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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$/ 2-12: Actua
F/;#./
Bu&%/t
Stat#c
Bu&%/t
9utputs units -number of assembled units. 21< 21< 288
Gours of assembly time ,11 ,+2
c
,88
a
Assembly hours per unit 1.>8
b
2.88 2.88
7ariable mfg. overhead cost per hour of assembly time = +1.88
d
= +8.88 = +8.88
7ariable mfg. overhead costs =12,H,1 =12,><8
e
=12,888
f
1ied mfg. overhead costs =28,;;8 =1>,288 =1>,288
1ied mfg. overhead costs per hour of assembly time = ;8.88
g
= ,0.88
h
a
288 units
=1.;8 C =18,;88
e
'tatic budget delivery hours C 18,888 units 8.H8 hoursLunit C H,888 hoursN
1ied overhead rate C 1ied overhead costs 'tatic budget delivery hours C =+;,888 H,888 hours C =; per hour
VARIABLE OVERHEAD
Actua C!"t"
I$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$t#t4 A!=/& Bu&%/t/&
1!' Actua Out6ut Rat/
9.: 9a: 9c:
1;,888
=<.88 1,,0;8
=<.88
mach. hrs. per mach. hr. mach. hrs. per mach. hr.
A8,,*2) A,-,--- A8,,1--
=+H; 1 A,-- U 9&:
'pending variance Efficiency variance
A)2) U 9/:
1leible!budget variance
a. 15,000 machine-hours
A15*-B 9c:
mach. hrs. per mach. hr.
A3-,3+) A28,8-- A23,+*-
=1,;H; ? A),-(- U 9&:
'pending variance P'!&uct#!$-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
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
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!;;