Select solutions to Chapter 11:

11-16 The conceptual problem in applying fixed manufacturing overhead as a product cost is that this procedure treats
fixed overhead as though it were a variable cost. Fixed overhead is applied as a product cost by multiplying the
fixed overhead rate by the standard allowed amount of the cost driver used to apply fixed overhead. For example,
fixed overhead might be applied to Work-in-Process Inventory by multiplying the fixed-overhead rate by the standard
allowed machine hours. As the number of standard allowed machine hours increases, the amount of fixed overhead
applied increases proportionately. This situation is conceptually unappealing, because fixed overhead, although it is
a fixed cost, appears variable in the way that it is applied to work in process.
EXERCISE 11-26 (40 MINUTES)

1. Variable overhead variances:

VARIABLE-OVERHEAD SPENDING AND EFFICIENCY VARIANCES

(1) (2) (3) (4) †
VARIABLE OVERHEAD
ACTUAL VARIABLE FLEXIBLE BUDGET: APPLIED TO
OVERHEAD VARIABLE OVERHEAD WORK-IN-PROCESS
Standard Standard
Actual Actual Actual Standard Allowed Standard Allowed Standard
Hours x Rate Hours x Rate x Rate x Rate
Hours Hours
(AH) (AVR) (AH) (SVR) (SH) (SVR) (SH) (SVR)
50,000 x $19.20 50,000 x $18.00 40,000 x $18.00 40,000 x $18.00
hours per hours per hours per hours per
hour* hour hour hour
$960,000 $900,000 $720,000 $720,000

$60,000 Unfavorable actual $180,000 Unfavorable

variable overheadcost $960,000
*Actual variable-overhead rate (AVR)    $19.20per hour
Variable-overhead actualhours
Variable-overhead 50,000
No difference
† spending variance efficiency variance
Column  (4) is not used to compute the variances. It is included to point out that the flexible-budget amount
for variable overhead, $720,000, is the amount that will be applied to Work-in-Process Inventory for product-
costing purposes.
EXERCISE 11-26 (CONTINUED)

2. Fixed-overhead variances:

FIXED-OVERHEAD BUDGET AND VOLUME VARIANCES

(1) (2) (3)

ACTUAL BUDGETED FIXED OVERHEAD
FIXED FIXED APPLIED TO
OVERHEAD OVERHEAD WORK IN PROCESS

Standard
Standard Fixed-
Allowed  Overhead
Hours Rate
40,000 $6.00 per

hours hour*

$291,000 $300,000    $240,000

$9,000 Favorable $60,000 Unfavorable †

Fixed-overhead Fixed-overhead
budget variance volume variance

$300,000
*Fixed overhead rate = $6.00 per hour = (25,000)(2hrs per unit)

†
Some accountants would designate a positive volume variance as "unfavorable."
EXERCISE 11-31 (45 MINUTES)

$ 25,000  
Budgeted fixed overhead...........................................................................
$ 32,500 a
Actual fixed overhead ...............................................................................
  12,500
Budgeted production in units......................................................................
  12,000 c
Actual production in units ..........................................................................
      4 hours
Standard machine hours per unit of output.................................................
     $8.00
Standard variable-overhead rate per machine hour.....................................
     $9.00 b
Actual variable-overhead rate per machine hour.........................................
      3 d
Actual machine hours per unit of output......................................................
$ 36,000  U
Variable-overhead spending variance ........................................................
$ 96,000  F
Variable-overhead efficiency variance........................................................
$ 7,500  U
Fixed-overhead budget variance................................................................
$ 1,000 g U*
Fixed-overhead variance............................................................................
Total actual overhead................................................................................
$356,500
$409,000 e
Total budgeted overhead (flexible budget)..................................................
$425,000 f
Total budgeted overhead (static budget).....................................................
Total applied overhead...............................................................................
$408,000

*Some accountants would designate a positive fixed-overhead volume variance as

unfavorable.
EXERCISE 11-31 (CONTINUED)

Explanatory Notes:

a. Fixed-overhead budget = actual fixed overhead – budgeted fixed

variance overhead
$7,500 U = X – $25,000
X = $32,500 = actual fixed overhead

b. Total actual = actual variable overhead + actual fixed overhead

overhead
$356,500 = X + $32,500
X = $324,000 = actual variable overhead
Variable-overhead spending = actual variable overhead – (AH  SR)
variance
$36,000 U = $324,000 – (AH  $8)
$8 AH = $288,000
AH = 36,000
Actual variable-overhead actual variable overhead
rate per machine hour = actual hours
$324,000
 $9 per hour
= 36,000

Exercise 11-31 (continued)

budgeted fixed overhead

c. Fixed-overhead rate = budgeted machine hours
$25,000
= (12,500units)(4 hrs. per unit)

= $.50 per hr.

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

Total applied overhead = total standard hours  total standard overhead rate
$408,000 = X  $8.50
X = 48,000 = total standard hrs.
total standard hrs.
Actual production = standard hrs. per unit
 48,000
 12,000units
= 4

total actual machine hrs.

d. Actual machine hrs. per unit of = actual production
output
36,000hrs.
 3 hrs. per unit
= 12,000units

e. Total budgeted overhead (flexible budget)

= budgeted fixed overhead + (SVR  SH)
= $25,000 + ($8.00  12,000 units  4 hrs. per
unit)
= $409,000
EXERCISE 11-31 (CONTINUED)

f. Total budgeted overhead (static budget)

toals ndarbudget standrhs.

=

   
overhad teproductin perunit 
= ($8.50)(12,500)(4)
= $425,000

g. Fixed overhead volume variance

= budgeted fixed overhead – applied fixed overhead
= $25,000 – ($.50)(12,000  4)
= $1,000 U*

* Some accountants would designate a positive volume variance as "unfavorable."

PROBLEM 11-45 (45 MINUTES)

Missing amounts for case A:

2. $21.00 a per hour

3. $28.50 b per hour

6. $294,150 c

9. $7,500 U d
10. $9,000 F e

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

12. $24,150 underapplied g

13. $135,000 overapplied h

16. 6,000 units i

19. $270,000 j

20. $756,000 k

Explanatory notes for case A:

a
Budgeted direct-labor hours
= budgeted production  standard direct-labor hours per unit

= 5,000 units  6 hrs. = 30,000 hrs.

budgeted fixed overhead
Fixed overhead rate = budgeted direct-labor hours
$630,000
 $21per hr.
= 30,000hrs.
Problem 11-45 (continued)

b
Total standard overhead rate
= variable overhead rate + fixed overhead rate
= $7.50 + $21.00 = $28.50
c
Variable-overhead spending variance
= actual variable overhead – (actual direct-labor
hours  standard variable overhead rate)
$16,650 U = actual variable overhead – (37,000  $7.50)
Actual variable overhead = $294,150
d
Variable-overhead efficiency variance
= SVR(AH – SH)
= $7.50(37,000 – 36,000)
= $7,500 U
e
Fixed-overhead budget variance
= actual fixed overhead – budgeted fixed overhead
= $621,000 – $630,000
= $9,000 F

f
Fixed-overhead volume variance
= budgeted fixed overhead – applied fixed overhead
= $630,000 – (36,000  $21)
= $126,000 F

(Some accountants would designate a negative volume

variance as “favorable.”)
g
Underapplied variable overhead
= actual variable overhead – applied variable overhead
= $294,150 – (36,000  $7.50)
= $24,150 underapplied
PROBLEM 11-45 (CONTINUED)
h
Overapplied fixed overhead
= actual fixed overhead – applied fixed overhead
= $621,000 – (36,000  $21)
= $135,000 overapplied

standard allowed direct -labor hours

i
Actual production = standard hrs. per unit

36,000
 6,000units
= 6

j
Applied variable overhead
= SH  SVR
= 36,000  $7.50
= $270,000
k
Applied fixed overhead
= SH  fixed overhead rate
= 36,000  $21
= $756,000
PROBLEM 11-47 (60 MINUTES)
budgeted machine hours 30,000
1. Standard machine hours per unit = budgeted production = 6,000

= 5 hours per unit

$540,000  $166,000
2. Actual cost of direct material per unit = 6,200units

= $113.87 per unit (rounded)

$504,000 $156,000
3. Standard direct-material cost per machine = 30,000
hour
= $22 per machine
hour

$546,000 $468,000
 $169.00per unit
4. Standard direct-labor cost per = 6,000units
unit

5. Standard variable-overhead rate per machine =

hour
$1,294,400- $1,254,000 $40,400

32,000- 30,000 2,000hours = $20.20 per machine hour

6. First, continue using the high-low method to determine total budgeted fixed
overhead as follows:

Total budgeted overhead at 30,000 hours........................................ $1,254,000

Total budgeted variable overhead at 30,000 hours (30,000  $20.20)   606,000
Total budgeted fixed overhead......................................................... $ 648,000

The key is to realize that fixed overhead includes not only insurance and
depreciation, but also the fixed component of the semivariable-overhead costs
(supervision and inspection). (Note that maintenance and supplies are true
variable costs.)

Now, we can compute the standard fixed-overhead rate per machine hour, as
follows:

$648,000
Standard fixed-overhead rate per machine hour = 30,000hours

= $21.60 per hour

PROBLEM 11-47 (CONTINUED)

7. First, compute actual variable overhead as follows:

Total actual overhead...................................................................... $1,266,000

Total fixed overhead (given)............................................................   648,000
Total variable overhead................................................................... $ 618,000

Variable-overhead spending variance = Actual variable overhead – (AH  SVR)

= $618,000 – (32,000  $20.20)
= $28,400 Favorable

8. Variable-overhead efficiency
variance
= (AH  SVR) – (SH  SVR)
= (32,000  $20.20) – (31,000*  $20.20) = $20,200 Unfavorable

*Standard allowed machine hours = 6,200 units  5 hours per unit

9. Fixed-overhead budget variance

= actual fixed overhead – budgeted fixed overhead
= $648,000 – $648,000 = 0

10. Fixed-overhead volume variance

= budgeted fixed overhead – applied fixed overhead
= $648,000 – (31,000  $21.60) = $21,600 F*

* Some accountants would designate a negative volume variance as "favorable."

PROBLEM 11-47 (CONTINUED)

11. Flexible budget formula, using the high-low method of cost estimation:
$3,080,000 $2,928,000
Variable cost per machine hour =  $76 per hour
32,000  30,000

Total budgeted cost at 30,000 hours................................................ $2,928,000

Total variable cost at 30,000 hours (30,000  $76)...........................  2,280,000
Fixed overhead cost....................................................................... $   648,000

Thus, the flexible budget formula is as follows:

Total production cost = $76 X + $648,000

where X = number of machine hours allowed.

Therefore, the total budgeted production cost for 6,050 units is:

($76  30,250*) + $648,000 = $2,947,000

*Standard allowed machine hours = 6,050 units  5 hours per unit

PROBLEM 11-48 (40 MINUTES)

1. a. Three weaknesses in Albuquerque Wood Crafts, Inc.'s monthly Bookcase

Production Performance Report are as follows:

 The report is based on a static budget. Management should use a flexible budget
that compares the same level of activity, calculating variances between the actual
results and the flexible budget. Also, management might consider implementing an
activity-based costing system.

 Costs over which the supervisors have no control, such as fixed production costs
and allocated overhead costs, are included in the report.

 The report uses a single plant-wide rate to allocate fixed production costs. Square
footage may not drive the fixed production costs, and there may be a more
appropriate base such as number of units produced. It may be more appropriate to
use different cost drivers for each of the different product lines.

b. Due to Sara McKinley's remarks Steve Clark is likely to:

 Feel tense and apprehensive. The timing of McKinley's remarks, immediately

before the meeting, without an opportunity for discussion and feedback, will leave
Clark feeling tense and probably inattentive throughout the meeting.

 Be frustrated and confused by the conflicting signals of the report and what is
occurring in his department and in the market. This confusion about the
department's results and, consequently, the uncertainty of his job will lead to stress
which may negatively affect his performance.

2. a. To improve the monthly performance report, management should:

 Use a flexible budget.

 Hold supervisors responsible for only those costs over which they have control by
using a contribution approach.

 Include footnotes to make the report more understandable.

PROBLEM 11-48 (CONTINUED)

A revised monthly performance report based on a flexible budget is as follows:

ALBUQUERQUE WOOD CRAFTS, INC.

BOOKCASE PRODUCTION PERFORMANCE REPORT FOR NOVEMBER

Flexible
Actual Budget Variance
Units.............................................................    3,000     3,000
Revenue........................................................ $483,000 $495,000 a $12,000 U  
Variable production costs:..............................
Direct material........................................... $ 69,300 $ 72,000 b $  2,700 F   
Direct labor................................................ 54,900 54,000 c 900 U  
Machine time............................................. 57,600 58,500 d 900 F  
Manufacturing overhead.............................  123,000 126,000 e   3,000 F  
Total variable costs.................................... $304,800 $310,500    $ 5,700 F  
Contribution margin....................................... $178,200 $184,500    $ 6,300 U  
a
($412,500 budget ÷ 2,500 budgeted units)  3,000 actual units
b
($ 60,000 budget ÷ 2,500 budgeted units)  3,000 actual units
c
($ 45,000 budget ÷ 2,500 budgeted units)  3,000 actual units
d
($ 48,750 budget ÷ 2,500 budgeted units)  3,000 actual units
e
($105,000 budget ÷ 2,500 budgeted units)  3,000 actual units

b. Steve Clark should be more motivated by the revised report since it clearly shows
that the variable cost variances for his product line were better than Sara McKinley
had thought, despite the fact that there is an unfavorable contribution margin
variance. Clark is not responsible for the revenue variance which resulted from a
decrease in the sales price.

In addition, the separation of costs into controllable and noncontrollable

categories allows Clark to devote full effort to those costs which he can influence.
Clark will probably exhibit a positive attitude and will continue looking for ways to
improve his operation.
PROBLEM 11-49 (35 MINUTES)

1. Calculation of variances:
Direct-material price = PQ(AP – SP)
variance
= 15,000($2.20* – $2.00)
= $3,000 Unfavorable

*$2.20 = $33,000  15,000

Direct-material quantity = SP(AQ – SQ)

variance
= $2.00(15,000 – 14,500*)
= $1,000 Unfavorable

*14,500 lbs. = 725  20 lbs. per unit

Direct-labor rate = AH(AR – SR)

variance
= 4,000($18.90* – $18.00)
= $3,600 Unfavorable

*$18.90 = $75,600  4,000

Direct-labor efficiency = SR(AH – SH)

variance
= $18.00(4,000 – 3,625*)
= $6,750 Unfavorable

*3,625 hours = 725 units  5 hours per unit

Variable-overhead spending variance

= actual variable overhead – (AH  SVR)
= $5,500 – (4,000)($1.50)
= $500 Favorable

Variable-overhead efficiency = SVR(AH – SH)

variance
= $1.50(4,000 – 3,625)
= $562.50 Unfavorable
PROBLEM 11-49 (CONTINUED)

Fixed-overhead budget variance

= actual fixed overhead – budgeted fixed overhead
= $13,000 – $12,500*
= $500 Unfavorable

*$12,500 = $150,000 (annual)  12 months

Fixed-overhead volume = budgeted fixed overhead – applied fixed

variance overhead
= $12,500 – $10,875* = $1,625 U †

*$10,875 = 725 units  $15.00 per unit

†
Some accountants would designate a positive volume variance as "unfavorable."

PROBLEM 11-52 (20 MINUTES)

1. Sales price variance

= (Actual sales price – budgeted sales price)  actual sales volume
= ($48* – $50 †)  7,500 = $15,000 Unfavorable

*Actual sales price = $360,000/7,500

†
Budgeted sales price = $450,000/9,000

2. Sales volume variance

= (Actual sales volume – budgeted sales volume)  budgeted sales price
= (7,500 – 9,000)  $50** = $75,000 Unfavorable

**Budgeted sales price = $450,000/9,000

CASE 11-55 (50 MINUTES)

1. New contribution report for February based on a flexible budget:

Flexible Budget* Actual Variance

____________________________________
__
Units (in pounds)……………….. 225,000 225,000
--
 Revenue…………………………... $1,800,000 $1,777,500
$ 22,500 U
Direct material…………………… 326,250 432,500
106,250 U
Direct labor………………………. 189,000 174,000
15,000 F
Variable overhead………………. 364,500 375,000
10,500 U
Total variable costs…………. $ 879,750 $ 981,500
$101,750 U
Contribution margin…………….. $ 920,250 $ 796,000
$124,250 U

*Each dollar number in the flexible budget column is equal to the static budget
number given in the problem multiplied by 1.125 (225,000/200,000). This reflects the
increase in the volume of sales from 200,000 units to 225,000 units.

2. The total contribution margin on the flexible budget is $920,250. See

requirement (1). Alternatively, multiply the static budget contribution margin
of $818,000 by 1.125 (225,000/200,000), as explained in requirement (1).
CASE 11-55 (CONTINUED)

3. The interpretation of the contribution margin on the flexible budget, $920,250,

is as follows: If the unit sales price and unit variable costs had all remained
at their budgeted levels, and sales volume increased from 200,000 units to
225,000 units, the contribution margin would have been $920,250.

4. The variance between the flexible budget contribution margin and the actual
contribution margin, from requirement (1) is $124,250 U.

This $124,250 unfavorable variance between the flexible budget and actual
contribution margin for the chocolate nut supreme cookie product line during
April is explained by the following variances:

a. Direct-material price variance:

Type of Material PQ*(AP +  SP) Variance

Cookie mix...................... 2,325,000($.02$.02)........ $ 0
Milk chocolate.................. 1,330,000($.20$.15)........ 66,500 U
Almonds.......................... 240,000($.50$.50)........... 0
Total.............................................................................. $66,500 U

* PQ = AQ , because all materials were used during the month of

purchase.
+
AP = actual total cost (given)  actual quantity

b. Direct-material quantity variance:

Type of Material SP(AQ  SQ*) Variance

Cookie mix...................... $.02(2,325,0002,250,000) $ 1,500 U
Milk chocolate.................. $.15(1,330,0001,125,000) 30,750 U
Almonds.......................... $.50(240,000225,000)..... 7,500 U
Total.............................................................................. $39,750 U

* SQ = standard ounces of input per pound of cookies  actual pounds of

cookies produced.

c. Direct-labor rate variance = AH(AR  SR) = 0.

Dividing the total actual labor cost by the actual labor time used, for
each type of labor, shows that the actual rate and the standard rate are
the same (i.e ., AR = SR ). Thus, this variance is zero.
CASE 11-55 (CONTINUED)

d. Direct-labor efficiency variance:

Type of Labor SR*(AH  SH +) Variance

Mixing............................. $.24(225,000225,000)..... $ 0
Baking............................. $.30(400,000450,000)..... 15,000 F
Total.............................................................................. $15,000 F

*Standard rate per minute = standard rate per hour  60 minutes

+
Standard minutes per unit (pound)  actual units (pounds) produced

e. Variable-overhead spending variance

= actual variable overhead  ( AH  SVR )

= $375,000  [(625,000*/60)  $32.40]

= $37,500 U

*Total actual minutes of direct labor.

f. Variable-overhead efficiency variance

= SVR ( AH  SH *)

 625,000 3  225,000 
= $32.40   
 60 60 

= $27,000 F

* SH = (3 minutes per unit, or pound  225,000 units, or pounds)  60

minutes

g. Sales-price variance =

( actual budgeted actual

sales price  sales price � sales volume )
= ($7.90*  $8.00)  225,000

= $22,500 U

*Actual sales price = $1,777,500  225,000 units sold

 CASE 11-55 (CONTINUED)

Summary of variances:

Direct-material price variance............................................... $ 66,500 U

Direct-material quantity variance........................................... 39,750 U
Direct-labor rate variance..................................................... 0
Direct-labor efficiency variance............................................. 15,000 F
Variable-overhead spending variance.................................... 37,500 U
Variable-overhead efficiency variance................................... 27,000 F
Sales-price variance............................................................. 22,500 U
Total.................................................................................... $124,250 U

5. a. One problem may be that direct labor is not an appropriate cost driver
for Colonial Cookies, Inc. because it may not be the activity that drives
variable overhead. A good indication of this situation is shown in the
variance analysis. The direct-labor efficiency variance is favorable,
while the variable-overhead spending variable is unfavorable. Another
problem is that baking requires considerably more power than mixing
does; this difference could distort product costs.

b. Activity-based costing (ABC) may solve the problems described in

requirement 5(a) and therefore is an alternative that management
should consider. Since direct labor does not seem to have a direct
cause-and-effect relationship with variable overhead, the company
should try to identify the activity or activities that drive variable
overhead. If the same proportion of these activities is used in all of
Colonial’s products, then ABC may not be beneficial. However, if the
products require a different mix of these activities, then ABC could be
beneficial.
FOCUS ON ETHICS (See page 476 in the text.)
In this situation, misstated standards are affecting the accuracy of accounting
reports.
Cleverly is misusing the standard costing system at Shrood to manage its
relationship with the parent company, Gigantic. By overestimating direct-labor
hours, too much overhead is routinely applied to products, artificially inflating cost
of goods sold (CGS) during the year. This accounting fudge is ‘corrected’ in the
fourth quarter of each year by means of a variance adjustment, which serves to
instantly reduce CGS and thus boost profits.
It is possible that Cleverly and his staff are sufficiently knowledgeable about the
real costs of production that the artificial direct-labor hour estimates do not impede
their decision making (although this is not certain). However, it is unlikely that the
managers at the parent company are in the same position. The information which
is being passed to them is distorted, and thus provides a poor basis for managerial
decision making. That is, the distorted data may have a negative impact on the
business, leading to loss of enterprise value and perhaps jobs. Hence it is
unethical for Cleverly to provide this distorted quarterly information to Gigantic,
knowing that the company uses the data to make management decisions.
A further ethical dilemma occurs because the quarterly numbers from Shrood are
provided to analysts and stockholders as a basis on which to judge the financial
performance of Gigantic. The management of Gigantic is thus in contravention of
its ethical and legal obligations to market regulators, since it is knowingly providing
false information to investors.
Because of these ethical and legal concerns, it is imperative that Shrood provide
accurate information to Gigantic henceforth. Note, however, that this does not
necessarily mean that Shrood needs to change its internal cost accounting
standards, although it would be preferable to manage according to the most
accurate cost numbers available.