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

predetermined fixed standard allowed

hours
overhead rate

$180,000

(13,500 4)
15,000 4

= $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.

2.

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)

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 ............................................................

Actual production in units .................................................................
Standard machine hours per unit of output .....................................
Standard variable-overhead rate per machine hour ........................
Actual variable-overhead rate per machine hour.............................
Actual machine hours per unit of output ..........................................
Variable-overhead spending variance ..............................................
Variable-overhead efficiency variance ..............................................
Fixed-overhead budget variance .......................................................
Fixed-overhead volume variance.......................................................
Total actual overhead..........................................................................
Total budgeted overhead (flexible budget).......................................
Total budgeted overhead (static budget)..........................................
Total applied overhead........................................................................

12,500
12,000c
4 hours
$8.00
$9.00b
3d
$ 36,000 U
$ 96,000 F
$ 7,500 U
$ 1,000g (positive or U*)
$356,500
$409,000e
$425,000f
$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

actual variable overhead

actual hours

$324,000
= $9 per hour
36,000

EXERCISE 11-31 (CONTINUED)

c.

Fixed-overhead rate

budgeted fixed overhead

budgeted machine hours

$25,000
(12,500 units)(4 hrs. per unit)

= $.50 per hr.

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

= total standard hours total standard overhead rate

$408,000 = X $8.50
X = 48,000 = total standard hrs.

d.

e.

Actual production =

total standard hrs.

standard hrs. per unit

48,000
= 12,000 units
4

Actual machine hrs. per unit of output

total actual machine hrs.

actual production

36,000 hrs.
= 3 hrs. per unit
12,000 units

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.

g.

Total budgeted overhead (static budget)

=

total standard budgeted standard hrs.

overhead rate production per unit

($8.50)(12,500)(4)

$425,000

budgeted fixed overhead applied fixed overhead

$25,000 ($.50)(12,000 4)

$1,000 (positive)*

Fixed overhead volume variance

*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

Advertising ......................................................
Staff salaries ...................................................
Sales salariesa .................................................
Commissionsb .................................................
Per diem expensec ..........................................
Office expensesd .............................................

Flexible
Budget
$3,300,000
250,000
230,400
992,000
316,800
732,000

Actual
$3,320,000
250,000
230,800
992,000
325,200
716,800

Variance
$20,000 (U)
0
400 (U)
0
8,400 (U)
15,200 (F)

Shipping expensese ........................................

Total expenses................................................

1,985,000
$7,806,200

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.
90) 15 days = $220 per day.
($220 15) 96 = $316,800.

c($297,000

6,000,000) 54,000 = $40 per order.

($6,000,000 12) + ($40 5,800) = $732,000.

d($8,160,000

($6 2,000,000)] 12 = $125,000

monthly fixed expense.

e[$13,500,000

$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

1,953,000
$7,787,800

32,000 (F)
$18,400 (F)

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 =
=

bTotal

budgeted fixed overhead

budgeted direct-labor hours
$630,000
= $21per hr.
30,000 hrs.

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

jApplied

standard allowed direct-labor hours

standard hrs. per unit

36,000
= 6,000 units
6

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

=
=

$72,000
$9

8,000

Budgeted production =
=

jActual

production

kApplied

budgeted fixed overhead

fixed-overhead rate

budgeted direct-labor hours

standard hours per unit

8,000
= 1,000 units
8

standard allowed hours

standard hours per unit

6,400
= 800 units
8

variable overhead
= SH SVR = 6,400 $4
= $25,600

lApplied

fixed overhead
= SH standard fixed-overhead rate
= 6,400 $9
= $57,600