CHAPTER 11 Flexible Budgeting and the Management of Overhead and Support Activity Costs

ANSWERS TO REVIEW QUESTIONS

11-1 A static budget is based on only one level of activity. A flexible budget allows for several different levels of activity.

11-2 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.

11-17 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.

SOLUTIONS TO EXERCISES EXERCISE 11-22 (20 MINUTES)

1. Variable-overhead spending variance = actual variable overhead – (AH × SVR) = $607,500 – (60,750 × $9.00) = $60,750 U 2. Variable-overhead efficiency variance = SVR(AH – SH) = $9.00(60,750 – 54,000*) = $60,750 U *SH = 54,000 hrs. = 13,500 cases × 4 hours per case 3. Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead = $183,000 – $180,000 = $3,000 U

4. Fixed-overhead volume variance = budgeted fixed overhead – applied fixed overhead = $180,000 – $162,000† = $18,000 (positive)**

†Applied fixed overhead = ⎟⎟⎠

⎞⎜⎜⎝

⎛×⎟⎟⎠

⎞⎜⎜⎝

⎛hours

allowed standard

rate overheadfixed nedpredetermi

= 4)(13,500

415,000$180,000

××⎟⎠

⎞⎜⎝

⎛×

= $162,000 **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."

EXERCISE 11-30 (10 MINUTES)

1. Flexible budgeted amounts, using activity-based flexible budget: a. Indirect material: $33,000 ($18,000 + $3,000 + $3,000 + $9,000)

b. Utilities: $6,000 ($4,500 + $1,500)

c. Inspection: $3,300

d. Test kitchen: $2,400

e. Material handling: $3,000

f. Total overhead cost: $64,800 ($45,000 + $7,800 + $2,400 + $3,000 + $6,600) 2. Variance for setup cost: a. Using the activity-based flexible budget: $1,000 F (actual cost minus flexible budget =

$3,500 – $4,500) b. Using the conventional flexible budget: $500 U (actual cost minus flexible budget =

$3,500 – $3,000)

EXERCISE 11-31 (45 MINUTES)

Budgeted fixed overhead.................................................................... $ 25,000 Actual fixed overhead ........................................................................ $ 32,500a

Budgeted production in units ............................................................ 12,500 Actual production in units ................................................................. 12,000c Standard machine hours per unit of output ..................................... 4 hours Standard variable-overhead rate per machine hour ........................ $8.00 Actual variable-overhead rate per machine hour............................. $9.00b Actual machine hours per unit of output .......................................... 3d Variable-overhead spending variance .............................................. $ 36,000 U Variable-overhead efficiency variance .............................................. $ 96,000 F Fixed-overhead budget variance ....................................................... $ 7,500 U Fixed-overhead volume variance....................................................... $ 1,000g (positive or U*) Total actual overhead.......................................................................... $356,500 Total budgeted overhead (flexible budget) ....................................... $409,000e Total budgeted overhead (static budget) .......................................... $425,000f Total applied overhead........................................................................ $408,000 *Some accountants would designate a positive fixed-overhead volume variance as unfavorable. Explanatory Notes: a. Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead $7,500 U = X – $25,000 X = $32,500 = actual fixed overhead b. Total actual overhead = actual variable overhead + actual fixed overhead $356,500 = X + $32,500 X = $324,000 = actual variable overhead Variable-overhead spending variance = actual variable overhead – (AH × SR) $36,000 U = $324,000 – (AH × $8) $8AH = $288,000 AH = 36,000 Actual variable-overhead

rate per machine hour = hours actualoverhead variableactual

= hour per $9

36,000$324,000

=

EXERCISE 11-31 (CONTINUED)

c. Fixed-overhead rate = hours machine budgetedoverhead fixed budgeted

= unit) per hrs. units)(4 (12,500

$25,000

= $.50 per hr. Total standard

overhead rate = standard variable overhead rate + fixed-overhead rate

$8.50 = $8.00 + $.50

Total applied overhead = total standard hours × total standard overhead rate $408,000 = X × $8.50 X = 48,000 = total standard hrs.

Actual production = unit per hrs. standardhrs. standard total

= units ,00021

448,000

=

d. Actual machine hrs. per unit of output = production actualhrs. machine actual total

= unit per hrs. 3

units 12,000hrs. 36,000

=

e. Total budgeted overhead (flexible budget) = budgeted fixed overhead + (SVR × SH) = $25,000 + ($8.00 × 12,000 units × 4 hrs. per unit) = $409,000

EXERCISE 11-31 (CONTINUED)

f. Total budgeted overhead (static budget)

= ⎟⎟⎠

⎞⎜⎜⎝

⎛⎟⎟⎠

⎞⎜⎜⎝

⎛⎟⎟⎠

⎞⎜⎜⎝

⎛unit per

hrs. standardproductionbudgeted

rate overheadstandard total

= ($8.50)(12,500)(4) = $425,000 g. Fixed overhead volume variance = budgeted fixed overhead – applied fixed overhead = $25,000 – ($.50)(12,000 × 4) = $1,000 (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."

PROBLEM 11-44 (40 MINUTES)

1. Susan Porter recommended that EduSoft use flexible budgeting in this situation because a flexible budget would allow Mark Fletcher to compare EduSoft'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.

2.

EDUSOFT CORPORATION REVISED MONTHLY SELLING EXPENSE REPORT FOR OCTOBER

Flexible

Budget

Actual

Variance Advertising ...................................................... $3,300,000 $3,320,000 $20,000 (U) Staff salaries ................................................... 250,000 250,000 0 Sales salariesa................................................. 230,400 230,800 400 (U) Commissionsb................................................. 992,000 992,000 0 Per diem expensec.......................................... 316,800 325,200 8,400 (U) Office expensesd............................................. 732,000 716,800 15,200 (F)

Shipping expensese........................................ 1,985,000 1,953,000 32,000 (F) Total expenses................................................ $7,806,200 $7,787,800 $18,400 (F) Supporting calculations: aMonthly salary for salesperson $216,000 ÷ 90 = $2,400. Budgeted amount $2,400 × 96 = $230,400. bCommission rate $896,000 ÷ $22,400,000 = .04. Budgeted amount $24,800,000 × .04 = $992,000. c($297,000 ÷ 90) ÷ 15 days = $220 per day. ($220 × 15) × 96 = $316,800. d($8,160,000 – 6,000,000) ÷ 54,000 = $40 per order. ($6,000,000 ÷ 12) + ($40 × 5,800) = $732,000. e[$13,500,000 – ($6 × 2,000,000)] ÷ 12 = $125,000 monthly fixed expense. $125,000 + ($6 × 310,000) = $1,985,000.

PROBLEM 11-45 (45 MINUTES)

Missing amounts for case A: 2. $21.00a per hour 3. $28.50b per hour 6. $294,150c 9. $7,500 Ud 10. $9,000 Fe

11. $(126,000) (Negative)f (The negative sign means that applied fixed overhead

exceeded budgeted fixed overhead.) 12. $24,150 underappliedg 13. $135,000 overappliedh 16. 6,000 unitsi 19. $270,000j 20. $756,000k

Explanatory notes for case A: aBudgeted direct-labor hours = budgeted production × standard direct-labor hours per unit

= 5,000 units × 6 hrs. = 30,000 hrs.

Fixed overhead rate = hours labor-direct budgetedoverhead fixed budgeted

= hr. per $21

hrs. 30,000$630,000

=

bTotal standard overhead rate = variable overhead rate + fixed overhead rate = $7.50 + $21.00 = $28.50 cVariable-overhead spending variance = actual variable overhead – (actual direct-labor hours

× standard variable overhead rate) $16,650 U = actual variable overhead – (37,000 × $7.50) Actual variable overhead = $294,150 dVariable-overhead efficiency variance = SVR(AH – SH)

= $7.50(37,000 – 36,000) = $7,500 U eFixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead = $621,000 – $630,000 = $9,000 F

fFixed-overhead volume variance = budgeted fixed overhead – applied fixed overhead = $630,000 – (36,000 × $21) = $126,000 (negative sign) gUnderapplied variable overhead = actual variable overhead – applied variable overhead = $294,150 – (36,000 × $7.50) = $24,150 underapplied hOverapplied fixed overhead = actual fixed overhead – applied fixed overhead = $621,000 – (36,000 × $21) = $135,000 overapplied

iActual production = unit per hrs. standardhours labor-direct allowed standard

= units 6,000

636,000

= jApplied variable overhead = SH × SVR = 36,000 × $7.50 = $270,000

kApplied fixed overhead = SH × fixed overhead rate = 36,000 × $21 = $756,000 Missing amounts for case B: 1. $4.00a per hour 2. $9.00b per hour 4. $25,600c 5. $72,000d 6. $32,000e 7. $76,320f 12. $6,400 underappliedg 13. $18,720 underappliedh 14. 1,000 unitsi 16. 800 unitsj 19. $25,600k 20. $57,600l Explanatory notes for case B: aTo find the standard variable overhead rate: Variable-overhead efficiency variance

= SVR(AH – SH) $1,600 F = SVR(6,000 – 6,400) SVR = $4

bStandard fixed-overhead rate = total standard overhead rate – SVR = $13 – $4 = $9 cFlexible budget for variable overhead = SH × SVR = 6,400 × $4 = $25,600 dFlexible budget for fixed overhead = applied fixed overhead + volume variance = (6,400 × $9) + $14,400 = $72,000 eActual variable overhead = applied variable overhead + spending variance + efficiency variance = (6,400 × $4) + $8,000 U – $1,600 F = $32,000 fActual fixed overhead = budgeted fixed overhead + fixed-overhead budget variance = $72,000 + $4,320 U = $76,320 gUnderapplied variable overhead = spending variance + efficiency variance = $8,000 U* + $1,600 F* = $6,400 underapplied *Note that the signs cancel when adding variances of different signs. hUnderapplied fixed overhead = fixed-overhead budget variance + volume variance

= $4,320 U + $14,400 (positive)

= $18,720 underapplied

iBudgeted direct-labor hours = rate overhead-fixed

overhead fixed budgeted

= $9

$72,000

= 8,000

Budgeted production = unit per hours standardhours labor-direct budgeted

= units 1,000

88,000

=

jActual production = unit per hours standardhours allowed standard

= units 800

86,400

= kApplied variable overhead = SH × SVR = 6,400 × $4 = $25,600 lApplied fixed overhead = SH × standard fixed-overhead rate = 6,400 × $9 = $57,600