $84,000 = $189,000

An overview of the 4-variance analysis using the block format of the text is:

Production-
4-Variance Spending Efficiency Volume
Analysis Variance Variance Variance

Variable
Manufacturing
Overhead $150 U $8,850 F Never a variance

Fixed
Manufacturing

8-37

Variable Manufacturing Overhead

(1) (2) (3) (4)
(315,000 × $0.59) (330,000 × $0.59) (330,000 × $0.59)
$186,000 $185,850 $194,700 $194,700

$150 U $8,850 F

Fixed Manufacturing Overhead

Flexible Budget:
(1) (2) (3) (4)
(330,000 × $0.61)
$189,000 $183,000 $183,000 $201,300

$6,000 U $18,300 F

Alternate computation of the production volume variance:

= (
 Budgeted hours allowed
 for actual output achieved
 ) − ( Denominator )  × Budgeted fixed
hours overhead rate

  3, 600, 000  
= ( 330,000 ) −  ÷ × $ 0.61
  12 
= (330,000 – 300,000) × $0.61 = $18,300 F

8-38

8-34 (20 min.) Direct Manufacturing Labor and Variable Manufacturing
Overhead Variances

1. Direct Manufacturing Labor variance analysis for Sarah Beth’s Art Supply Company

Flexible Budget:
Budgeted Input Quantity
Actual Costs Actual Input Quantity Allowed for Actual Output
Incurred × Budgeted Rate × Budgeted Price
29,000 × 2.3 × 10.4 29,000 × 2.3 × 10 29,000 × 2 × 10.0
$693,680 $667,000 $580,000

$26,680 U $87,000 U

2. Variable Manufacturing Overhead variance analysis for Sarah Beth’s Art Supply Company

Flexible Budget:
Budgeted Input Quantity
Actual Costs Actual Input Quantity Allowed for Actual Output
29,000 × 2.3 × 18.95 29,000 × 2.3 × 20.0 29,000 × 2 × 20.0
$1,263,965 $1,334,000 $1,160,000

$70,035 F $174,000 U

3. The favorable spending variance for variable manufacturing overhead suggests that less costly
items were used, which could have a negative impact on labor efficiency. But note that the
workers were paid a higher rate than budgeted, which, if it indicates the hiring of more qualified
employees, should lead to favorable labor efficiency variances. Moreover, the price variance and
the spending variance are both much smaller than the efficiency variances. It is clear therefore
that the efficiency variances are related to factors other than the cost of the labor or overhead.

4. If the variable overhead consisted only of costs that were related to direct manufacturing
labor, then Sarah is correct—both the labor efficiency variance and the variable overhead
efficiency variance would reflect real cost overruns due to the inefficient use of labor. However,
a portion of variable overhead may be a function of factors other than direct labor (e.g., the costs
of energy or the usage of indirect materials). In this case, allocating variable overhead using
direct labor as the only base will inflate the effect of inefficient labor usage on the variable
overhead efficiency variance. The real effect on firm profitability will be lower, and will likely
be captured in a favorable spending variance for variable overhead.

8-39

8-35 (20 min.) Activity-based costing, batch-level variance analysis

1. Static budget number of crates = Budgeted pairs shipped / Budgeted pairs per crate
= 250,000/10
= 25,000 crates

2. Flexible budget number of crates = Actual pairs shipped / Budgeted pairs per crate
= 175,000/10
= 17,500 crates

3. Actual number of crates shipped = Actual pairs shipped / Actual pairs per box
= 175,000/8
= 21,875 crates

4. Static budget number of hours = Static budget number of crates × budgeted hours per box
= 25,000 × 1.1 = 27,500 hours

Fixed overhead rate = Static budget fixed overhead / static budget number of hours
= $55,000/27,500
= $2.00 per hour

5. Variable Direct Variance Analysis for Pointe’s Fleet Feet, Inc. for 2011

Actual Actual Hours Budgeted Hours Allowed for
Variable Cost × Budgeted Rate Actual Output × Budgeted Rate
(21,875 × 0.9 × $24) (21,875 × 0.9 × $22) (17,500 × 1.1 × $22)
$472,500 $433,125 $423,500

$39,375 U $9,625 U

6. Fixed Overhead Variance Analysis for Pointe’s Fleet Feet, Inc. for 2011

Actual Static Budget Budgeted Hours Allowed for
Fixed Overhead Fixed Overhead Actual Output × Budgeted Rate
(17,500 × 1.1 × $2.0)
$52,500 $55,000 $38,500

$2,500 F $16,500 U
Spending variance Production volume variance

8-40

8-36 (30 min.) Activity-based costing, batch-level variance analysis

1. Static budget number of setups = Budgeted books produced/ Budgeted books
per setup
= 300,000 ÷ 500 = 600 setups

2. Flexible budget number of setups = Actual books produced / Budgeted books
per setup
= 324,000 ÷ 500 = 648 setups

3. Actual number of setups = Actual books produced / Actual books per setup
= 324,000/480 = 675 setups

4. Static budget number of hours = Static budget # of setups × Budgeted hours
per setup
= 600 × 8 = 4,800 hours

Fixed overhead rate = Static budget fixed overhead / Static budget number of hours
= 105,600/4,800 = $22 per hour

5. Budgeted direct variable cost of a setup
= Budgeted variable cost per setup-hour × Budgeted number of setup-hours
= $40 × 8 = $320.

Budgeted total cost of a setup
= Budgeted direct variable cost + Fixed overhead rate × Budgeted number of setup-hours
= $320 + $22 × 8 = $496.

So, the charge of $400 covers the budgeted incremental (i.e., variable) cost of a setup, but
not the budgeted full cost.

6. Direct Variable Variance Analysis for Jo Nathan Publishing Company for 2012

Actual Actual Hours Standard Hours
Variable Cost × Budgeted Rate × Standard Rate
(675 × 8.2 × $39) (675 × 8.2 × $40) (648 × 8.0 × $40)
$215,865 $221,400 $207,360

$5,535 F $14,040 U

8-41

7. Fixed Setup Overhead Variance Analysis for Jo Nathan Publishing Company for 2012

Actual Static Budget Standard Hours
Fixed Overhead Fixed Overhead × Budgeted Rate
(648 × 8.0 × $22)
$119,000 $105,600 $114,048

$13,400 U $8,448 F

8. Rejecting an order may have implications for future orders (i.e., professors would be
reluctant to order books from this publisher again). Jo Nathan should consider factors
such as prior history with the customer and potential future sales.

If a book is relatively new, Jo Nathan might consider running a full batch and holding the
extra books in case of a second special order or just hold the extra books until next
semester.

If the special order comes at heavy volume times, Jo Nathan should look at the
opportunity cost of filling it, i.e., accepting the order may interfere with or delay the
printing of other books.

8-42

8-37 (35 min.) Production-Volume Variance Analysis and Sales Volume Variance.

1. and 2. Fixed Overhead Variance Analysis for Dawn Floral Creations, Inc. for February

Actual Fixed Static Budget Standard Hours
Overhead Fixed Overhead × Budgeted Rate
(600 × 1.5 × $6*)
$9,200 $9,000 $5,400

$200 U $3,600 U

* fixed overhead rate = (budgeted fixed overhead)/(budgeted DL hours at capacity)
= $9,000/(1000 × 1.5 hours)
= $9,000/1,500 hours
= $6/hour

3. An unfavorable production-volume variance measures the cost of unused capacity. Production
at capacity would result in a production-volume variance of 0 since the fixed overhead rate is
based upon expected hours at capacity production. However, the existence of an unfavorable
volume variance does not necessarily imply that management is doing a poor job or incurring
unnecessary costs. Using the suggestions in the problem, two reasons can be identified.

a. For most products, demand varies from month to month while commitment to the
factors that determine capacity, e.g. size of workshop or supervisory staff, tends to
remain relatively constant. If Dawn wants to meet demand in high demand months, it
will have excess capacity in low demand months. In addition, forecasts of future
demand contain uncertainty due to unknown future factors. Having some excess
capacity would allow Dawn to produce enough to cover peak demand as well as slack
to deal with unexpected demand surges in non-peak months.

b. Basic economics provides a demand curve that shows a tradeoff between price
charged and quantity demanded. Potentially, Dawn could have a lower net revenue if
they produce at capacity and sell at a lower price than if they sell at a higher price at
some level below capacity.

In addition, the unfavorable production-volume variance may not represent a feasible cost
savings associated with lower capacity. Even if Dawn could shift to lower fixed costs by
lowering capacity, the fixed cost may behave as a step function. If so, fixed costs would
decrease in fixed amounts associated with a range of production capacity, not a specific
production volume. The production-volume variance would only accurately identify
potential cost savings if the fixed cost function is continuous, not discrete.

8-43

4. The static-budget operating income for February is:
Revenues $55 × 1,000 $55,000
Variable costs $25 × 1,000 25,000
Fixed overhead costs 9,000
Static-budget operating income $21,000

The flexible-budget operating income for February is:
Revenues $55 × 600 $33,000
Variable costs $25 × 600 15,000
Fixed overhead costs 9,000
Flexible-budget operating income $ 9,000

The sales-volume variance represents the difference between the static-budget operating income
and the flexible-budget operating income:

Static-budget operating income $21,000
Flexible-budget operating income 9,000
Sales-volume variance $12,000 U

Equivalently, the sales-volume variance captures the fact that when Dawn sells 600 units instead
of the budgeted 1,000, only the revenue and the variable costs are affected. Fixed costs remain
unchanged. Therefore, the shortfall in profit is equal to the budgeted contribution margin per
unit times the shortfall in output relative to budget.

= – ×

= ($55 – $25) × 400 = $30 × 400 = $12,000 U

In contrast, we computed in requirement 2 that the production-volume variance was $3,600U.
This captures only the portion of the budgeted fixed overhead expected to be unabsorbed because
of the 400-unit shortfall. To compare it to the sales-volume variance, consider the following:

Budgeted selling price $ 55
Budgeted variable cost per unit $25
Budgeted fixed cost per unit ($9,000 ÷ 1,000) 9
Budgeted cost per unit 34
Budgeted profit per unit $ 21

Operating income based on budgeted profit per unit
$21 per unit × 600 units $12,600

8-44

The $3,600 U production-volume variance explains the difference between operating income
based on the budgeted profit per unit and the flexible-budget operating income:

Operating income based on budgeted profit per unit $12,600
Production-volume variance 3,600 U
Flexible-budget operating income $ 9,000

Since the sales-volume variance represents the difference between the static- and flexible-budget
operating incomes, the difference between the sales-volume and production-volume variances,
which is referred to as the operating-income volume variance is:

Operating-income volume variance
= Sales-volume variance – Production-volume variance
= Static-budget operating income – Operating income based on budgeted profit per unit
= $21,000 U – $12,600 U = $8,400 U.

The operating-income volume variance explains the difference between the static-budget
operating income and the budgeted operating income for the units actually sold. The static-
budget operating income is $21,000 and the budgeted operating income for 600 units would have
been $12,600 ($21 operating income per unit × 600 units). The difference, $8,400 U, is the
operating-income volume variance, i.e., the 400 unit drop in actual volume relative to budgeted
volume would have caused an expected drop of $8,400 in operating income, at the budgeted
operating income of $21 per unit. The operating-income volume variance assumes that $50,000
in fixed cost ($9 per unit × 400 units) would be saved if production and sales volumes decreased
by 400 units.

8-45

8-38 (30−40 min.) Comprehensive review of Chapters 7 and 8, working backward from
given variances.

1. Solution Exhibit 8-38 outlines the Chapter 7 and 8 framework underlying this solution.

a. Pounds of direct materials purchased = $176,000 ÷ $1.10 = 160,000 pounds

b. Pounds of excess direct materials used = $69,000 ÷ $11.50 = 6,000 pounds

c. Variable manufacturing overhead spending variance = $10,350 – $18,000 = $7,650 F

d. Standard direct manufacturing labor rate = $800,000 ÷ 40,000 hours = $20 per hour
Actual direct manufacturing labor rate = $20 + $0.50 = $20.50
Actual direct manufacturing labor-hours = $522,750 ÷ $20.50
= 25,500 hours

e. Standard variable manufacturing overhead rate = $480,000 ÷ 40,000
= $12 per direct manuf. labor-hour
Variable manuf. overhead efficiency variance of $18,000 ÷ $12 = 1,500 excess hours
Actual hours – Excess hours = Standard hours allowed for units produced
25,500 – 1,500 = 24,000 hours

f. Budgeted fixed manufacturing overhead rate = $640,000 ÷ 40,000 hours
= $16 per direct manuf. labor-hour
Fixed manufacturing overhead allocated = $16 × 24,000 hours = $384,000
Production-volume variance = $640,000 – $384,000 = $256,000 U

2. The control of variable manufacturing overhead requires the identification of the cost drivers
for such items as energy, supplies, and repairs. Control often entails monitoring nonfinancial
measures that affect each cost item, one by one. Examples are kilowatts used, quantities of
lubricants used, and repair parts and hours used. The most convincing way to discover why
overhead performance did not agree with a budget is to investigate possible causes, line item by
line item.
Individual fixed overhead items are not usually affected very much by day-to-day
control. Instead, they are controlled periodically through planning decisions and budgeting
procedures that may sometimes have planning horizons covering six months or a year (for
example, management salaries) and sometimes covering many years (for example, long-term
leases and depreciation on plant and equipment).

8-46


Actual Costs Flexible Budget:
Incurred Budgeted Input
(Actual Input Actual Input Quantity Quantity Allowed
Quantity × Budgeted Rate for Actual Output
× Actual Rate) Purchases Usage × Budgeted Rate
Direct 160,000 × $10.40 160,000 × $11.50 96,000 × $11.50 3 × 30,000 × $11.50
Materials $1,664,000 $1,840,000 $1,104,000 $1,035,000
$176,000 F $69,000 U

Direct 0.85 × 30,000 × $20.50 0.85 × 30,000 × $20 0.80 × 30,000 × $20
Manuf. $522,750 $510,000 $480,000
Labor
$12,750 U $30,000 U
$42,750 U

Variable 0.85 × 30,000 × $11.70 0.85 × 30,000 × $12 0.80 × 30,000 × $12 0.80 × 30,000 × $12
MOH $298,350 $306,000 $288,000 $288,000
$7,650 F $18,000 U
Spending variance Efficiency Never a variance
$10,350 U variance

Flexible Budget:
(1) (2) (3) (4)
Fixed 0.80 × 50,000 × $16 0.80 × 30,000 × $16
MOH $597,460 $640,000 $640,000 $384,000

$42,540 F $256,000 U
Spending variance Never a variance
volume variance $42,540 F $256,000 U
Flexible-budget variance Production volume variance

8-47

8-39 (30−50 min.) Review of Chapters 7 and 8, 3-variance analysis.

1. Total standard production costs are based on 7,800 units of output.

Direct materials, 7,800 × $15.00
7,800 × 3 lbs. × $5.00 (or 23,400 lbs. × $5.00) $ 117,000
Direct manufacturing labor, 7,800 × $75.00
7,800 × 5 hrs. × $15.00 (or 39,000 hrs. × $15.00) 585,000
Manufacturing overhead:
Variable, 7,800 × $30.00 (or 39,000 hrs. × $6.00) 234,000
Fixed, 7,800 × $40.00 (or 39,000 hrs. × $8.00) 312,000
Total $1,248,000

The following is for later use:
Fixed manufacturing overhead, a lump-sum budget $ 320,000*
*
Fixed manufacturing overhead rate =
Budget
$8.00 =
40,000 hours
Budget = 40,000 hours × $8.00 = $320,000

2. Solution Exhibit 8-39 presents a columnar presentation of the variances. An overview of
the 3-variance analysis using the block format of the text is:

3-Variance Spending Efficiency Production
Total Manufacturing
$39,400 U $6,600 U $8,000 U
Overhead

8-48

Actual Costs Flexible Budget:
Incurred: Budgeted Input
Actual Input Actual Input Quantity Quantity Allowed
Quantity × Budgeted Price for Actual Output
× Actual Rate Purchases Usage × Budgeted Price
Direct (25,000 × $5.20) (25,000 × $5.00) (23,100 × $5.00) (23,400 × $5.00)
Materials $130,000 $125,000 $115,500 $117,000

$5,000 U $1,500 F
a. Price variance b. Efficiency variance

Direct
Manuf. (40,100 × $14.60) (40,100 × $15.00) (39,000 × $15.00)
Labor $585,460 $601,500 $585,000

$16,040 F $16,500 U
c. Price variance d. Efficiency variance

Budgeted Input (Budgeted Input
Actual Actual Input Quantity Allowed Quantity Allowed
Costs Quantity for Actual Output for Actual Output
Incurred × Budgeted Rate × Budgeted Rate × Budgeted Rate)
Variable
Manuf. (40,100 × $6.00) (39,000 × $6.00) (39,000 × $6.00)
Overhead (not given) $240,600 $234,000 $234,000

$6,600 U
Efficiency variance Never a variance

Fixed
Manuf. (39,000 × $8.00)
Overhead (not given) $320,000 $320,000 $312,000

$8,000 U*
Never a variance Prodn. volume variance

Total
Manuf. (given) ($240,600 + $320,000) ($234,000 + $320,000) ($234,000 + $312,000)
Overhead $600,000 $560,600 $554,000 $546,000

$39,400 U $6,600 U $8,000 U
e. Spending variance f. Efficiency variance g. Prodn. volume variance

*
Denominator level in hours 40,000
Production volume in standard hours allowed 39,000
Production-volume variance 1,000 hours × $8.00 = $8,000 U

8-49

8-40 (20 minutes) Non-financial variances

1. Variance Analysis of Inspection Hours for Supreme Canine Products for May

Actual Pounds Standard Pounds Inspected
Actual Hours Inspected/Budgeted for Actual Output /Budgeted
For Inspections Pounds per hour Pounds per hour

277,500lbs/1,500 lbs/hr (3,000,000 × 0.1)lbs/(1,500 lbs/hr)
215 hours 185 hours 200 hours

30 hours U 15 hours F
Efficiency Variance Quantity Variance

2. Variance Analysis of Pounds Failing Inspection for Supreme Canine Products for May

Actual pounds Standard Pounds Inspected
Actual Pounds Inspected × Budgeted for Actual Output × Budgeted
Failing Inspections Inspection Failure Rate Inspection Failure Rate

(277,500 lbs × .06) (3,000,000 × .1 × .06)
15,650 lbs 16,650 lbs 18,000 lbs

1,000 lbs F 1,350 lbs F
Quality Variance Quantity Variance

8-50

8.41(30 – 40 minutes) Overhead variances and sales volume variance

1. Variable overhead variances

Actual Actual Hours Standard Hours
Variable Overhead × Budgeted Rate × Standard Rate
(440,000 × $1.60) (900,000 × .5 × $1.60)
$699,600 $704,000 $720,000

$4,400 F $16,000 F

Fixed overhead variances

Actual Static Budget Standard Hours
Fixed Overhead Fixed Overhead × Budgeted Rate
(900,000 × .5 × $1.175*)
$501,900 $470,000 $528,750

$31,900 U $58,750 F

*FOH rate is $470,000 / 400,000 std hours = $1.175 per hour

2.
Flexible- Sales-
Actual Budget Flexible Volume Static
results Variances Budget Variances Budget
(1) (2) = (1) – (3) (3) (4) = (3)-(5) (5)
Units sold 900,000 900,000 800,000
Unit price $ 6 $ 5 $ 5
Revenues $5,400,000 $900,000 F $4,500,000 $500,000 F $4,000,000
Variable costs
Direct materials 1,080,000 0 1,080,000 120,000 U 960,000
Direct labor 1,620,000 0 1,620,000 180,000 U 1,440,000
Variable overhead 699,600 20,400 F 720,000 80,000 U 640,000
Total variable costs 3,399,600 20,400 F 3,420,000 380,000 U 3,040,000
Contribution margin 2,000,400 920,400 F 1,080,000 120,000 F 960,000
Fixed manufacturing
costs 501,900 31,900 U 470,000 0 470,000
Operating income $1,498,500 $888,500 F $ 610,000 $120,000 F $ 490,000

8-51

3. Budgeted cost per shopping bag:
Direct materials per bag (given) $1.20
Direct labor per bag (given) 1.80
Variable overhead ($1.6 per hour × .5 MH) .80
Fixed overhead ($1.175 per hour × .5 MH) .5875
Total $4.3875

Budgeted sales revenue
900,000 units × $5 $4,500,000
Budgeted cost of goods sold
900,000 × $4.3875 3,948,750
Budgeted operating income $ 551,250

4. Budgeted operating income (from #3) $ 551,250
Add: favorable volume variance (from #1) 58,750
Flexible budget operating income 610,000
Add: Favorable flexible budget variance 888,500
Actual operating income $1,498,500

5. Operating income volume variance:
Budgeted operating income for actual output – static budget operating income
= $551,250 – $490,000 = $61,250 F

Sales volume variance = $120,000 F
= production volume variance + operating income volume variance
= $58,750 + $ 61,250 = $120,000 F

8-52

Collaborative Learning Problem

8-42 (40–50 minutes) Overhead variances, ethics

1. a. Nevada plant:
Expected output in units 4,000,000
Direct labor hours per unit .25
Total budgeted labor hours 1,000,000

Budgeted fixed OH rate = $2,500,000 / 1,000,000 DLH = $2.50 per DLH

Ohio plant:
Expected output in units 4,200,000
Direct labor hours per unit .25
Total budgeted labor hours 1,050,000

Budgeted fixed OH rate = $2,310,000 / 1,050,000 DLH = $2.20 per DLH

b. Allocation of common fixed costs:
To Nevada: $3,150,000 × 2/3 = $2,100,000
To Ohio: $3,150,000 × 1/3 = $1,050,000

Nevada plant:

Budgeted fixed OH rate = ($2,500,000 + $2,100,000) / 1,000,000 DLH = $4.60 per DLH

Ohio plant:

Budgeted fixed OH rate = ($2,310,000 + $1,050,000)/ 1,050,000 DLH = $3.20 per DLH

2. Variable overhead variances:

Nevada plant:

Actual Actual Hours Budgeted Input Allowed for
Variable Overhead × Budgeted Rate Actual Output × Budgeted Rate
(1,014,000 × $3.20) (1,014,000 × $3.25) (3,900,000 × .25 × $3.25)
$3,244,800 $3,295,500 $3,168,750

$50,700 F $126,750 U

8-53

Ohio plant:

Actual Actual Hours Budgeted Input Allowed for
Variable Overhead × Budgeted rate Actual Output × Budgeted Rate
(1,218,000 × $3.10) (1,218,000 × $3) (4,350,000 × .25 × $3)
$3,775,800 $3,654,000 $3,262,500

$121,800 U $391,500 U

3. Fixed overhead variances

a. Excluding the allocated common costs

Nevada plant:

Actual Static Budget Budgeted Input Allowed for
(3,900,000 × .25 × $2.50)
$2,520,000 $2,500,000 $2,437,500

$20,000 U $62,500 U

Ohio plant:

(4,350,000 × .25 × $2.20)
$2,400,000 $2,310,000 $2,392,500

$90,000 U $82,500 F

8-54

b. Including allocated common costs

Nevada plant:

$2,520,000 + (2/3 ×$3,126,000) ($2,500,000+$2,100,000) (3,900,000 × .25 × $4.60)
$4,604,000 $4,600,000 $4,485,000

$4,000 U $115,000 U

Ohio plant:

$2,400,000 + (1/3 ×$3,126,000) ($2,310,000+$1,050,000) (4,350,000 × .25 × $3.20)
$3,442,000 $3,360,000 $3,480,000

$82,000 U $120,000 F

4. Jack Jones’s attempt did not fully work. Even though he tried to allocate a significantly
larger amount of common cost to the Nevada plant than to the Ohio plant, the cost becomes
part of the fixed overhead rate and thus will only cause a large unfavorable spending
variance for the Nevada plant if the cost itself is much larger than expected. Since the
actual common costs were lower, the result was actually to lower Nevada’s unfavorable
spending variance. Also, the spending variance for the Ohio plant is already larger than
that of the Nevada plant, and that carries over even adding the common fixed costs to both
plants. That said, the inclusion of the common fixed cost does exacerbate the impact of
the underproduction by Ohio relative to budget (via the higher unfavorable production
volume variance), while increasing the favorable volume variance for Ohio.

5. Common fixed costs should not be allocated to units that are being evaluated for
performance because common fixed costs are not controllable by those units. Thus, the
units should not be responsible for such costs.

6. Jack Jones’s behavior is not ethical. He attempted to make his friend better off by
manipulating costs and overhead rates, rather than focusing on which cost system would
provide the best measure of relative performance among the divisions.

8-55

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