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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 fied overhead costs are
locked!in than is the case with variable overhead costs. "hen planning fied overhead costs, a
company must choose the appropriate level of capacity or investment that will benefit the
company over a long time. #his is a strategic decision.
8-3 #he key differences are how direct costs are traced to a cost ob$ect and how indirect costs
are allocated to a cost ob$ect:
Actua C!"t#$% Sta$&a'& C!"t#$%
%irect costs Actual prices
& Actual inputs used
'tandard prices
& 'tandard inputs allowed for actual output
(ndirect costs Actual indirect rate
& Actual inputs used
'tandard indirect cost!allocation rate
& 'tandard )uantity of cost!allocation base
allowed for actual output
8-( 'teps in developing a budgeted variable!overhead cost rate are:
1. *hoose the period to be used for the budget,
2. 'elect the cost!allocation bases to use in allocating variable overhead costs to the
output produced,
+. (dentify the variable overhead costs associated with each cost!allocation base, and
,. *ompute the rate per unit of each cost!allocation base used to allocate variable
overhead costs to output produced.
8-) #wo 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 )uantity used of individual items included in variable
overhead cost pool, relative to the percentage change in the )uantity of the cost driver
of the variable overhead cost pool.
8-* Possible reasons for a favorable variable!overhead efficiency variance are:
"orkers more skillful in using machines than budgeted,
Production scheduler was able to schedule $obs better than budgeted, resulting in
lower!than!budgeted machine!hours,
/achines operated with fewer slowdowns than budgeted, and
/achine time standards were overly lenient.
0!1
8-+ 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 'teps in developing a budgeted fied!overhead rate are
1. *hoose the period to use for the budget,
2. 'elect the cost!allocation base to use in allocating fied overhead costs to output
produced,
+. (dentify the fied!overhead costs associated with each cost!allocation base, and
,. *ompute the rate per unit of each cost!allocation base used to allocate fied overhead
costs to output produced.
8-, #he relationship for fied!manufacturing overhead variances is:
#here is never an efficiency variance for fied overhead because managers cannot be
more or less efficient in dealing with an amount that is fied regardless of the output level. #he
result is that the fleible!budget variance amount is the same as the spending variance for fied!
manufacturing overhead.
8-1- 1or planning and control purposes, fied overhead costs are a lump sum amount that is
not controlled on a per!unit basis. (n contrast, for inventory costing purposes, fied 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 fied manufacturing overhead rate. 1or
eample, 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.
0!2
1leible!budget variance
'pending variance
Efficiency variance
-never a variance.
8-12 A strong case can be made for writing off an unfavorable production!volume variance to
cost of goods sold. #he alternative is prorating it among inventories and cost of goods sold, but
this would 2penali3e4 the units produced -and in inventory. for the cost of unused capacity, i.e.,
for the units not produced. 5ut, if we take the view that the denominator level is a 2soft4 number
6i.e., it is only an estimate, and it is never epected to be reached eactly, then it makes more
sense to prorate the production volume variance6whether favorable or not6among 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. 1inally, prorating also dampens the efficacy of any steps taken by company
management to manage operating income through manipulation of the production volume
variance. (n sum, a production!volume variance need not always be written off to cost of goods
sold.
8-13 #he four variances are:
7ariable manufacturing overhead costs
spending variance
efficiency variance
1ied manufacturing overhead costs
spending variance
production!volume variance
8-1( (nterdependencies among the variances could arise for the spending and efficiency
variances. 1or eample, 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 eample, interdependencies can be induced when
there are misclassifications of costs as fied when they are variable, and vice versa.
8-1) 1leible!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. 1or eample,
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 si3e assumed in the fleible budget.
0!+
8-1* -28 min.. Va'#a./ 0a$u1actu'#$% !2/'3/a&, 2a'#a$c/ a$a4"#"5
1. 7ariable /anufacturing 9verhead 7ariance Analysis for Es)uire *lothing for :une 2812
Actua C!"t"
I$cu''/&
Actua I$6ut
7ua$t#t4
8 Actua Rat/
91:
Actua I$6ut
7ua$t#t4
8 Bu&%/t/& Rat/
92:
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
-,,;+< & =11.;8.
=;2,1<,
-,,;+< & =12.
=;,,,+2
-, & 1,808 & =12.
=;1,0,8
-, & 1,808 & =12.
=;1,0,8
2. Es)uire had a favorable spending variance of =2,2<0 because the actual variable overhead
rate was =11.;8 per direct manufacturing labor!hour versus =12 budgeted. (t had an unfavorable
efficiency variance of =2,;>2 ? because each suit averaged ,.2 labor!hours -,,;+< hours @ 1,808
suits. versus ,.8 budgeted labor!hours.
0!,
=2,2<0 1
'pending variance
=2,;>2 ?
Efficiency variance
Aever a variance
=+2, ?
1leible!budget variance
Aever a variance
8-1+ -28 min.. F#;/&-0a$u1actu'#$% !2/'3/a&, 2a'#a$c/ a$a4"#" 9c!$t#$uat#!$ !1 8-1*:5
1 B 2.
5udgeted fied overhead
rate per unit of
allocation base
C
, 8,8 , 1
,88 , <2 =

C
1<8 , ,
,88 , <2 =
C =1; per hour
1ied /anufacturing 9verhead 7ariance Analysis for Es)uire *lothing for :une 2812
Actua C!"t"
I$cu''/&
91:
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
92:
F/;#./ Bu&%/t<
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
=<+,>1< =<2,,88 =<2,,88
-, 8 1,808 8 =1;.
=<,,088
=1,;1< ? =2,,88 1
'pending variance Aever a variance Production!volume variance
=1,;1< ? =2,,88 1
1leible!budget variance Production!volume variance
#he fied manufacturing overhead spending variance and the fied manufacturing
fleible budget variance are the sameDD=1,;1< ?. Es)uire spent =1,;1< above the =<2,,88
budgeted amount for :une 2812.
#he production!volume variance is =2,,88 1. #his arises because Es)uire utili3ed its
capacity more intensively than budgeted -the actual production of 1,808 suits eceeds the
budgeted 1,8,8 suits.. #his results in overallocated fied manufacturing overhead of =2,,88 -, &
,8 & =1;.. Es)uire would want to understand the reasons for a favorable production!volume
variance. (s the market growingE (s Es)uire gaining market shareE "ill Es)uire need to add
capacityE
0!;
8-18 -+8 min.. Va'#a./ 0a$u1actu'#$% !2/'3/a& 2a'#a$c/ a$a4"#"5
1. %enominator level C -+,288,888 & 8.82 hours. C <,,888 hours
2. Actua
R/"ut"
F/;#./
Bu&%/t A0!u$t"
1. 9utput units -baguettes. 2,088,888 2,088,888
2. %irect manufacturing labor!hours ;8,,88 ;<,888
a
+. Fabor!hours per output unit -2 1. 8.810 8.828
,. 7ariable manuf. overhead -/9G. costs =<08,,88 =;<8,888
;. 7ariable /9G per labor!hour -, 2. =1+.;8 =18
<. 7ariable /9G per output unit -, 1. =8.2,+ =8.288
a
2,088,888 8.828C ;<,888 hours
7ariable /anufacturing 9verhead 7ariance Analysis for 1rench 5read *ompany for 2812
Actua C!"t"
I$cu''/&
Actua I$6ut
7ua$t#t4
8 Actua Rat/
91:
Actua I$6ut
7ua$t#t4
8 Bu&%/t/& Rat/
92:
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
-;8,,88 & =1+.;8.
=<08,,88
-;8,,88 & =18.
=;8,,888
-;<,888 & =18.
=;<8,888
-;<,888 & =18.
=;<8,888
+. 'pending variance of =1H<,,88 ?. (t is unfavorable because variable manufacturing overhead
was +;I higher than planned. A possible eplanation could be an increase in energy rates
relative to the rate per standard labor!hour assumed in the fleible budget.
Efficiency variance of =;<,888 1. (t is favorable because the actual number of direct
manufacturing labor!hours re)uired was lower than the number of hours in the fleible budget.
Fabor was more efficient in producing the baguettes than management had anticipated in the
budget. #his could occur because of improved morale in the company, which could result from
an increase in wages or an improvement in the compensation scheme.
1leible!budget variance of =128,,88 ?. (t is unfavorable because the favorable
efficiency variance was not large enough to compensate for the large unfavorable spending
variance.
0!<
=1H<,,88 ?
'pending variance
=;<,888 1
Efficiency variance Aever a variance
=128,,88 ?
1leible!budget variance Aever a variance
8-1, -+8 min.. F#;/& 0a$u1actu'#$% !2/'3/a& 2a'#a$c/ a$a4"#" 9c!$t#$uat#!$ !1 8-18:5
1. 5udgeted standard direct manufacturing labor used C 8.82 per baguette
5udgeted output C +,288,888 baguettes
5udgeted standard direct manufacturing labor!hours
C +,288,888 & 8.82
C <,,888 hours
5udgeted fied manufacturing overhead costs
C <,,888 & =,.88 per hour
C =2;<,888
Actual output C 2,088,888 baguettes
Allocated fied manufacturing overhead
C 2,088,888 & 8.82 & =,
C =22,,888
1ied /anufacturing 9verhead 7ariance Analysis for 1rench 5read *ompany for 2812
Actua C!"t"
I$cu''/&
91:
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
92:
F/;#./ Bu&%/t<
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
=2H2,888 =2;<,888 =2;<,888
-2,088,888 & 8.82 & =,.
=22,,888
2. #he fied manufacturing overhead is underallocated by =,0,888.
+. #he production!volume variance of =+2,888? captures the difference between the budgeted
+,288,8888 baguettes and the lower actual 2,088,888 baguettes produced6the fied cost
capacity not used. #he spending variance of =1<,888 unfavorable means that the actual
aggregate of fied costs -=2H2,888. eceeds the budget amount -=2;<,888.. 1or eample,
monthly leasing rates for baguette!making machines may have increased above those in the
budget for 2812.
0!H
=1<,888 ?
'pending variance Aever a variance
=+2,888 ?
Production!volume
variance
=1<,888 ?
1leible!budget variance
=+2,888 ?
Production!volume
variance
=,0,888 ?
?nderallocated fied overhead
-#otal fied overhead variance.
8-2- -+8D,8 min.. Ma$u1actu'#$% !2/'3/a&, 2a'#a$c/ a$a4"#"5
1. #he summary information is:
T3/ S!ut#!$" C!'6!'at#!$ 9>u$/ 2-12: Actua
F/;#./
Bu&%/t
Stat#c
Bu&%/t
9utputs units -number of assembled units. 21< 21< 288
Gours of assembly time ,11 ,+2
c
,88
a
Assembly hours per unit 1.>8
b
2.88 2.88
7ariable mfg. overhead cost per hour of assembly time = +1.88
d
= +8.88 = +8.88
7ariable mfg. overhead costs =12,H,1 =12,><8
e
=12,888
f
1ied mfg. overhead costs =28,;;8 =1>,288 =1>,288
1ied mfg. overhead costs per hour of assembly time = ;8.88
g
= ,0.88
h
a
288 units

2 assembly hours per unit C ,88 hours


b
,11 hours 21< units C 1.>8 assembly hours per unit
c
21< units

2 assembly hours per unit C ,+2 hours


d
=12,H,1 ,11 assembly hours C =+1.88 per assembly hour
e
,+2 assembly hours

=+8 per assembly hour C =12,><8


f
,88 assembly hours

=+8 per assembly hour C =12,888


g
=28,;;8 ,11 assembly hours C =;8 per assembly hour
h
=1>,288 ,88 assembly hours C =,0 per assembly hour
0!0
F/;#./ Bu&%/t< A!cat/&<
Actua C!"t" Actua I$6ut 7ua$t#t4
Bu&%/t/& I$6ut
7ua$t#t4 A!=/& Bu&%/t/&
Bu&%/t/& I$6ut
7ua$t#t4 A!=/& Bu&%/t/&
I$cu''/& Bu&%/t/& Rat/ 1!' Actua Out6ut Rat/ 1!' Actua Out6ut Rat/
Va'#a./ ,11 =+8.88 ,+2 =+8.88 ,+2 =+8.88
Ma$u1actu'#$
% assy. hrs. per assy. hr. assy. hrs. per assy. hr. assy. hrs. per assy. hr.
O2/'3/a& =12,H,1 =12,++8 =12,><8 =12,><8
=,11 ? =<+8 1
'pending variance Efficiency variance Aever a variance
=21> 1
1leible!budget variance Aever a variance
=21> 1
9verallocated variable overhead
F/;#./ Bu&%/t< A!cat/&<
Actua C!"t" Stat#c Bu&%/t Lu06 Su0 Stat#c Bu&%/t Lu06 Su0
Bu&%/t/& I$6ut
A!=/& Bu&%/t/&
I$cu''/& R/%a'&/"" !1 Out6ut L/2/ R/%a'&/"" !1 Out6ut L/2/ 1!' Actua Out6ut Rat/
F#;/& ,+2 =,0.88
Ma$u1actu'#$
% assy. hrs. per assy. hr.
O2/'3/a& =28,;;8 =1>,288 =1>,288 =28,H+<
=1,+;8 ? =1,;+< 1
'pending 7ariance Aever a 7ariance Production!volume variance
=1,+;8 ? =1,;+< 1
1leible!budget variance Production!volume variance
=10< 1
9verallocated fied overhead
0!>
0!18
#he summary analysis is:
S6/$&#$%
Va'#a$c/
E11#c#/$c4
Va'#a$c/
P'!&uct#!$-V!u0/
Va'#a$c/
7ariable
/anufacturing
9verhead = ,11 ? =<+8 1 Aever a variance
1ied /anufacturing
9verhead =1,+;8 ? Aever a variance =1,;+< 1
2. Va'#a./ Ma$u1actu'#$% C!"t" a$& Va'#a$c/"
a. 7ariable /anufacturing 9verhead *ontrol 12,H,1
Accounts Payable *ontrol and various other accounts 12,H,1
#o record actual variable manufacturing overhead costs incurred
b. "ork!in!Process *ontrol 12,><8
7ariable /anufacturing 9verhead Allocated 12,><
#o record variable manufacturing overhead allocated.
c. 7ariable /anufacturing 9verhead Allocated 12,><8
7ariable /anufacturing 9verhead 'pending 7ariance ,11
7ariable /anufacturing 9verhead *ontrol 12,H,
7ariable /anufacturing 9verhead Efficiency 7ariance <+8
#o isolate variances for the accounting period.
d. 7ariable /anufacturing 9verhead Efficiency 7ariance <+8
7ariable /anufacturing 9verhead 'pending 7ariance ,1
*ost of Joods 'old 2
#o write off variable manufacturing overhead variances to cost of goods sold.
0!11
F#;/& Ma$u1actu'#$% C!"t" a$& Va'#a$c/"
a. 1ied /anufacturing 9verhead *ontrol 28,;;8
'alaries Payable, Acc. %epreciation, various other accounts 28,;;8
#o record actual fied manufacturing overhead costs incurred.
b. "ork!in!Process *ontrol 28,H+<
1ied /anufacturing 9verhead Allocated 28,H+<
#o record fied manufacturing overhead allocated.
c. 1ied /anufacturing 9verhead Allocated 28,H+<
1ied /anufacturing 9verhead 'pending 7ariance 1,+;8
1ied /anufacturing 9verhead Production!7olume 7ariance 1,;+<
1ied /anufacturing 9verhead *ontrol 28,;;8
#o isolate variances for the accounting period.
d. 1ied /anufacturing 9verhead Production!7olume 7ariance 1,;+<
1ied /anufacturing 9verhead 'pending 7ariance 1,+;8
*ost of Joods 'old 10<
#o write off fied manufacturing overhead variances to cost of goods sold.
+. Planning and control of variable manufacturing overhead costs has both a long!run and a
short!run focus. (t involves 'olutions planning to undertake only value!added overhead activities
-a long!run view. and then managing the cost drivers of those activities in the most efficient way
-a short!run view.. Planning and control of fixed manufacturing overhead costs at 'olutions have
primarily a long!run focus. (t involves undertaking only value!added fied!overhead activities
for a budgeted level of output. 'olutions makes most of the key decisions that determine the
level of fied!overhead costs at the start of the accounting period.
0!12
8-21 -181; min.. (-2a'#a$c/ a$a4"#", 1# #$ t3/ .a$?"5
Va'#a./ F#;/&
1. 'pending variance
2. Efficiency variance
+. Production!volume variance
,. 1leible!budget variance
;. ?nderallocated -overallocated. /9G
=288 ?
2,288 1
AE7EK
2,888 1
2,888 1
=,,<88 ?
AE7EK
1,288 1
,,<88 ?
+,,88 ?
#hese relationships could be presented in the same way as in Ehibit 0!,.
Actua C!"t"
I$cu''/&
91:
Actua I$6ut
7ua$t#t4
8 Bu&%/t/& Rat/
92:
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
7ariable
/9G =+1,888 =+8,088 =++,888 =++,888
Actua C!"t"
I$cu''/&
91:
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
92:
F/;#./ Bu&%/t<
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
1ied
/9G =10,888 =1+,,88 =1+,,88 =1,,<88
0!1+
=288 ?
'pending variance
=2,288 1
Efficiency variance
Aever a variance
=,,<88 ?
'pending variance Aever a variance
=1,288 1
Production!volume variance
=2,888 1
1leible!budget variance Aever a variance
=2,888 1
9verallocated variable overhead
-#otal variable overhead variance.
=,,<88 ?
1leible!budget variance
=1,288 1
Production!volume variance
=+,,88 ?
?nderallocated fied overhead
-#otal fied overhead variance.
An overview of the , overhead variances is:
(-Va'#a$c/
A$a4"#"
S6/$&#$%
Va'#a$c/
E11#c#/$c4
Va'#a$c/
P'!&uct#!$-
V!u0/
Va'#a$c/
7ariable
9verhead =288 ? =2,288 1 Aever a variance
1ied
9verhead =,,<88 ? Aever a variance =1,288 1
8-22 -28D+8 min.. St'a#%3t1!'=a'& (-2a'#a$c/ !2/'3/a& a$a4"#"5
1. #he budget for fied manufacturing overhead is ,,888 units & < machine!hours & =1;
machine!hoursLunit C =+<8,888.
An overview of the ,!variance analysis is:
(-Va'#a$c/
A$a4"#"
S6/$&#$%
Va'#a$c/
E11#c#/$c4
Va'#a$c/
P'!&uct#!$-
V!u0/ Va'#a$c/
7ariable
/anufacturing
9verhead =1H,088 ? =1<,888 ? Aever a 7ariance
1ied
/anufacturing
9verhead =1+,888 ? Aever a 7ariance =+<,888 1
'olution Ehibit 0!22 has details of these variances.
A detailed comparison of actual and fleible budgeted amounts is:
Actua F/;#./ Bu&%/t
9utput units -auto parts. ,,,88 ,,,88
Allocation base -machine!hours. 20,,88 2<,,88
a
Allocation base per output unit <.,;
b
<.88
7ariable /9G =2,;,888 =211,288
c
7ariable /9G per hour =0.<+
d
=0.88
1ied /9G =+H+,888 =+<8,888
e
1ied /9G per hour =1+.1+
f
D
a
,,,88 units & <.88 machine!hoursLunit C 2<,,88 machine!hours
b
20,,88 @ ,,,88 C <.,; machine!hours per unit
c
,,,88 units & <.88 machine!hours per unit & =0.88 per machine!hour C =211,288
d
=2,;,888 @ 20,,88 C =0.<+
e
,,888 units & <.88 machine!hours per unit & =1; per machine!hour C =+<8,888
f
=+H+,888 @ 20,,88 C =1+.1+
2. 7ariable /anufacturing 9verhead *ontrol 2,;,888
Accounts Payable *ontrol and other accounts 2,;,888
0!1,
"ork!in!Process *ontrol 211,288
7ariable /anufacturing 9verhead Allocated 211,288
7ariable /anufacturing 9verhead Allocated 211,288
7ariable /anufacturing 9verhead 'pending 7ariance 1H,088
7ariable /anufacturing 9verhead Efficiency 7ariance 1<,888
7ariable /anufacturing 9verhead *ontrol 2,;,888
1ied /anufacturing 9verhead *ontrol +H+,888
"ages Payable *ontrol, Accumulated %epreciation
*ontrol, etc. +H+,888
"ork!in!Process *ontrol +><,888
1ied /anufacturing 9verhead Allocated +><,888
1ied /anufacturing 9verhead Allocated +><,888
1ied /anufacturing 9verhead 'pending 7ariance 1+,888
1ied /anufacturing 9verhead Production!7olume 7ariance +<,888
1ied /anufacturing 9verhead *ontrol +H+,888
+. (ndividual fied manufacturing overhead items are not usually affected very much by
day!to!day control. (nstead, they are controlled periodically through planning decisions and
budgeting procedures that may sometimes have hori3ons covering si months or a year -for
eample, management salaries. and sometimes covering many years -for eample, long!term
leases and depreciation on plant and e)uipment..
,. #he fied overhead spending variance is caused by the actual reali3ation of fied costs
differing from the budgeted amounts. 'ome fied costs are known because they are
contractually specified, such as rent or insurance, although if the rental or insurance contract
epires during the year, the fied amount can change. 9ther fied 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. (n this eample, the spending variance is unfavorable, so actual
19G is greater than the budgeted amount of 19G.
#he fied overhead production volume variance is caused by production being over or
under epected capacity. Mou may be under capacity when demand drops from epected levels,
or if there are problems with production. 9ver capacity is usually driven by favorable demand
shocks or a desire to increase inventories. #he fact that there is a favorable volume variance
indicates that production eceeded the epected level of output -,,,88 units actual relative to a
denominator level of ,,888 output units..
0!1;
SOLUTION EXHIBIT 8-22
Actua C!"t"
I$cu''/&
91:
Actua I$6ut
7ua$t#t4
8 Bu&%/t/& Rat/
92:
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
& Bu&%/t/& Rat/
9(:
7ariable
/9G =2,;,888
-20,,88 & =0.
=22H,288
-,,,88 & < & =0.
=211,288
-,,,88 & < & =0.
=211,288
Actua C!"t"
I$cu''/&
91:
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
92:
F/;#./ Bu&%/t<
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
1ied
/9G =+H+,888
-,,888 & < & =1;.
=+<8,888
-,,888 & < & =1;.
=+<8,888
-,,,88 & < & =1;.
=+><,888
0!1<
=1H,088 ?
'pending variance
=1<,888 ?
Efficiency variance Aever a variance
=1+,888 ?
'pending variance Aever a variance
=+<,888 1
Production!volume
variance
=++,088 ?
1leible!budget variance Aever a variance
=++,088 ?
?nderallocated variable overhead
-#otal variable overhead variance.
=1+,888 ?
1leible!budget variance
=+<,888 1
Production!volume variance
=2+,888 1
9verallocated fied overhead
-#otal fied overhead variance.
8-23 -+8,8 min.. St'a#%3t1!'=a'& c!2/'a%/ !1 0a$u1actu'#$% !2/'3/a&, "ta$&a'&-
c!"t#$% "4"t/05
1. 'olution Ehibit 0!2+ shows the computations. 'ummary details are:
Actua F/;#./ Bu&%/t
9utput units <;,;88 <;,;88
Allocation base -machine!hours. H<,,88 H0,<88
a
Allocation base per output unit 1.1H
b
1.2
7ariable /9G =<10,0,8 =<20,088
c
7ariable /9G per hour =0.>2
d
=0.88
1ied /9G =1,;,H>8 =1,,,888
1ied /9G per hour =1.>1
e
D
a
<;,;88 & 1.2 C H0,<88
d
=<10,0,8 @ H<,,88 C =0.18
b
H<,,88 @ <;,;88 C 1.1H
e
=1,;,H>8 @ H<,,88 C =1.>1
c
<;,;88 & 1.2 & =0 C =<20,088
An overview of the ,!variance analysis is:
(-Va'#a$c/
A$a4"#"
S6/$&#$%
Va'#a$c/
E11#c#/$c4
Va'#a$c/
P'!&uct#!$
V!u0/ Va'#a$c/
7ariable
/anufacturing
9verhead =H,<,8 ? =1H,<88 1 Aever a variance
1ied
/anufacturing
9verhead =1,H>8 ? Aever a variance =1+,288 1
0!1H
2. 7ariable /anufacturing 9verhead *ontrol <10,0,8
Accounts Payable *ontrol and other accounts <10,0,8
"ork!in!Process *ontrol <20,088
7ariable /anufacturing 9verhead Allocated <20,088
7ariable /anufacturing 9verhead Allocated <20,088
7ariable /anufacturing 9verhead 'pending 7ariance H,<,8
7ariable /anufacturing 9verhead Efficiency 7ariance 1H,<88
7ariable /anufacturing 9verhead *ontrol <10,0,8
1ied /anufacturing 9verhead *ontrol 1,;,H>8
"ages Payable *ontrol, Accumulated
%epreciation *ontrol, etc. 1,;,H>8
"ork!in!Process *ontrol 1;H,288
1ied /anufacturing 9verhead Allocated 1;H,288
1ied /anufacturing 9verhead Allocated 1;H,288
1ied /anufacturing 9verhead 'pending 7ariance 1,H>8
1ied /anufacturing 9verhead Production!7olume 7ariance 1+,288
1ied /anufacturing 9verhead *ontrol 1,;,H>8
+. #he control of variable manufacturing overhead re)uires the identification of the cost
drivers for such items as energy, supplies, and repairs. *ontrol often entails monitoring
nonfinancial measures that affect each cost item, one by one. Eamples are kilowatt!hours used,
)uantities of lubricants used, and repair parts and hours used. #he most convincing way to
discover why overhead performance did not agree with a budget is to investigate possible causes,
line item by line item.
,. #he variable overhead spending variance is unfavorable. #his means the actual rate
applied to the manufacturing costs is higher than the budgeted rate. 'ince 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.
#he variable overhead efficiency variance is favorable, which implies that the estimated
denominator activity was too high. 'ince 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 epected level of efficiency.
0!10
SOLUTION EXHIBIT 8-23
Actua C!"t"
I$cu''/&
91:
Actua I$6ut
7ua$t#t4
8 Bu&%/t/& Rat/
92:
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
7ariable
/anufacturing
9verhead
=<10,0,8
-H<,,88 & =0.
=<11,288
-H0,<88 & =0.
=<20,088
-H0,<88 & =0.
=<20,088
Actua C!"t"
I$cu''/&
91:
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
92:
F/;#./ Bu&%/t<
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
1ied
/anufacturing
9verhead
=1,;,H>8 =1,,,888 =1,,,888
-H0,<88 & =2.
=1;H,288
C=1,,,888 L H2,888 machine!hours C =2 per machine!hour.
8-2( -28D2; min.. O2/'3/a& 2a'#a$c/", "/'2#c/ "/ct!'5
0!1>
=H,<,8 ?
'pending variance
=1H,<88 1
Efficiency variance Aever a variance
=1,H>8 ?
'pending variance Aever a variance
=1+,288 1
Production!volume variance
=>,><8 1
1leible!budget variance Aever a variance
=>,><8 1
9verallocated variable overhead
-#otal variable overhead variance.
=1,H>8 ?
1leible!budget variance
=1+,288 1
Production!volume variance
=11,,18 1
9verallocated fied overhead
-#otal fied overhead variance.
1.
M/a" !$ @3//"
9Ma4 2-12:
Actua
R/"ut"
F/;#./
Bu&%/t
Stat#c
Bu&%/t
9utput units -number of deliveries. 0,088 0,088 18,888
Gours per delivery 8.<;
a
8.H8 8.H8
Gours of delivery time ;,H28 <,1<8
b
H,888
b
7ariable overhead costs per delivery hour =1.08
c
=1.;8 =1.;8
7ariable overhead -79G. costs =18,2>< =>,2,8
d
=18,;88
d
1ied overhead costs =+0,<88 =+;,888 =+;,888
1ied overhead cost per hour =;.88
e
a
;,H28 hours 0,088 deliveries C 8.<; hours per delivery
b
hrs. per delivery

number of deliveries C 8.H8

18,888 C H,888 hours


c
=18,2>< 79G costs ;,H28 delivery hours C =1.08 per delivery hour
d
%elivery hours

79G cost per delivery hour C H,888

=1.;8 C =18,;88
e
'tatic budget delivery hours C 18,888 units 8.H8 hoursLunit C H,888 hoursN
1ied overhead rate C 1ied overhead costs 'tatic budget delivery hours C =+;,888 H,888 hours C =; per hour
VARIABLE OVERHEAD
Actua C!"t"
I$cu''/&
Actua I$6ut 7ua$t#t4
Bu&%/t/& Rat/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/& 1!'
Actua Out6ut
Bu&%/t/& Rat/
;,H28 hrs =1.;8 per hr. <,1<8 hrs =1.;8 per hr.
=18,2>< =0,;08 =>,2,8
=1,H1< ? =<<8 1
'pending variance Efficiency variance
2.
FIXED OVERHEAD
Actua C!"t"
I$cu''/&
F/;#./ Bu&%/t<
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1 Out6ut
L/2/
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/& 1!'
Actua Out6ut
Bu&%/t/& Rat/
0,088 units 8.H8 hrs.Lunit =;Lhr.
<,1<8 hrs. =;Lhr.
=+0,<88 =+;,888 =+8,088
=+,<88 ? =,,288 ?
'pending variance Production!volume variance
0!28
+. #he spending variances for variable and fied overhead are both unfavorable. #his means
that /9" 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.. #he favorable efficiency variance for variable
overhead costs results from more efficient use of the cost allocation baseDDeach delivery takes
8.<; hours versus a budgeted 8.H8 hours.
/9" can best manage its fied overhead costs by long!term planning of capacity rather
than day!to!day decisions. #his involves planning to undertake only value!added fied!overhead
activities and then determining the appropriate level for those activities. /ost fied overhead
costs are committed well before they are incurred. (n contrast, for variable overhead, a mi of
long!run planning and daily monitoring of the use of individual items is re)uired to manage costs
efficiently. /9" 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..
#here is no production!volume variance for variable overhead costs. #he unfavorable
production!volume variance for fied overhead costs arises because /9" has unused fied
overhead resources that it may seek to reduce in the long run.
0!21
8-2) -,8;8 min.. T!ta !2/'3/a&, 3-2a'#a$c/ a$a4"#"5
1. #his problem has two ma$or purposes: -a. to give eperience with data allocated on a total
overhead basis instead of on separate variable and fied bases and -b. to reinforce distinctions
between actual hours of input, budgeted -standard. hours allowed for actual output, and
denominator level.
An analysis of direct manufacturing labor will provide the data for actual hours of input
and standard hours allowed. 9ne approach is to plug the known figures -designated by asterisks.
into the analytical framework and solve for the unknowns. #he direct manufacturing labor
efficiency variance can be computed by subtracting =;12 from =+,;12. #he complete picture is
as follows:
Actua C!"t"
I$cu''/&
Actua I$6ut 7ua$t#t4
8 Bu&%/t/& Rat/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
-;,128 hrs. & =2;.18.
=120,;12
O
-;,128hrs. & =2;.88
O
.
=120,888
-;,888 hrs. & =2;.88
O
.
=12;,888
O
Jiven
Direct Labor calculations
Actual input & 5udgeted rate C Actual costs D Price variance
C =120,;12 D =;12 C =120,888
Actual input C =120,888 @ 5udgeted rate C =120,888 @ =2; C ;,128 hours
5udgeted input & 5udgeted rate C =120,888 D Efficiency variance
C =120,888 D =+,888 C =12;,888
5udgeted input C =12;,888 @ 5udgeted rate C =12;,888 @ 2; C ;,888 hours
Production Overhead
7ariable overhead rate C =,+,288
O
@ +,<88
O
hrs. C =12.88 per standard labor!hour
C =18+,,88
O
D -,,888
O
& =12.88. C =;;,,88
(f total overhead is allocated at 128I of direct labor!cost, the single overhead rate must
be 128I of =2;.88, or =+8.88 per hour. #herefore, the fied overhead component of the rate
must be =+8.88 D =12.88, or =10.88 per direct labor!hour.
0!22
=;12 ?
O
Price variance
=+,888 ?
Efficiency variance
=+,;12 ?
O
1leible!budget variance
Fet % C denominator level in input units
5udgeted fied
overhead rate
per input unit
C
=10.88 C =;;,,88 @ %
% C +,8HH direct labor!hours
A summary +!variance analysis for 9ctober follows:
Actua C!"t"
I$cu''/&
Actua I$6ut 7ua$t#t4
8 Bu&%/t/& Rat/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
=128,H88
O
-=;;,,88 P -;,128 & =12.88.
=11<,0,8
=;;,,88 P -=12 & ;,888.
=11;,,88
-;,888 hrs. & =+8.88.
=1;8,888
O
Qnown figure
An overview of the +!variance analysis using the block format in the tet is:
3-Va'#a$c/
A$a4"#"
S6/$&#$%
Va'#a$c/
E11#c#/$c4
Va'#a$c/
P'!&uct#!$
V!u0/ Va'#a$c/
#otal 9verhead =+,0<8 ? =1,,,8? =+,,<88 1
2. #he control of variable manufacturing overhead re)uires the identification of the cost
drivers for such items as energy, supplies, e)uipment, and maintenance. *ontrol often entails
monitoring nonfinancial measures that affect each cost item, one by one. Eamples are kilowatts
used, )uantities of lubricants used, and e)uipment parts and hours used. #he most convincing
way to discover why overhead performance did not agree with a budget is to investigate possible
causes, line item by line item.
(ndividual fied manufacturing overhead items are not usually affected very much by day!
to!day control. (nstead, they are controlled periodically through planning decisions and
budgeting that may sometimes have hori3ons covering si months or a year -for eample,
management salaries. and sometimes covering many years -for eample, long!term leases and
depreciation on plant and e)uipment..
0!2+
=+,0<8 ?
'pending variance
=1,,,8 ?
Efficiency variance
=+,,<88 1O
Production!volume variance
=;,+88 ?
1leible!budget variance
=+,,<88 1O
Production!volume variance
8-2* -+8 min.. O2/'3/a& 2a'#a$c/", 0#""#$% #$1!'0at#!$5
1. (n the columnar presentation of variable overhead variance analysis, all numbers shown in
bold are calculated from the given information, in the order -a. D -e..
VARIABLE MANUFACTURING OVERHEAD
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
Actua C!"t"
I$cu''/&
Actua I$6ut 7ua$t#t4
Bu&%/t/& Rat/
7ua$t#t4 A!=/& Bu&%/t/&
1!' Actua Out6ut Rat/
9.: 9a: 9c:
1;,888

=<.88 1,,0;8

=<.88
mach. hrs. per mach. hr. mach. hrs. per mach. hr.
A8,,*2) A,-,--- A8,,1--
=+H; 1 A,-- U 9&:
'pending variance Efficiency variance
A)2) U 9/:
1leible!budget variance
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 fleible budget variable overhead of
=0>,188. #he actual variable overhead cost is =0>,<2;. #herefore, variable overhead is
underallocated by =;2;.
0!2,
2. (n the columnar presentation of fied overhead variance analysis, all numbers shown in
bold are calculated from the given information, in the order -a. D -e..
FIXED MANUFACTURING OVERHEAD
F/;#./ Bu&%/t< A!cat/&<
Actua C!"t"
Stat#c Bu&%/t Lu06 Su0
R/%a'&/"" !1 Out6ut
Bu&%/t/& I$6ut
7ua$t#t4 A!=/& Bu&%/t/&
I$cu''/& L/2/ 1!' Actua Out6ut Rat/
9a: 9.:
1,,0;8

A15*-B 9c:
mach. hrs. per mach. hr.
A3-,3+) A28,8-- A23,+*-
=1,;H; ? A),-(- U 9&:
'pending variance P'!&uct#!$-2!u0/ 2a'#a$c/
A1,)+) U 9/:
F/;#./-.u&%/t 2a'#a$c/
a. Actual 19G costs C =128,888 total overhead costs D =0>,<2; 79G costs C =+8,+H;
b. 'tatic budget 19G lump sum C =+8,+H; D =1,;H; spending variance C =20,088
c. O19G allocation rate C =20,088 19G static!budget lump sum

10,888 static!budget machine!hours


C =1.<8 per machine!hour
Allocated 19G C 1,,0;8 machine!hours

=1.<8 per machine!hour C =2+,H<8


d. P77 C =20,088 D =2+,H<8 C =;,8,8 ?
e. 19G fleible budget variance C 19G spending variance C =1,;H; ?
Allocated fied overhead is =2+,H<8. #he actual fied overhead cost is =+8,+H;. #herefore, fied
overhead is underallocated by =<,<1;.
0!2;
8-2+ -1; min.. I&/$t#14#$% 1a2!'a./ a$& u$1a2!'a./ 2a'#a$c/"5
Scenario
VOH
Spending
Variance
VOH
Efficiency
Variance
FOH
Spending
Variance
FOH
Production-
Volume Variance
Production output is
4% less than budgeted,
and actual fixed
manufacturing
overhead costs are 5%
more than budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Cannot be
determined: no
information on
actual versus
flexible-budget
machine-hours
Unfavorable:
actual fixed
costs are more
than budgeted
fixed costs
Unfavorable:
output is less than
budgeted causing
FOH costs to be
underallocated
Production output is
12% less than
budgeted; actual
machine-hours are 7%
more than budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Unfavorable: actual
machine-hours
more than flexible-
budget machine-
hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Unfavorable:
output is less than
budgeted causing
FOH costs to be
underallocated
Production output is
9% more than
budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Cannot be
determined: no
information on
actual machine-
hours versus
flexible-budget
machine-hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Favorable: output
more than
budgeted will
cause FOH costs to
be overallocated
Actual machine-hours
are 20% less than
flexible-budget
machine-hours
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Favorable: less
machine-hours used
relative to flexible
budget
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Cannot be
determined: no
information on
flexible-budget
machine-hours
relative to static-
budget machine-
hours
Relative to the flexible
budget, actual
machine-hours are 12%
less, and actual
variable manufacturing
overhead costs are 20%
greater
Unfavorable:
actual VOH rate
greater than
budgeted VOH
rate
Favorable: actual
machine-hours less
than flexible-
budget machine-
hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Cannot be
determined: no
information on
actual output
relative to
budgeted output

0!2<
8-28 -+; min.. F/;#./-.u&%/t 2a'#a$c/", '/2#/= !1 C3a6t/'" + a$& 85
1. 'olution Ehibit 0!20 contains a columnar presentation of the variances for %oorknob %esign
*ompany -%%*. for April 2812.
SOLUTION EXHIBIT 8-28
Actua C!"t"
I$cu''/&<
Actua I$6ut 7ua$t#t4
Actua I$6ut 7ua$t#t4
Bu&%/t/& P'#c/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Actua Rat/ Pu'c3a"/" U"a%/ 8 Bu&%/t/& P'#c/
%irect
/aterials
-12,888 =11.
=1+2,888
-12,888 =18.
=128,888
-18,,;8 =18.
=18,,;88
-18,;88 =18.
=18;,888
=12,888 ? =;88 1
a. Price variance b. Efficiency variance
%irect
/anufacturing
Fabor =080,;88
-+0,;88 =28.
=HH8,888
-,2,888 =28.
=0,8,888
=+0,;88 ? =H8,888 1
c. Price variance d. Efficiency variance
Actua C!"t"
I$cu''/&
Actua I$6ut 7ua$t#t4
Bu&%/t/& Rat/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
Bu&%/t/& Rat/
A!cat/&<
9Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
Bu&%/t/& Rat/:
7ariable
/anufacturing
9verhead =<,,1;8
-18,,;8 =<.
=<2,H88
-18,;88 =<.
=<+,888
-18,;88 =<.
=<+,888
=1,,;8? =+88 1
e. 'pending variance f. Efficiency variance Aever a variance
1ied
/anufacturing
9verhead
=1;2,888 =1;8,888O =1;8,888
-18,;88 =1;.
=1;H,;88
=2,888 ? =H,;88 1
h. 'pending variance Aever a variance g. Production volume variance
O
%enominator level -Annual. in pounds of material: ,88,888 .+ C 128,888 pounds
Annual 5udgeted 1ied 9verhead: 128,888 =1;Llb C =1,088,888
/onthly budgeted 19G: =1,088,888 L 12 C =1;8,888
0!2H
2. #he direct materials price variance indicates that %%* paid more for brass than they had
planned. (f this is because they purchased a higher )uality of brass, it may eplain why they
used less brass than epected -leading to a favorable material efficiency variance.. (n turn, since
variable manufacturing overhead is assigned based on pounds of materials used, this directly led
to the favorable variable overhead efficiency variance. #he purchase of a better )uality of brass
may also eplain why it took less labor time to produce the doorknobs than epected -the
favorable direct labor efficiency variance.. 1inally, the unfavorable direct labor price variance
could imply that the workers who were hired were more eperienced than epected, which could
also be related to the positive direct material and direct labor efficiency variances.
0!20
8-2, -+8 min.. C!06'/3/$"#2/ 2a'#a$c/ a$a4"#"5
1. 5udgeted number of machine!hours planned can be calculated by multiplying the number
of units planned -budgeted. by the number of machine!hours allocated per unit:
000 units 2 machine!hours per unit C 1,HH< machine!hours.
2. 5udgeted fied /9G costs per machine!hour can be computed by dividing the fleible
budget amount for fied /9G -which is the same as the static budget. by the number of
machine!hours planned -calculated in -a...:
=+,0,8>< @ 1,HH< machine!hours C =1><.88 per machine!hour
+. 5udgeted variable /9G costs per machine!hour are calculated as budgeted variable
/9G costs divided by the budgeted number of machine!hours planned:
=H1,8,8 @ 1,HH< machine!hours C =,8.88 per machine!hour.
,. 5udgeted number of machine!hours allowed for actual output achieved can be calculated
by dividing the fleible!budget amount for variable /9G by budgeted variable /9G
costs per machine!hour:
=H<,088 @ =,8.88 per machine!hourC 1,>28 machine!hours allowed
;. #he actual number of output units is the budgeted number of machine!hours allowed for
actual output achieved divided by the planned allocation rate of machine hours per unit:
1,>28 machine!hours @ 2 machine!hours per unit C ><8 units.
<. #he actual number of machine!hours used per output unit is the actual number of
machine hours used -given. divided by the actual number of units manufactured:
1,02, machine!hours @ ><8 units C 1.> machine!hours used per output unit.
0!2>
8-3- -<8 min.. >!u'$a /$t'#/" 9c!$t#$uat#!$ !1 8-2,:5
1. Qey information underlying the computation of variances is:
Actua
R/"ut"
F/;#./-Bu&%/t
A0!u$t
Stat#c-Bu&%/t
A0!u$t
1. 9utput units -food processors. ><8 ><8 000
2. /achine!hours 1,02, 1,>28 1,HH<
+. /achine!hours per output unit 1.>8 2.88 2.88
,. 7ariable /9G costs = H<,<80 = H<,088 = H1,8,8
;. 7ariable /9G costs per machine!
hour -Kow , @ Kow 2. = ,2.88 = ,8.88 = ,8.88
<. 7ariable /9G costs per unit
-Kow , @ Kow 1. = H>.08 = 08.88 = 08.88
H. 1ied /9G costs =+;8,280 =+,0,8>< =+,0,8><
0. 1ied /9G costs per machine!
hour -Kow H @ Kow 2. = 1>2.88 = 101.+8 = 1><.88
>. 1ied /9G costs per unit -H @ 1. = +<,.08 = +<2.<8 = +>2.88
'olution Ehibit 0!+8 shows the computation of the variances.
>!u'$a /$t'#/" 1!' 2a'#a./ MOH, 4/a' /$&/& D/c/0./' 31, 2-12<
7ariable /9G *ontrol H<,<80
Accounts Payable *ontrol and 9ther Accounts H<,<80
"ork!in!Process *ontrol H<,088
7ariable /9G Allocated H<,088
7ariable /9G Allocated H<,088
7ariable /9G 'pending 7ariance +,<,0
7ariable /9G *ontrol H<,<80
7ariable /9G Efficiency 7ariance +,0,8
>!u'$a /$t'#/" 1!' 1#;/& MOH, 4/a' /$&/& D/c/0./' 31, 2-12<
1ied /9G *ontrol +;8,280
"ages Payable, Accumulated %epreciation, etc. +;8,280
"ork!in!Process *ontrol +H<,+28
1ied /9G Allocated +H<,+28
1ied /9G Allocated +H<,+28
1ied /9G 'pending 7ariance 2,112
1ied /9G *ontrol +;8,280
1ied /9G Production!7olume 7ariance 20,22,
0!+8
2. A&Cu"t0/$t !1 COGS
7ariable /9G Efficiency 7ariance +,0,8
1ied /9G Production!7olume 7ariance 20,22,
7ariable /9G 'pending 7ariance +,<,0
1ied /9G 'pending 7ariance 2,112
*ost of Joods 'old 2<,+8,
SOLUTION EXHIBIT 8-3-
Va'#a./ Ma$u1actu'#$% O2/'3/a&
Actua C!"t"
I$cu''/&
91:
Actua I$6ut
7ua$t#t4
8 Bu&%/t/& Rat/
92:
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
-1,02, =,2.
=H<,<80
-1,02, =,8.
=H2,><8
-1,>28 =,8.
=H<,088
-1,>28 =,8.
=H<,088
F#;/& Ma$u1actu'#$% O2/'3/a&
Actua C!"t"
I$cu''/&
91:
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" O1
Out6ut L/2/
92:
F/;#./ Bu&%/t<
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
-1,>28 & =1><.
=+;8,280 =+,0,8>< =+,0,8>< =+H<,+28
0!+1
=+,<,0 ?
'pending variance
=+,0,8 1
Efficiency variance Aever a variance
=2,112 ?
'pending variance Aever a variance
=20,22, 1
Production!volume variance
Jraph for planning
and control purpose
Jraph for inventory
costing purpose
-=1H per machine!hour.
8-31 -+8,8 min.. G'a63" a$& !2/'3/a& 2a'#a$c/"5
1. 7ariable /anufacturing 9verhead *osts
1ied /anufacturing 9verhead *osts
C
C =1H,888,888L 1,888,888 machine hours
C =1H per machine!hour
0!+2
#otal
7ariable
/anuf.
9verhead
*osts
=1H,888,888
=0,;88,888
Jraph for planning
and control and inventory
costing
purposes at =18
per machine!hour
1,888,888
/achine!Gours
#otal
1ied
/anuf.
9verhead
*osts
=1H,888,888
=0,;88,888
1,888,888
/achine!Gours
2. -a. 7ariable /anufacturing 9verhead 7ariance Analysis for 5est Around, (nc. for 2812
Actua C!"t"
I$cu''/&
91:
Actua I$6ut 7ua$t#t4
8 Bu&%/t/& Rat/
92:
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
=12,8H;,888
-1,1;8,888 =18.
=11,;88,888
-1,12;,888 =18.
=11,2;8,888
-1,12;,888 =18.
=11,2;8,888
-b. 1ied /anufacturing 9verhead 7ariance Analysis for 5est Around, (nc. for 2812
Actua C!"t"
I$cu''/&
91:
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
92:
F/;#./ Bu&%/t<
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
=1H,188,888 =1H,888,888 =1H,888,888
-1,12;,888 & =1H.
=1>,12;,888
O
Alternative computation: 1,12;,888 budgeted hrs. allowed D 1,888,888 denominator hrs. C 12;,888 hrs.
12;,888 =1H C =2,12;,888 1
0!++
=;H;,888 ?
'pending variance
=2;8,888 ?
Efficiency variance Aever a variance
=,02;,888 ?
1leible!budget variance Aever a variance
=02;,888 ?
?nderallocated variable overhead
-#otal variable overhead variance.
=188,888 ?
'pending variance Aever a variance
=2,12;,888 1
O
Production!volume variance
=188,888 ?
1leible!budget variance
=2,12;,888 1
O
Production!volume variance
=2,82;,888 1
9verallocated fied overhead
-#otal fied overhead variance.
+. #he underallocated variable manufacturing overhead was =02;,888 and overallocated
fied overhead was =2,82;,888. #he fleible!budget variance and underallocated overhead are
always the same amount for variable manufacturing overhead, because the fleible!budget
amount of variable manufacturing overhead and the allocated amount of variable manufacturing
overhead coincide. (n contrast, the budgeted and allocated amounts for fied manufacturing
overhead only coincide when the budgeted input of the allocation base for the actual output level
achieved eactly e)uals the denominator level.
,. #he choice of the denominator level will affect inventory costs. #he new fied
manufacturing overhead rate would be =1H,888,888 @ 1,+<8,888 C =12.;8 per machine!hour. (n
turn, the allocated amount of fied manufacturing overhead and the production!volume variance
would change as seen below:
Actua Bu&%/t A!cat/&
=1H,188,888 =1H,888,888
1,12;,888 & =12.;8 C
=1,,8<2,;88
= 188 ,888 ? = 2 ,>+H,;88 ?
O

1leible!budget variance Prodn. volume variance
= +, 8+H,;88 ?
#otal fied overhead variance
O
Alternate computation: -1,+<8,888 D 1,12;,888. & =12.;8 C =2,>+H,;88 ?
#he ma$or point of this re)uirement is that inventory costs -and, hence, income determination.
can be heavily affected by the choice of the denominator level used for setting the fied
manufacturing overhead rate.
0!+,
8-32 -+8 min.. (-2a'#a$c/ a$a4"#", 1#$& t3/ u$?$!=$"5
Qnown figures denoted by an O
Ca"/ A<
Actua C!"t"
I$cu''/&
Actua I$6ut
7ua$t#t4
8 Bu&%/t/& Rat/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
7ariable
/anufacturing
9verhead =128,888O
-<,2+8 & =28.
=12,,<88
-<,288O & =28.
=12,,888O
-<,288O & =28.
=12,,888O
1ied
/anufacturing
9verhead =0,,>28O
-Fump sum.
=00,288O
-Fump sum.
=00,288O
-<,288O & =1,
a
.
=0<,088O
#otal budgeted manufacturing overhead C =12,,888 P =00,288 C =212,288
Ca"/ B<
Actua C!"t"
I$cu''/&
Actua I$6ut
7ua$t#t4
8 Bu&%/t/& Rat/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4
A!=/& 1!'
Actua Out6ut
8 Bu&%/t/& Rat/
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4
A!=/& 1!'
Actua Out6ut
8 Bu&%/t/& Rat/
7ariable
/anufacturing
9verhead =,;,<,8
-1,1,1 =,2.88O.
=,H,>22
-1,288 =,2.88O.
=;8,,88
b
-1,288 =,2.88O.
=;8,,88
0!+;
Aever a variance
=<88 ?
Efficiency variance
=,,<88O 1
'pending variance
=1,,88 ?
Production!volume
variance
Aever a variance
=+,208 1
'pending variance
Aever a variance
=2,,H0 1O
Efficiency variance
=2,202 1O
'pending variance
1ied
/anufacturing
9verhead =2+,108O
-Fump sum.
=28,888O
-Fump sum.
=28,888O =2,,888
c
#otal budgeted manufacturing overhead C =;8,,88 P =28,888 C =H8,,88
a
5udgeted 1/9G rate C 'tandard fied manufacturing overhead allocated @ 'tandard machine!hours allowed for
actual output achieved C =0<,088 @ <,288 C =1,
b
5udgeted hours allowed for actual output achieved must be derived from the output level variance before this
figure can be derived, or, since the fied manufacturing overhead rate is =28,888 @ 1,888 C =28, and the allocated
amount is =2,,888, the budgeted hours allowed for the actual output achieved must be 1,288 -=2,,888 =28..
c
1,288 -=28,888O @ 1,888O. C =2,,888
0!+<
=,,888 1O
Production!volume
variance
Aever a variance
=+,108 ?
'pending variance
8-33 -1;2; min.. F/;#./ .u&%/t", (-2a'#a$c/ a$a4"#"5
1. C
C
+,<88,888
H28,888
C ; hours per unit
5udgeted %FG allowed for /ay output C <<,888 units ; hrs.Lunit C ++8,888 hrs.
Allocated total /9G C ++8,888 #otal /9G rate per hour
C ++8,888 =1.28 C =+><,888
2, +, ,, ;. 'ee 'olution Ehibit 0!++
7ariable manuf. overhead rate per %FG C =8.2; P =8.+, C =8.;>
1ied manuf. overhead rate per %FG C =8.10 P =8.1; P =8.20 C =8.<1
1ied manuf. overhead budget for /ay C -=<,0,888 P =;,8,888 P =1,880,888. @ 12
C =2,1><,888 @ 12 C =10+,888
or,
1ied manuf. overhead budget for /ay C =;,,888 P =,;,888 P =0,,888 C =10+,888
?sing the format of Ehibit 0!; for variable manufacturing overhead and then fied
manufacturing overhead:
Actual variable manuf. overhead: =H;,888 P =111,888 C =10<,888
Actual fied manuf. overhead: =;1,888 P =;,,888 P =0,,888 C =10>,888
An overview of the ,!variance analysis using the block format of the tet is:
(-Va'#a$c/
A$a4"#"
S6/$&#$%
Va'#a$c/
E11#c#/$c4
Va'#a$c/
P'!&uct#!$-
V!u0/
Va'#a$c/
7ariable
/anufacturing
9verhead =1;8 ? =0,0;8 1 Aever a variance
1ied
/anufacturing
9verhead =<,888 ? Aever a variance =10,+88 1
0!+H
SOLUTION EXHIBIT 8-33
Va'#a./ Ma$u1actu'#$% O2/'3/a&
Actua C!"t"
I$cu''/&
91:
Actua I$6ut
7ua$t#t4
8 Bu&%/t/& Rat/
92:
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
=10<,888
-+1;,888 =8.;>.
=10;,0;8
-++8,888 =8.;>.
=1>,,H88
-++8,888 =8.;>.
=1>,,H88
F#;/& Ma$u1actu'#$% O2/'3/a&
Actua C!"t"
I$cu''/&
91:
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
92:
F/;#./ Bu&%/t<
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
=10>,888 =10+,888 =10+,888
-++8,888 =8.<1.
=281,+88
Alternate computation of the production volume variance:
C
( ) ( )
5udgeted hours allowed %enominator 5udgeted fied

for actual output achieved hours overhead rate
1 1

1 1
] ]
C ( )
+, <88, 888
++8,888
12
1 _

1
, ]
& = 8.<1
C -++8,888 D +88,888. & =8.<1 C =10,+88 1
0!+0
=1;8 ?
'pending variance
=0,0;8 1
Efficiency variance Aever a variance
=<,888 ?
'pending variance Aever a variance
=10,+88 1
Production!volume variance
8-3( -28 min.. D#'/ct Ma$u1actu'#$% La.!' a$& Va'#a./ Ma$u1actu'#$%
O2/'3/a& Va'#a$c/"
1. %irect /anufacturing Fabor variance analysis for 'arah 5ethRs Art 'upply *ompany
Actua C!"t"
I$cu''/&
Actua I$6ut 7ua$t#t4
Bu&%/t/& Rat/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut 7ua$t#t4
A!=/& 1!' Actua Out6ut
Bu&%/t/& P'#c/
2>,888 & 2.+ & 18., 2>,888 & 2.+ & 18 2>,888 & 2 & 18.8
=<>+,<08 =<<H,888 =;08,888

=2<,<08 ? =0H,888 ?
Price variance Efficiency variance
2. 7ariable /anufacturing 9verhead variance analysis for 'arah 5ethRs Art 'upply *ompany
Actua C!"t"
I$cu''/&
Actua I$6ut 7ua$t#t4
Bu&%/t/& Rat/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut 7ua$t#t4
A!=/& 1!' Actua Out6ut
Bu&%/t/& Rat/
2>,888 & 2.+ & 10.>; 2>,888 & 2.+ & 28.8 2>,888 & 2 & 28.8
=1,2<+,><; =1,++,,888 =1,1<8,888

=H8,8+; 1 =1H,,888 ?
'pending variance Efficiency variance
+. #he favorable spending variance for variable manufacturing overhead suggests that less costly
items were used, which could have a negative impact on labor efficiency. 5ut note that the
workers were paid a higher rate than budgeted, which, if it indicates the hiring of more )ualified
employees, should lead to favorable labor efficiency variances. /oreover, the price variance and
the spending variance are both much smaller than the efficiency variances. (t is clear therefore
that the efficiency variances are related to factors other than the cost of the labor or overhead.
,. (f the variable overhead consisted only of costs that were related to direct manufacturing
labor, then 'arah is correct6both the labor efficiency variance and the variable overhead
efficiency variance would reflect real cost overruns due to the inefficient use of labor. Gowever,
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.. (n 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. #he real effect on firm profitability will be lower, and will likely
be captured in a favorable spending variance for variable overhead.
0!+>
8-3) -28 min.. Act#2#t4-.a"/& c!"t#$%, .atc3-/2/ 2a'#a$c/ a$a4"#"
1. 'tatic budget number of crates C 5udgeted pairs shipped L 5udgeted pairs per crate
C 2;8,888L18
C 2;,888 crates
2. 1leible budget number of crates C Actual pairs shipped L 5udgeted pairs per crate
C 1H;,888L18
C 1H,;88 crates
+. Actual number of crates shipped C Actual pairs shipped L Actual pairs per bo
C 1H;,888L0
C 21,0H; crates
,. 'tatic budget number of hours C 'tatic budget number of crates & budgeted hours per bo
C 2;,888 & 1.1 C 2H,;88 hours
1ied overhead rate C 'tatic budget fied overhead L static budget number of hours
C =;;,888L2H,;88
C =2.88 per hour
;. 7ariable %irect 7ariance Analysis for PointeRs 1leet 1eet, (nc. for 2811
Actua Actua H!u'" Bu&%/t/& H!u'" A!=/& 1!'
Va'#a./ C!"t Bu&%/t/& Rat/ Actua Out6ut Bu&%/t/& Rat/
-21,0H; & 8.> & =2,. -21,0H; & 8.> & =22. -1H,;88 & 1.1 & =22.
=,H2,;88 =,++,12; =,2+,;88
=+>,+H; ? =>,<2; ?
Price variance Efficiency variance
<. 1ied 9verhead 7ariance Analysis for PointeRs 1leet 1eet, (nc. for 2811

Actua Stat#c Bu&%/t Bu&%/t/& H!u'" A!=/& 1!'
F#;/& O2/'3/a& F#;/& O2/'3/a& Actua Out6ut 8 Bu&%/t/& Rat/
-1H,;88 & 1.1 & =2.8.
=;2,;88 =;;,888 =+0,;88
=2,;88 1 =1<,;88 ?
'pending variance Production volume variance
0!,8
8-3* -+8 min.. Act#2#t4-.a"/& c!"t#$%, .atc3-/2/ 2a'#a$c/ a$a4"#"
1. 'tatic budget number of setups C 5udgeted books producedL 5udgeted books
per setup
C +88,888 @ ;88 C <88 setups
2. 1leible budget number of setups C Actual books produced L 5udgeted books
per setup
C +2,,888 @ ;88 C <,0 setups
+. Actual number of setups C Actual books produced L Actual books per setup
C +2,,888L,08 C <H; setups
,. 'tatic budget number of hours C 'tatic budget S of setups & 5udgeted hours
per setup
C <88 & 0 C ,,088 hours
1ied overhead rate C 'tatic budget fied overhead L 'tatic budget number of hours
C 18;,<88L,,088 C =22 per hour
;. 5udgeted direct variable cost of a setup
C 5udgeted variable cost per setup!hour & 5udgeted number of setup!hours
C =,8 & 0 C =+28.

5udgeted total cost of a setup
C 5udgeted direct variable cost P 1ied overhead rate & 5udgeted number of setup!hours

C =+28 P =22 & 0 C =,><.
'o, the charge of =,88 covers the budgeted incremental -i.e., variable. cost of a setup, but
not the budgeted full cost.
<. %irect 7ariable 7ariance Analysis for :o Aathan Publishing *ompany for 2812
Actua Actua H!u'" Sta$&a'& H!u'"
Va'#a./ C!"t Bu&%/t/& Rat/ Sta$&a'& Rat/
-<H; & 0.2 & =+>. -<H; & 0.2 & =,8. -<,0 & 0.8 & =,8.
=21;,0<; =221,,88 =28H,+<8
=;,;+; 1 =1,,8,8 ?
'pending variance Efficiency variance
0!,1
H. 1ied 'etup 9verhead 7ariance Analysis for :o Aathan Publishing *ompany for 2812
Actua Stat#c Bu&%/t Sta$&a'& H!u'"
F#;/& O2/'3/a& F#;/& O2/'3/a& Bu&%/t/& Rat/
-<,0 & 0.8 & =22.
=11>,888 =18;,<88 =11,,8,0
=1+,,88 ? =0,,,0 1
'pending variance Production!volume variance
0. Ke$ecting an order may have implications for future orders -i.e., professors would be
reluctant to order books from this publisher again.. :o Aathan should consider factors
such as prior history with the customer and potential future sales.
(f a book is relatively new, :o Aathan might consider running a full batch and holding the
etra books in case of a second special order or $ust hold the etra books until net
semester.
(f the special order comes at heavy volume times, :o Aathan should look at the
opportunity cost of filling it, i.e., accepting the order may interfere with or delay the
printing of other books.
0!,2
8-3+ -+; min.. P'!&uct#!$-V!u0/ Va'#a$c/ A$a4"#" a$& Sa/" V!u0/ Va'#a$c/5
1. and 2. 1ied 9verhead 7ariance Analysis for %awn 1loral *reations, (nc. for 1ebruary
Actua F#;/& Stat#c Bu&%/t Sta$&a'& H!u'"
O2/'3/a& F#;/& O2/'3/a& 8 Bu&%/t/& Rat/
-<88 & 1.; & =<O.
=>,288 =>,888 =;,,88
=288 ? =+,<88 ?
'pending variance Production!volume variance
O fied overhead rate C -budgeted fied overhead.L-budgeted %F hours at capacity.
C =>,888L-1888 1.; hours.
C =>,888L1,;88 hours
C =<Lhour
+. An unfavorable production!volume variance measures the cost of unused capacity. Production
at capacity would result in a production!volume variance of 8 since the fied overhead rate is
based upon epected hours at capacity production. Gowever, the eistence of an unfavorable
volume variance does not necessarily imply that management is doing a poor $ob or incurring
unnecessary costs. ?sing the suggestions in the problem, two reasons can be identified.
a. 1or most products, demand varies from month to month while commitment to the
factors that determine capacity, e.g. si3e of workshop or supervisory staff, tends to
remain relatively constant. (f %awn wants to meet demand in high demand months, it
will have ecess capacity in low demand months. (n addition, forecasts of future
demand contain uncertainty due to unknown future factors. Gaving some ecess
capacity would allow %awn to produce enough to cover peak demand as well as slack
to deal with unepected demand surges in non!peak months.
b. 5asic economics provides a demand curve that shows a tradeoff between price
charged and )uantity demanded. Potentially, %awn 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.
(n addition, the unfavorable production!volume variance may not represent a feasible cost
savings associated with lower capacity. Even if %awn could shift to lower fied costs by
lowering capacity, the fied cost may behave as a step function. (f so, fied costs would
decrease in fied amounts associated with a range of production capacity, not a specific
production volume. #he production!volume variance would only accurately identify
potential cost savings if the fied cost function is continuous, not discrete.
0!,+
,. #he static!budget operating income for 1ebruary is:
Kevenues =;; & 1,888 =;;,888
7ariable costs =2; & 1,888 2;,888
1ied overhead costs >,888
'tatic!budget operating income =21,888
#he fleible!budget operating income for 1ebruary is:
Kevenues =;; & <88 =++,888
7ariable costs =2; & <88 1;,888
1ied overhead costs >,888
1leible!budget operating income = >,888
#he sales!volume variance represents the difference between the static!budget operating income
and the fleible!budget operating income:
'tatic!budget operating income =21,888
1leible!budget operating income >,888
'ales!volume variance =12,888 ?
E)uivalently, the sales!volume variance captures the fact that when %awn sells <88 units instead
of the budgeted 1,888, only the revenue and the variable costs are affected. 1ied costs remain
unchanged. #herefore, the shortfall in profit is e)ual to the budgeted contribution margin per
unit times the shortfall in output relative to budget.
C D &
D -=;; D =2;. & ,88 C =+8 & ,88 C =12,888 ?
(n contrast, we computed in re)uirement 2 that the production!volume variance was =+,<88?.
#his captures only the portion of the budgeted fied overhead epected to be unabsorbed because
of the ,88!unit shortfall. #o compare it to the sales!volume variance, consider the following:
5udgeted selling price = ;;
5udgeted variable cost per unit =2;
5udgeted fied cost per unit -=>,888 @ 1,888. >
5udgeted cost per unit +,
5udgeted profit per unit = 21
9perating income based on budgeted profit per unit
=21 per unit & <88 units =12,<88
0!,,
#he =+,<88 ? production!volume variance eplains the difference between operating income
based on the budgeted profit per unit and the fleible!budget operating income:
9perating income based on budgeted profit per unit =12,<88
Production!volume variance +,<88 ?
1leible!budget operating income = >,888
'ince the sales!volume variance represents the difference between the static! and fleible!budget
operating incomes, the difference between the sales!volume and production!volume variances,
which is referred to as the operating!income volume variance is:
9perating!income volume variance
C 'ales!volume variance D Production!volume variance
C 'tatic!budget operating income D 9perating income based on budgeted profit per unit
C =21,888 ? D =12,<88 ? C =0,,88 ?.
#he operating!income volume variance eplains the difference between the static!budget
operating income and the budgeted operating income for the units actually sold. #he static!
budget operating income is =21,888 and the budgeted operating income for <88 units would have
been =12,<88 -=21 operating income per unit

<88 units.. #he difference, =0,,88 ?, is the


operating!income volume variance, i.e., the ,88 unit drop in actual volume relative to budgeted
volume would have caused an epected drop of =0,,88 in operating income, at the budgeted
operating income of =21 per unit. #he operating!income volume variance assumes that =;8,888
in fied cost -=> per unit

,88 units. would be saved if production and sales volumes decreased


by ,88 units.
0!,;
8-38 -+8,8 min.. C!06'/3/$"#2/ '/2#/= !1 C3a6t/'" + a$& 8, =!'?#$% .ac?=a'& 1'!0
%#2/$ 2a'#a$c/"5
1. 'olution Ehibit 0!+0 outlines the *hapter H and 0 framework underlying this solution.
a. Pounds of direct materials purchased C =1H<,888 @ =1.18 C 1<8,888 pounds
b. Pounds of ecess direct materials used C =<>,888 @ =11.;8 C <,888 pounds
c. 7ariable manufacturing overhead spending variance C =18,+;8 D =10,888 C =H,<;8 1
d. 'tandard direct manufacturing labor rate C =088,888 @ ,8,888 hours C =28 per hour
Actual direct manufacturing labor rate C =28 P =8.;8 C =28.;8
Actual direct manufacturing labor!hours C =;22,H;8 @ =28.;8
C 2;,;88 hours
e. 'tandard variable manufacturing overhead rate C =,08,888 @ ,8,888
C =12 per direct manuf. labor!hour
7ariable manuf. overhead efficiency variance of =10,888 @ =12 C 1,;88 ecess hours
Actual hours D Ecess hours C 'tandard hours allowed for units produced
2;,;88 D 1,;88 C 2,,888 hours
f. 5udgeted fied manufacturing overhead rate C =<,8,888 @ ,8,888 hours
C =1< per direct manuf. labor!hour
1ied manufacturing overhead allocated C =1< 2,,888 hours C =+0,,888
Production!volume variance C =<,8,888 D =+0,,888 C =2;<,888 ?
2. #he control of variable manufacturing overhead re)uires the identification of the cost drivers
for such items as energy, supplies, and repairs. *ontrol often entails monitoring nonfinancial
measures that affect each cost item, one by one. Eamples are kilowatts used, )uantities of
lubricants used, and repair parts and hours used. #he most convincing way to discover why
overhead performance did not agree with a budget is to investigate possible causes, line item by
line item.
(ndividual fied overhead items are not usually affected very much by day!to!day
control. (nstead, they are controlled periodically through planning decisions and budgeting
procedures that may sometimes have planning hori3ons covering si months or a year -for
eample, management salaries. and sometimes covering many years -for eample, long!term
leases and depreciation on plant and e)uipment..
0!,<
SOLUTION EXHIBIT 8-38
Actua C!"t"
I$cu''/&
9Actua I$6ut
7ua$t#t4
Actua Rat/:
Actua I$6ut 7ua$t#t4
Bu&%/t/& Rat/
Pu'c3a"/" U"a%/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
Bu&%/t/& Rat/
%irect
/aterials
1<8,888 =18.,8
=1,<<,,888
1<8,888 =11.;8
=1,0,8,888
><,888 =11.;8
=1,18,,888
+ +8,888 =11.;8
=1,8+;,888
%irect
/anuf.
Fabor
8.0; +8,888 =28.;8
=;22,H;8
8.0; +8,888 =28
=;18,888
8.08 +8,888 =28
=,08,888
Actua C!"t"
I$cu''/&
Actua I$6ut
7ua$t#t4
Actua Rat/
Actua I$6ut
7ua$t#t4
Bu&%/t/& Rat/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
Bu&%/t/& Rat/
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
Bu&%/t/& Rat/
7ariable
/9G
8.0; +8,888 =11.H8
=2>0,+;8
8.0; +8,888 =12
=+8<,888
8.08 +8,888 =12
=200,888
8.08 +8,888 =12
=200,888
Actua C!"t"
I$cu''/&
91:
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
92:
F/;#./ Bu&%/t<
Sa0/ Bu&%/t/&
Lu06 Su0
9a" #$ Stat#c Bu&%/t:
R/%a'&/"" !1
Out6ut L/2/
93:
A!cat/&<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Bu&%/t/& Rat/
9(:
1ied
/9G =;>H,,<8 =<,8,888
8.08 & ;8,888 & =1<
=<,8,888
8.08 +8,888 & =1<
=+0,,888
0!,H
=1H<,888 1
Price variance
=<>,888 ?
Efficiency variance
=12,H;8 ?
Price variance
=+8,888 ?
Efficiency variance
=,2,H;8 ?
1leible!budget variance
=H,<;8 1
'pending variance
=10,888 ?
Efficiency
variance
Aever a variance
=18,+;8 ?
1leible!budget variance Aever a variance
=2;<,888 ?
=,2,;,8 1
1leible!budget variance
=2;<,888 ?
Production volume variance
Aever a variance
=,2,;,8 1
'pending variance
volume variance
8-3, -+8;8 min.. R/2#/= !1 C3a6t/'" + a$& 8, 3-2a'#a$c/ a$a4"#"5
1. #otal standard production costs are based on H,088 units of output.
%irect materials, H,088 =1;.88
H,088 + lbs. =;.88 -or 2+,,88 lbs. =;.88. = 11H,888
%irect manufacturing labor, H,088 =H;.88
H,088 ; hrs. =1;.88 -or +>,888 hrs. =1;.88. ;0;,888
/anufacturing overhead:
7ariable, H,088 =+8.88 -or +>,888 hrs. =<.88. 2+,,888
1ied, H,088 =,8.88 -or +>,888 hrs. =0.88. +12,888
#otal =1,2,0,888
#he following is for later use:
1ied manufacturing overhead, a lump!sum budget = +28,888
O
O
1ied manufacturing overhead rate C
=0.88 C
5udget
,8,888 hours
5udget C ,8,888 hours =0.88 C =+28,888
2. 'olution Ehibit 0!+> presents a columnar presentation of the variances. An overview of
the +!variance analysis using the block format of the tet is:
3-Va'#a$c/
A$a4"#"
S6/$&#$%
Va'#a$c/
E11#c#/$c4
Va'#a$c/
P'!&uct#!$
V!u0/ Va'#a$c/
#otal /anufacturing
9verhead
=+>,,88 ? =<,<88 ? =0,888 ?
0!,0
SOLUTION EXHIBIT 8-3,
Actua C!"t"
I$cu''/&<
Actua I$6ut
7ua$t#t4
Actua I$6ut 7ua$t#t4

Bu&%/t/& P'#c/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
8 Actua Rat/ Pu'c3a"/" U"a%/ 8 Bu&%/t/& P'#c/
%irect
/aterials
-2;,888 =;.28.
=1+8,888
-2;,888 =;.88.
=12;,888
-2+,188 =;.88.
=11;,;88
-2+,,88 =;.88.
=11H,888
=;,888 ? =1,;88 1
a. Price variance b. Efficiency variance
%irect
/anuf.
Fabor
-,8,188 =1,.<8.
=;0;,,<8
-,8,188 =1;.88.
=<81,;88
-+>,888 =1;.88.
=;0;,888
=1<,8,8 1 =1<,;88 ?
c. Price variance d. Efficiency variance
Actua
C!"t"
I$cu''/&
Actua I$6ut
7ua$t#t4
Bu&%/t/& Rat/
F/;#./ Bu&%/t<
Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
Bu&%/t/& Rat/
A!cat/&<
9Bu&%/t/& I$6ut
7ua$t#t4 A!=/&
1!' Actua Out6ut
Bu&%/t/& Rat/:
7ariable
/anuf.
9verhead -not given.
-,8,188 =<.88.
=2,8,<88
-+>,888 =<.88.
=2+,,888
-+>,888 =<.88.
=2+,,888
=<,<88 ?
Efficiency variance Aever a variance
1ied
/anuf.
9verhead -not given. =+28,888 =+28,888
-+>,888 =0.88.
=+12,888
=0,888 ?
O
Aever a variance Prodn. volume variance
#otal
/anuf.
9verhead
-given.
=<88,888
-=2,8,<88 P =+28,888.
=;<8,<88
-=2+,,888 P =+28,888.
=;;,,888
-=2+,,888 P =+12,888.
=;,<,888
=+>,,88 ? =<,<88 ? =0,888 ?
e. 'pending variance f. Efficiency variance g. Prodn. volume variance
O
%enominator level in hours ,8,888
Production volume in standard hours allowed +>,888
Production!volume variance 1,888 hours =0.88 C =0,888 ?
0!,>
8-(- -28 minutes. N!$-1#$a$c#a 2a'#a$c/"
1. 7ariance Analysis of (nspection Gours for 'upreme *anine Products for /ay
Actua P!u$&" Sta$&a'& P!u$&" I$"6/ct/&
Actua H!u'" I$"6/ct/&EBu&%/t/& 1!' Actua Out6ut EBu&%/t/&
F!' I$"6/ct#!$" P!u$&" 6/' 3!u' P!u$&" 6/' 3!u'

2HH,;88lbsL1,;88 lbsLhr -+,888,888 8.1.lbsL-1,;88 lbsLhr.
21; hours 10; hours 288 hours
+8 hours ? 1; hours 1
Efficiency 7ariance Tuantity 7ariance
2. 7ariance Analysis of Pounds 1ailing (nspection for 'upreme *anine Products for /ay
Actua 6!u$&" Sta$&a'& P!u$&" I$"6/ct/&
Actua P!u$&" I$"6/ct/& Bu&%/t/& 1!' Actua Out6ut Bu&%/t/&
Fa##$% I$"6/ct#!$" I$"6/ct#!$ Fa#u'/ Rat/ I$"6/ct#!$ Fa#u'/ Rat/

-2HH,;88 lbs .8<. -+,888,888 .1 .8<.
1;,<;8 lbs 1<,<;8 lbs 10,888 lbs
1,888 lbs 1 1,+;8 lbs 1
Tuality 7ariance Tuantity 7ariance
0!;8
0.,1-+8 D ,8 minutes. O2/'3/a& 2a'#a$c/" a$& "a/" 2!u0/ 2a'#a$c/
1. Va'#a./ !2/'3/a& 2a'#a$c/"
Actua Actua H!u'" Sta$&a'& H!u'"
Va'#a./ O2/'3/a& Bu&%/t/& Rat/ Sta$&a'& Rat/
-,,8,888 & =1.<8. ->88,888 & .; & =1.<8.
=<>>,<88 =H8,,888 =H28,888
=,,,88 1 =1<,888 1
'pending variance Efficiency variance
F#;/& !2/'3/a& 2a'#a$c/"
Actua Stat#c Bu&%/t Sta$&a'& H!u'"
F#;/& O2/'3/a& F#;/& O2/'3/a& Bu&%/t/& Rat/
->88,888 .; & =1.1H;O.
=;81,>88 =,H8,888 =;20,H;8
=+1,>88 ? =;0,H;8 1
'pending variance Production!volume variance
O19G rate is =,H8,888 L ,88,888 std hours C =1.1H; per hour
2.
Actua
F/;#./-
Bu&%/t F/;#./
Sa/"-
V!u0/ Stat#c
'/"ut" Va'#a$c/" Bu&%/t Va'#a$c/" Bu&%/t
91: 92: D 91: F 93: 93: 9(: D 93:-9): 9):
?nits sold >88,888 >88,888 088,888
?nit price = < = ; = ;
Kevenues =;,,88,888 =>88,888 1 =,,;88,888 =;88,888 1 =,,888,888
7ariable costs
%irect materials 1,808,888 8 1,808,888 128,888 ? ><8,888
%irect labor 1,<28,888 8 1,<28,888 108,888 ? 1,,,8,888
7ariable overhead <>>,<88 28,,88 1 H28,888 08,888 ? <,8,888
#otal variable costs +,+>>,<88 28,,88 1 +,,28,888 +08,888 ? +,8,8,888
*ontribution margin 2,888,,88 >28,,88 1 1,808,888 128,888 1 ><8,888
1ied manufacturing
costs ;81,>88 +1,>88 ? ,H8,888 8 ,H8,888
9perating income =1,,>0,;88 =000,;88 1 = <18,888 =128,888 1 = ,>8,888
0!;1
+. 5udgeted cost per shopping bag:
%irect materials per bag -given. =1.28
%irect labor per bag -given. 1.08
7ariable overhead -=1.< per hour .; /G. .08
1ied overhead -=1.1H; per hour .; /G. .;0H;
#otal =,.+0H;
5udgeted sales revenue
>88,888 units =; =,,;88,888
5udgeted cost of goods sold
>88,888 =,.+0H; +,>,0,H;8
5udgeted operating income = ;;1,2;8
,. 5udgeted operating income -from S+. = ;;1,2;8
Add: favorable volume variance -from S1. ;0,H;8
1leible budget operating income <18,888
Add: 1avorable fleible budget variance 000,;88
Actual operating income =1,,>0,;88
;. 9perating income volume variance:
5udgeted operating income for actual output D static budget operating income
C =;;1,2;8 D =,>8,888 C =<1,2;8 1
'ales volume variance C =128,888 1
C production volume variance P operating income volume variance
C =;0,H;8 P = <1,2;8 C =128,888 1
0!;2
C!a.!'at#2/ L/a'$#$% P'!./0
8-(2 -,8D;8 minutes. O2/'3/a& 2a'#a$c/", /t3#c"
1. a. Aevada plant:
Epected output in units ,,888,888
%irect labor hours per unit .2;
#otal budgeted labor hours 1,888,888
5udgeted fied 9G rate C =2,;88,888 L 1,888,888 %FG C =2.;8 per %FG
9hio plant:
Epected output in units ,,288,888
%irect labor hours per unit .2;
#otal budgeted labor hours 1,8;8,888
5udgeted fied 9G rate C =2,+18,888 L 1,8;8,888 %FG C =2.28 per %FG
b. Allocation of common fied costs:
#o Aevada: =+,1;8,888

2L+ C =2,188,888
#o 9hio: =+,1;8,888

1L+ C =1,8;8,888
N/2a&a 6a$t<
5udgeted fied 9G rate C -=2,;88,888 P =2,188,888. L 1,888,888 %FG C =,.<8 per %FG
O3#! 6a$t<
5udgeted fied 9G rate C -=2,+18,888 P =1,8;8,888.L 1,8;8,888 %FG C =+.28 per %FG
2. 7ariable overhead variances:
N/2a&a 6a$t<
Actua Actua H!u'" Bu&%/t/& I$6ut A!=/& 1!'
Va'#a./ O2/'3/a& Bu&%/t/& Rat/ Actua Out6ut Bu&%/t/& Rat/
-1,81,,888 & =+.28. -1,81,,888 & =+.2;. -+,>88,888 & .2; & =+.2;.
=+,2,,,088 =+,2>;,;88 =+,1<0,H;8
=;8,H88 1 =12<,H;8 ?
'pending variance Efficiency variance
0!;+
O3#! 6a$t<
Actua Actua H!u'" Bu&%/t/& I$6ut A!=/& 1!'
Va'#a./ O2/'3/a& Bu&%/t/& 'at/ Actua Out6ut Bu&%/t/& Rat/
-1,210,888 & =+.18. -1,210,888 & =+. -,,+;8,888 & .2; & =+.
=+,HH;,088 =+,<;,,888 =+,2<2,;88
=121,088 ? =+>1,;88 ?
'pending variance Efficiency variance
+. 1ied overhead variances
a. Ecluding the allocated common costs
N/2a&a 6a$t<
Actua Stat#c Bu&%/t Bu&%/t/& I$6ut A!=/& 1!'
F#;/& O2/'3/a& F#;/& O2/'3/a& Actua Out6ut Bu&%/t/& Rat/
-+,>88,888 & .2; & =2.;8.
=2,;28,888 =2,;88,888 =2,,+H,;88
=28,888 ? =<2,;88 ?
'pending variance Production!volume variance
O3#! 6a$t<
Actua Stat#c Bu&%/t Bu&%/t/& I$6ut A!=/& 1!'
F#;/& O2/'3/a& F#;/& O2/'3/a& Actua Out6ut Bu&%/t/& Rat/
-,,+;8,888 & .2; & =2.28.
=2,,88,888 =2,+18,888 =2,+>2,;88
=>8,888 ? =02,;88 1
'pending variance Production!volume variance
0!;,
b. (ncluding allocated common costs
N/2a&a 6a$t<
Actua Stat#c Bu&%/t Bu&%/t/& I$6ut A!=/& 1!'
F#;/& O2/'3/a& F#;/& O2/'3/a& Actua Out6ut Bu&%/t/& Rat/
=2,;28,888 P -2L+ &=+,12<,888. -=2,;88,888P=2,188,888. -+,>88,888 & .2; & =,.<8.
=,,<8,,888 =,,<88,888 =,,,0;,888
=,,888 ? =11;,888 ?
'pending variance Production!volume variance
O3#! 6a$t<
Actua Stat#c Bu&%/t Bu&%/t/& I$6ut A!=/& 1!'
F#;/& O2/'3/a& F#;/& O2/'3/a& Actua Out6ut Bu&%/t/& Rat/
=2,,88,888 P -1L+ &=+,12<,888. -=2,+18,888P=1,8;8,888. -,,+;8,888 & .2; & =+.28.
=+,,,2,888 =+,+<8,888 =+,,08,888
=02,888 ? =128,888 1
'pending variance Production!volume variance
,. :ack :onesRs attempt did not fully work. Even though he tried to allocate a significantly
larger amount of common cost to the Aevada plant than to the 9hio plant, the cost becomes
part of the fied overhead rate and thus will only cause a large unfavorable spending
variance for the Aevada plant if the cost itself is much larger than epected. 'ince the
actual common costs were lower, the result was actually to lower AevadaRs unfavorable
spending variance. Also, the spending variance for the 9hio plant is already larger than
that of the Aevada plant, and that carries over even adding the common fied costs to both
plants. #hat said, the inclusion of the common fied cost does eacerbate the impact of
the underproduction by 9hio relative to budget -via the higher unfavorable production
volume variance., while increasing the favorable volume variance for 9hio.
;. *ommon fied costs should not be allocated to units that are being evaluated for
performance because common fied costs are not controllable by those units. #hus, the
units should not be responsible for such costs.
<. :ack :onesRs behavior is not ethical. Ge 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.
0!;;