MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES

By Dennis Caplan, Oregon State University

 

CHAPTER 17:  Cost Variances for Variable and Fixed Overhead

 

Chapter Contents:

-                     Cost variances for variable overhead

-                     Cost variances for fixed overhead

-                     The fixed overhead spending variance

-                     The fixed overhead volume variance

-                     Additional issues related to the volume variance

-                     Comprehensive example of fixed overhead variances

-                     Exercises and problems

 

Cost Variances for Variable Overhead:

The formulas for splitting the flexible budget variance for variable overhead into a “price” variance and an “efficiency” variance are the same as the formulas for direct materials and direct labor explained in Chapter 7. The “price” variance for variable overhead is called the variable overhead spending variance:

 

Spending variance = PV = AQ x (APSP)

 

Efficiency variance = EV = SP x (AQSQ)

 

Where AP is the actual overhead rate used to allocate variable overhead, and SP is the budgeted overhead rate. The “Q’s” refer to the quantity of the allocation base used to allocate variable overhead, so that AQ is the actual quantity of the allocation base used during the period, and SQ is the standard quantity of the allocation base. The standard quantity of the allocation base is the amount of the allocation base that should have been used (i.e., would have been budgeted) for the actual output units produced. 

 

Given the use of the allocation base in these formulas for the cost variances for variable overhead, the meaning of these variances differs fundamentally from the interpretation of the variances for direct materials and direct labor. Consider a company that allocates electricity using direct labor as the allocation base. A negative variable overhead efficiency variance does not necessarily mean that the factory used more electricity than the flexible budget quantity of kilowatt hours for the actual outputs produced. Rather, the negative variance literally means that the factory used more direct labor than the flexible budget quantity for direct labor. If there is a cause-and-effect relationship between the allocation base and the variable overhead cost category (i.e., if more direct labor hours implies more electricity used), then the negative efficiency variance suggests that more electricity was used than the flexible budget quantity, but the efficiency variance does not measure kilowatts directly.

 

Similarly, a negative spending variance for variable overhead does not necessarily mean that the cost per kilowatt-hour was higher than budgeted. Rather, a negative spending variance for variable overhead literally states that the actual overhead rate was higher than the budgeted overhead rate, which could be due either to a higher cost per kilowatt-hour, or more kilowatt hours used per unit of the allocation base. Hence, what one might think should be included in the efficiency variance (kilowatt hours required per direct-labor-hour being higher or lower than budgeted) actually gets included as part of the spending variance.

 

Cost Variances for Fixed Overhead:

Whereas the cost variances for direct materials, direct labor, and variable overhead all use the same two formulas, the cost variances for fixed overhead are different, and do not use these formulas at all.

 

Also, whereas cost variances for direct materials, direct labor, and variable overhead can be calculated for individual products in a multi-product factory, cost variances for fixed overhead can only be calculated for the factory or facility as a whole. (More precisely, fixed overhead cost variances can only be calculated for the combined operations to which the resources represented by the fixed costs apply.)

 

There are two fixed overhead cost variances: the spending variance and the volume variance.

 

The Fixed Overhead Spending Variance:

The fixed overhead spending variance is the difference between two lump sums:

 

     Actual fixed overhead costs incurred - Budgeted fixed overhead costs

 

The fixed overhead spending variance is also called the fixed overhead price variance or the fixed overhead budget variance.

 

The Fixed Overhead Volume Variance:

The fixed overhead volume variance is also called the production volume variance, because this variance is a function of production volume. The volume variance attaches a dollar amount to the difference between two production levels. The first production level is the actual output for the period. The second production level is the denominator-level concept in the budgeted fixed overhead rate, expressed in units. As discussed in the previous chapter, there are two common choices for this denominator:

           

(1)   budgeted production

(2)   factory capacity

 

The interpretation of the volume variance depends on which of these two denominators are used, but in either case, the production volume variance is the difference between budgeted fixed overhead (a lump sum), and the amount of fixed overhead that would be allocated to production under a standard costing system using this fixed overhead rate.

 

The volume variance with budgeted production in the denominator of the overhead rate:

First we use budgeted production to calculate the volume variance. In this case:

 

 

volume variance

 

= (

 

budgeted fixed overhead

 

x

 

units produced

 

 ) -

 

budgeted fixed overhead

 

budgeted production

 

 

 

 

 

The term in parenthesis equals the amount of fixed overhead that would be allocated to production under a standard costing system, when budgeted production is the denominator-level concept.

 

 

Since

 

            budgeted fixed overhead  ÷  budgeted production  =  budgeted overhead rate

 

the above expression for the volume variance is algebraically equivalent to the following formula:

 

volume variance

=

(units produced - budgeted production)  x  budgeted overhead rate

 

This formula for the volume variance illustrates the statement above; that the volume variance attaches a dollar amount to the difference between two production levels. In this case, the two production levels are actual production and budgeted production. The interpretation of the volume variance, when budgeted production is used in the denominator of the overhead rate, is the following. When actual production is less than budgeted production, the volume variance represents the fixed overhead costs that are not allocated to product because actual production is below budget. In this case, the volume variance is unfavorable. When actual production is greater than budgeted production, then the volume variance represents the additional fixed overhead costs that are allocated to product because actual production exceeds budget. In this case, the volume variance is favorable.

 

The intuition for when the volume variance is favorable and when it is unfavorable is the following. If the company can produce more units of output using the same fixed assets (i.e., the resources that comprise fixed overhead), then assuming those additional units can be sold, the company is more profitable. When fixed overhead is allocated to production, this greater profitability is reflected in a lower per-unit production cost, because the same amount of total fixed overhead is spread over more units. On the other hand, if fewer units are produced than planned, then the same fixed overhead is spread over fewer units, the per-unit production cost is higher, and the company is less profitable. This higher or lower profitability that arises from changes in production levels is not an artifact of the accounting system. Even if the company uses Variable Costing, and expenses fixed overhead as a lump-sum period cost, when the company makes and sells fewer units than planned using the same fixed overhead resources, it really is less profitable than was budgeted, and when the company makes and sells more units than planned using the same fixed overhead resources, it really is more profitable than was budgeted.

 

The volume variance with factory capacity in the denominator of the O/H rate:

Next we use factory capacity to calculate the volume variance. In this case:

 

volume variance

 

= (

 

budgeted fixed overhead

 

x

 

units produced

 

 ) -

 

budgeted fixed overhead

 

factory capacity

 

 

 

 

 

Since

 

            budgeted fixed overhead  ÷  factory capacity  =  budgeted overhead rate

 

the above expression for the volume variance is algebraically equivalent to the following formula:

 

volume variance

=

(units produced - factory capacity)  x  budgeted overhead rate

 

The interpretation of the volume variance, when factory capacity is used in the denominator of the overhead rate, is the following. Actual production is almost always below capacity. The volume variance represents the fixed overhead costs that are not allocated to product because actual production is below capacity. Hence the volume variance represents the cost of idle capacity, and this variance is typically unfavorable. For this reason, this volume variance is sometimes called the idle capacity variance. In the unlikely event that the factory produces above capacity (which can occur if the concept of practical capacity is used, and actual down-time for routine maintenance, etc., is less than expected), then the volume variance represents the additional fixed overhead costs that are allocated to product because actual production exceeds capacity. In this case, the volume variance is favorable.

 

Additional Issues Related to the Volume Variance:

Under what circumstances would a company calculate the volume variance using budgeted production as the denominator-level concept, and under what circumstances would a company use factory capacity as the denominator-level concept?

 

The use of budgeted production in the calculation of the volume variance attaches a lump sum benefit or cost to actual production levels that exceed or fall short of budgeted production levels. For this reason, many companies consider this calculation of the volume variance to be an important performance measure for the factory manager and marketing managers responsible for making and marketing the product.

 

The use of factory capacity in the calculation of the volume variance provides an indication of how low the per-unit cost can go, if demand equals or exceeds factory capacity. If senior management would like product managers to make pricing and operating decisions based on a long-term expectation that demand for the product will equal or exceed factory capacity, even though current or short-term demand is below capacity, calculating the per-unit cost in this manner will encourage product managers to take this long-run perspective. For example, consider the launch of a new product line in a new factory. If fixed overhead is allocated based on budgeted production, then product managers might feel pressured to set sales prices that will cover full product costs at initially-low production levels, but these sales prices might be too high to generate sufficient initial consumer interest in the product for a successful product launch.

 

Another reason to use factory capacity in the denominator of the fixed overhead rate, and in the calculation of the volume variance, is that doing so isolates the cost of idle capacity. Often, the decision to build a factory that is larger than current demand warrants is a strategic decision made at high levels within the organization. If the fixed overhead associated with this factory is allocated based on budgeted or actual production, the per-unit cost of every unit manufactured includes a small portion of the cost of this strategic decision, and the cost reports of factory managers and the product profitability statements of product managers are negatively affected by this unused capacity. Some companies prefer to isolate the cost associated with this strategic decision, and to either show the cost of idle capacity as separate line-items on the cost reports and profit statements of the factory manager and product managers, or remove this cost entirely from these performance reports, and report it only at the corporate level. 

 

Allocating fixed overhead using actual production can provide managers short-run incentives to overproduce, because as production increases, the per-unit cost decreases. Similarly, calculating the volume variance using budgeted production in the denominator of the overhead rate can provide managers short-run incentives to overproduce, because as production exceeds budget, the volume variance becomes increasingly favorable. For this reason, some companies choose not to allocate fixed overhead at all. However, the use of factory capacity in the denominator of the fixed overhead rate accomplishes the same objective, because it isolates the volume variance such that the performance reports of these managers need not be affected by it.

 

We have assumed, throughout this section, that fixed overhead is allocated based on units of output. However, we saw in the chapter on activity-based costing that units of production is often a poor choice of allocation base in a multi-product factory, and many companies that use standard costing systems use allocation bases that are more sophisticated, such as direct labor hours or direct materials dollars. The question might arise, how does the use of a different allocation base, such as direct labor hours, affect the calculation of the volume variance? The answer is: Not at all. Because of the way in which standard costing systems work, the amount of fixed overhead that will be allocated to product does not depend on the choice of allocation base.

 

For example, assume that a one-product company budgets two direct labor hours to make each unit, and assume that if fixed overhead is allocated based on output units, the budgeted fixed overhead rate is $10 per unit. Then using direct labor hours as the allocation base, the budgeted fixed overhead rate is $5 per direct labor hour. Because of the mechanics of standard costing systems, no matter whether the $10-per-unit rate is used, or the $5-per-direct-labor-hour rate is used, $10 of fixed overhead will be allocated to every unit produced, no matter how many direct labor hours are actually used per unit. (If this fact is not obvious to you, refer back to Chapter 10 on standard costing.) Therefore, for the purpose of calculating the volume variance, we might as well use the easiest allocation base, which is units-of-output.

 

It is important to recognize that even though most manufacturing companies use a standard costing system, and even though the calculation of the fixed overhead volume variance relies on the concept of standard costing, companies can calculate the volume variance even if they do not use a standard costing system. In this case, the calculation is identical to the discussion above, but the company will not be able to obtain the required information from the cost accounting system itself, but rather, will need to make a separate calculation.

 

Comprehensive Example of Fixed Overhead Variances:

The Coachman Company makes pencils. The pencils are sold by the box. Following is information about the company’s only factory:

 

 

Budget

Actual

Capacity

Number of boxes

Direct labor hours

Machine hours

Fixed overhead

10,000

200

500

$40,000

12,000

250

650

$42,000

20,000

 

 

 

The outputs here are boxes of pencils. The inputs are direct labor hours and machine hours. First we calculate a fixed overhead rate using actual amounts, and output units as the allocation base:

 

            $42,000 ÷ 12,000 boxes = $3.50 per box.

 

Using this overhead rate, every box of pencils is costed at the variable cost of production plus $3.50 in allocated fixed overhead.

 

Next we calculate a fixed overhead rate using budgeted costs, and budgeted output units as the denominator-level concept:

 

            $40,000 ÷ 10,000 boxes = $4.00 per box.

 

Next we calculate a fixed overhead rate using budgeted costs, and factory capacity as the denominator-level concept (expressed in terms of output units).

 

            $40,000 ÷ 20,000 boxes = $2.00 per box.

 

The advantage of using capacity in the denominator is that this denominator-level concept shows how low the fixed cost per unit can go, and hence, how low the total cost per unit can go, as production increases.

 

The fixed overhead spending variance is calculated as follows:

 

            $42,000 actual - $40,000 budgeted = $2,000 unfavorable.

 

Next, we calculate the volume variance using capacity as the denominator-level concept:

 

            volume variance = ($2.00 per box x 12,000 boxes) - $40,000 = $16,000 unfavorable

 

                        or equivalently:

 

            volume variance = $2.00 per box x (12,000 boxes - 20,000 boxes) = $16,000 unfavorable

 

If the company uses a standard costing system, the amount of overallocated or underallocated fixed overhead is the difference between actual fixed overhead incurred, and fixed overhead allocated to product, calculated as follows:

 

            actual fixed overhead - fixed overhead allocated

 

            $42,000 - ($2.00 per box  x  12,000 boxes)

 

            = $42,000 - $24,000 = $18,000 underallocated

 

This $18,000 of underallocated fixed overhead is equal to the sum of the $2,000 unfavorable fixed overhead spending variance and the $16,000 unfavorable volume variance.

 

Next, we calculate the volume variance using budgeted production as the denominator-level concept:

 

            volume variance = ($4.00 per box  x  12,000 boxes) - $40,000 = $8,000 favorable

 

                        or equivalently:

 

            volume variance = $4.00 per box x (12,000 boxes - 10,000 boxes) = $8,000 favorable

 

If the company uses a standard costing system, the amount of overallocated or underallocated fixed overhead is the difference between actual fixed overhead incurred, and fixed overhead allocated to product, calculated as follows:

 

            actual fixed overhead - fixed overhead allocated

 

            $42,000 - ($4.00 per box x 12,000 boxes)

 

            = $42,000 - $48,000 = $6,000 overallocated

 

This $6,000 of overallocated fixed overhead is equal to the sum of the $2,000 unfavorable fixed overhead spending variance (which did not change when we changed the denominator-level concept from capacity to budgeted production) and the $8,000 favorable volume variance.

 

To illustrate that the choice of allocation base does not affect the calculation of the volume variance, we recalculate the volume variance assuming the company allocates overhead using machine hours as the allocation base and budgeted production as the denominator-level concept. The budgeted overhead rate is now

 

            $40,000 ÷ 500 machine hours = $80 per machine hour.

 

Since the standard for machine time is one hour for every twenty boxes (derived from the budget column in the box at the beginning of the example), the standard costing system will allocate fixed overhead as follows:

 

            Budgeted overhead rate x (standard inputs allowed for actual outputs achieved)

 

            = $80 per machine hour x (12,000 boxes ÷ 20 boxes per machine hour)

 

            = $80 per machine hour x 600 machine hours = $48,000

 

And the volume variance is

 

            fixed overhead allocated to product - budgeted fixed overhead

 

            = $48,000 - $40,000 = $8,000 favorable, as before.

 

 

Exercises and Problems:

 

17-1: Following is selected information about the Hopi Popcorn company. All information represents total amounts, not per unit amounts.

 

 

Static Budget

Actual Results

Units made and sold

Direct materials costs

Direct materials used in production

Fixed overhead

100

$5,000

1,000 pounds

$3,000

50

$2,700

450 pounds

$4,000

 

Hopi had no beginning or ending inventory of either finished product or raw materials. Hopi allocates fixed overhead using units of output as the allocation base, and a budgeted overhead rate with budgeted production in the denominator.

 

Required: Calculate the fixed overhead volume variance.

 

17-2: Border Construction Company is a road-paving company. Such companies are characterized by high fixed costs in plant and equipment. The company allocates fixed overhead to its jobs based on miles of road paved. The company has an unfavorable fixed overhead spending variance, and overallocated fixed overhead. This set of facts is consistent with

 

(A)                          Unexpected capital expenditures and the use of practical capacity in the denominator of the fixed overhead rate.

 

(B)                          An unexpected decrease in fixed overhead costs, the use of budgeted activity in the denominator of the fixed overhead rate, and an unexpected increase in business.

 

(C)                          An unexpected increase in appropriations by the State Legislature for road work, resulting in more business for the company, and unexpected capital expenditures.

 

(D)                         The use of actual miles in the denominator of the fixed overhead rate, actual fixed overhead costs in the numerator, and significant unexpected capital expenditures.

 

17-3: Assume the following information for the Centerville 2 plant of Polypar, which manufactures only butyl.    

 

Budgeted fixed overhead

Plant production capacity

Budgeted butyl production

Actual butyl production

$12,000,000

1,000,000 tons of butyl

500,000 tons of butyl

600,000 tons of butyl

 

Required:

A)        Using budgeted butyl production in the denominator of the fixed overhead rate, calculate the fixed overhead volume variance.

           

B)        Using plant capacity in the denominator of the fixed overhead rate, calculate the fixed overhead volume variance.

 

C)                In one or two sentences, interpret what each of these variances represents.                   

 

17-4: Yellow Company budgeted fixed manufacturing overhead of $1,000,000, but actually incurred fixed manufacturing overhead of $1,200,000. The company expected to produce 100,000 units of product, but actually produced 80,000 units. The company allocates fixed overhead using a budgeted rate, based on budgeted production in the denominator.

 

Required:

A)  Calculate the fixed overhead spending variance. Is this variance favorable or unfavorable?

 

B)  Calculate the fixed overhead volume variance. Is this variance favorable or unfavorable?

 

C)  Calculate the overallocated or underallocated fixed overhead.

 

17-5: The Plutonium Fruitcake Company allocated variable overhead based on pounds of direct materials. The company's production level (units of output) and direct materials prices (cost per pound) in 1957 were exactly as planned in the static budget for that year, but the company used more pounds of direct materials per unit of output than planned. This set of circumstances certainly resulted in

 

(I)        an unfavorable variable overhead efficiency variance.

 

(II)       an unfavorable flexible budget variance for variable overhead.

 

(III)      an unfavorable static budget variance for variable overhead.

 

 

            (A)       (I), (II) and (III)

 

            (B)       neither (I), (II) nor (III) need be true    

 

            (C)       (I) only

 

            (D)       (I) and (II) only

 

17-6: Following is information about December production at the Doorstop Fruitcake Company, and the principal ingredient used in the manufacture of fruitcakes: flour. All flour purchased during the month was used in production. There was no flour on hand at the beginning of the month. Fixed manufacturing overhead was budgeted at $90,000, but was actually $100,000. Fixed manufacturing overhead is allocated using pounds of flour as the allocation base. The factory expects to be operating at capacity in December.

 

 

 

# of Fruitcakes produced

 

Pounds of flour used

 

Cost of flour

 

Actual

 

Budget

 

1,150

 

1,200

 

5,980

 

6,000

 

$2,840.50

 

$3,000.00

 

If the company allocates variable overhead based on pounds of flour, the variable overhead efficiency variance will be

 

            (A)       Zero                

 

            (B)       Unfavorable

 

            (C)       Favorable

 

            (D)       Unable to determine from the information provided

 

17-7: Which of the following scenarios might not result in an unfavorable production volume variance?

 

I.          Actual production is below practical capacity, when budgeted production is used in the denominator to calculate the overhead rate.

 

II.         Actual production is below practical capacity, when practical capacity is used in the denominator to calculate the overhead rate.

 

III.       Actual production is below budget, when budgeted production is used in the denominator to calculate the overhead rate.

 

IV.       Actual production is above budget, when practical capacity is used in the denominator to calculate the overhead rate.

 

                        (A)       I and IV

 

            (B)       I only

 

                        (C)       I, II, III and IV

 

                        (D)       I and III

 

17-8: Assume the following information for the Pittsfield factory of Carnegie Steel.        

 

Budgeted fixed overhead

Production capacity

Budgeted production

$12,000,000

1,000,000 tons

500,000 tons

 

A)        Assume we are at the beginning of the year. If the volume variance will be calculated using plant capacity in the denominator of the fixed overhead rate, what would the plant manager have to do to ensure that the production volume variance will be zero?

                       

B)        Again, assume we are at the beginning of the year. If the volume variance will be calculated using budgeted production in the denominator of the fixed overhead rate, what would the plant manager have to do to ensure that the production volume variance will be favorable?

           

           

C)        Assume that we are at the beginning of the year, and that the factory manager is told that the production volume variance, favorable or unfavorable, will be recorded at the corporate level, and not on the factory income statement that forms the basis for the manager’s performance review. Assume also that the factory manager is given the choice of the denominator-level concept for calculating the volume variance (actual, budget, or practical capacity), but that the manager must make the choice at the beginning of the year, knowing only the information in the table at the start of this question, but not knowing actual production or actual fixed overhead costs. What denominator-level concept do you think the factory manager will choose, and why? Would your answer change if, instead of budgeting production of 500,000 tons, production was budgeted for factory practical capacity of 1,000,000 tons?                       

               

17-9: If a factory is on a Standard Costing System, and has overallocated fixed overhead, which of the following statements is certainly true?

 

(A)       The factory made more units than planned.

 

(B)       The factory has a favorable spending variance.

 

(C)       The factory has a favorable production volume variance.

 

(D)       The actually amount spent for fixed overhead was less than the amount of fixed overhead allocated to inventory.

 

17-10: The Large and Expensive Widget Company allocates overhead based on direct labor hours. If the company uses more total direct labor hours than planned, but the actual labor wage rate is the same as the budgeted labor wage rate, which of the following statements might not be true?

 

(A)       There will be an unfavorable static budget variance for labor.

 

(B)       The labor wage rate variance will be zero.

 

(C)       There will be an unfavorable labor efficiency variance.

 

(D)       The labor efficiency and overhead efficiency variances will be in the same direction (i.e., either both variances will be favorable, they will both be unfavorable, or they will both be equal to zero).

 

17-11: McConnell McDowell McQueen Enterprises makes cotton shirts in a single factory in Cold Spring, VT. The company uses a Standard Costing System. The company allocates fixed and variable overhead separately. Variable overhead is allocated using direct labor hours as the allocation base. Fixed overhead is allocated based on output units (i.e., the allocation base is shirts), and factory practical capacity is the denominator-level concept. Practical capacity is 2,000 shirts per month. Following is budgeted and actual information for the month.

 

 

Static Budget Information

Actual Results

 

Production

Number of shirts

 

Direct Materials

Cost per yard of fabric

Yards of fabric per shirt

 

Direct labor

Direct labor cost for all of the shirts

Hours of direct labor for all of the shirts

 

Variable Overhead

Fixed Overhead

 

1,200

 

 

$4.50

2.00

 

 

$27,000

3,000

 

$18,000

$15,000

 

1,000

 

 

$4.20

2.50

 

 

$30,000

3,400

 

$18,500

$10,500

 

Required:

A) Calculate the spending and efficiency variances for variable overhead.

 

B) Compute the fixed overhead volume variance. Is it favorable or unfavorable?

 

C) Compute the spending variance for fixed overhead.

           

D) Compute the amount of underallocated or overallocated fixed overhead.

 

17-12: Li, Lee and Levy Industries makes widgets in its factory located in the Marina Shores district of Seattle. The company uses a standard costing system. Following is budgeted and actual information for the month.

 

 

Static Budget Information

 

Actual Results

 

 

Widgets produced

 

Direct materials: copper fibers

 

 

Direct labor

 

 

Variable overhead

(allocated based on machine hours)

 

Fixed costs

(allocated based on units of output, and budgeted production in the denominator)

 

Machine hours

 

1,000

 

15,000 pounds for a total cost of $31,500

 

1,000 hours for a total cost of $9,000

 

$18,000

 

 

$56,000

 

 

 

800

 

900

 

12,600 pounds for a total cost of $25,200

 

950 hours for a total cost of $8,075

 

$14,553

 

 

$57,000

 

 

 

630

 

Required: Calculate the variances for variable and fixed overhead.

 

17-13: NPX Company reports the following information for October:

 

 

Static Budget

Actual Results

Production

Direct labor

Variable overhead

Fixed overhead

Machine hours

1000 units

20 minutes per unit

$3,333

$47,000

200

1,100 units

15 minutes per unit

$3,666

$47,000

220

 

NPX allocates overhead based on direct labor hours, using a standard costing system, and allocates fixed overhead using the denominator-level concept of budgeted production.

 

A) How much of the flexible budget variance for variable overhead is due to the fact that NPX produced more units than planned?

 

B) The variable overhead efficiency variance is $917 favorable (rounded to the nearest dollar). Recalculate the variable overhead efficiency variance assuming the company allocates overhead based on machine hours instead of labor hours.

 

C) Calculate the variable overhead spending variance assuming the company allocates variable overhead based on machine hours instead of labor hours.

 

D) Calculate the fixed overhead spending variance. Is it favorable or unfavorable?

 

E) How much of the fixed overhead spending variance is due to the fact that production was higher than planned?

 

F) Calculate the fixed overhead volume variance.

 

G) How much of the fixed overhead volume variance is due to the fact that production was higher than planned?

 

H) Calculate the amount of overapplied or underapplied fixed overhead.

 

17-14: The Electric Sound Opera Company makes three models of an electronic keyboard. Budgeted and actual information for the year follows:

 

 

Model A

Model B

Model C

Total

Units produced:

  actual

  budgeted

 

Direct materials (per unit)

  actual

  budgeted

 

Direct labor (per unit)

  actual

  budgeted

 

Cost driver info:

  number of parts (per unit)

    actual

    budget

 

  direct labor hours (per unit)

    actual

    budget

 

  total square feet (budget = actual)

 

Overhead costs:

Labor Support (variable overhead)

  actual 

  budget

 

Materials Support (variable overhead)

  actual

  budget

 

Fixed Overhead

  actual

  budget   

 

Total Overhead

  actual

  budget

 

315

275

 

 

$50

$52

 

 

$24

$20

 

 

 

32

32

 

 

3.50

4

 

3,000

 

 

 

450

400

 

 

$76

$73

 

 

$56

$50

 

 

 

56

56

 

 

4.60

5

 

6,000

 

 

 

 

226

300

 

 

$100

$105

 

 

$38

$40

 

 

 

43

43

 

 

4.50

5

 

10,000

 

 

991

975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,000

 

 

 

$   535,000

 $   600,000

 

 

$   780,000

$   860,000

 

 

$1,250,000

$1,000,000

 

 

$2,565,000

$2,460,000

Notes:

(1)               The company uses a Normal Costing System.

(2)               Total square feet refers to the square feet of factory floor space used in the production of each model of product. It is expressed as total square feet for that model, not square feet per unit.

(3)               Variable manufacturing overhead is divided into two cost pools, one for labor support and one for materials support.

 

A) Assume that the Labor Support overhead cost pool is allocated based on direct labor hours (labor hours is the allocation base), that the Materials Support overhead cost pool is allocated based on number of parts (parts is the allocation base), and that the Fixed Overhead cost pool is allocated based on square feet. Calculate the cost per unit for each Model A. 

 

B) Now assume that the Variable Overhead Labor Support cost pool is allocated to product based on direct labor dollars. Calculate the variable overhead spending and efficiency variances for this overhead cost pool category.

 

C) Calculate the fixed overhead production volume and spending variances, assuming that fixed overhead is allocated using output units as the allocation base, and budgeted production as the denominator-level concept.

 

17-15: Silverstream Company makes travel trailers. The following information pertains to the company’s Ohio Division, which manufactures and markets only one model of trailer: the 32-foot Ambassador trailer. Following is budgeted and actual information for the Ohio Division for 2004:

 

 

Budgeted

Actual

 

 

Trailers manufactured in 2004

Trailers sold in 2004

Sales price per trailer

 

Direct materials costs (all variable costs):

            Aluminum

            Steel

            Other

  Total materials costs

 

Direct labor costs (all variable costs)

Variable overhead manufacturing costs

Fixed overhead costs:

          Manufacturing fixed overhead

          Non-manufacturing fixed overhead

 

Per Unit

 

 

 

 

 

 

$4,000

$2,000

$4,000

$10,000

 

$5,000

$8,000

Total

 

1,000

1,000

$45,000

 

 

$4,000,000

$2,000,000

$4,000,000

$10,000,000

 

$5,000,000

$8,000,000

 

$10,000,000

$2,000,000

 

 

800

600

$45,000

 

 

$3,400,000

$1,600,000

$3,800,000

$8,800,000

 

$3,800,000

$6,400,000

 

$11,000,000

$2,100,000

 

Additional information:

The Ohio Division started the year with no inventory of finished trailers or direct materials.

 

Direct labor standard:                                                   250 hours per trailer

Actual direct labor hours incurred:                                 195,000 hours

The budgeted quantity of aluminum:                               100 lbs. per trailer

The budgeted cost of aluminum:                                    $40 per lb.

The actual quantity of aluminum purchased                    84,000 lbs.

The actual quantity of aluminum used                             82,927 lbs.

The output capacity of the factory:                                 2,000 trailers

 

The division allocates overhead based on direct labor hours. The only non-manufacturing costs are certain fixed overhead costs, as shown above.

 

Calculate the following:

 

A)        The flexible budget variance for variable manufacturing overhead.

 

B)        The variable manufacturing overhead spending variance.

 

C)        The variable manufacturing overhead efficiency variance.

           

D)        Recalculate the variable manufacturing overhead rate, assuming the company applies variable overhead based on pounds of aluminum, instead of direct labor hours.

 

E)        Using the overhead rate calculated in part (D), recalculate the variable manufacturing overhead spending variance.

 

F)         Using the overhead rate calculated in part (D), recalculate the variable manufacturing overhead efficiency variance.

 

G)        Using the overhead rate calculated in part (D), recalculate the variable manufacturing overhead flexible budget variance.

 

H)        The fixed manufacturing overhead spending or budget variance.

 

I)         The flexible budget variance for fixed manufacturing overhead.

 

J)         The fixed manufacturing overhead production volume variance, assuming the volume variance is calculated based on budgeted production.

           

K)        The fixed manufacturing overhead production volume variance, assuming the volume variance is calculated based on factory capacity.

 

L)        The amount of overapplied or underapplied fixed manufacturing overhead, if the company applies overhead based on budgeted production.