ACCT6008

Week 9 – Variance Analysis of Direct and

Overhead Costs
Solutions to homework questions
All questions are from Hilton et al 12th ed, Chapters 10 & 11
PART A
10-2 Management by exception is a managerial technique in which only significant
deviations from expected performance are investigated.
10-10 The manager in the best position to influence the direct-material quantity variance
usually is the production manager.
11-3 Flexible overhead budgets are based on an input activity measure, such as process
time, in order to provide a meaningful measure of production activity. An output

__
measure, such as the number of units produced, could be used effectively only in a
single-product enterprise. If multiple, heterogeneous products are produced, it
would not be meaningful to base the flexible budget on an output measure
__

___
aggregated across highly different types of products.
11-7 The interpretation of the variable-overhead spending variance is that a different total
amount was spent on variable overhead than should have been spent in accordance
with the variable-overhead rate, given the actual level of the cost driver upon which
the variable-overhead budget is based. For example, if direct labor hours are used to
budget variable overhead, an unfavorable spending variance means that a greater
total amount was spent on variable overhead than should have been spent, after
nt
adjusting for how much actual direct-labor time was used. The spending variance is
the control variance for variable overhead.
11-10 The interpretations of the direct-labor and variable-overhead efficiency variances are
very different. The direct-labor efficiency variance does convey information about
the efficiency with which direct labor was used, relative to the standards. In contrast,
the variable-overhead efficiency variance conveys no information w about the
efficiency with which variable-overhead items were used.
11-13 A common but misleading interpretation of the fixed-overhead volume variance is
that it is a measure of the cost of underutilizing or overutilizing production capacity.
For example, when budgeted fixed overhead exceeds applied fixed overhead, the
fixed-overhead volume variance is positive. Some people interpret this positive
variance to be unfavorable and claim that it is a measure of the cost of not having
utilized production capacity to the level that was anticipated. However, this
interpretation is misleading, because the real cost of underutilizing capacity lies in

The University of Sydney 1

 the forgone contribution margins from the products that were not produced and
sold.

PART B
EXERCISE 10-26

Direct-material price variance = AQ(AP – SP)

= 4,200*($7.30 – $7.00)
= $1,260 Unfavorable
*AQ = 4,200 pounds = $30,660 ÷ $7.30 per pound

Direct-material quantity variance = SP(AQ – SQ)

= $7.00(4,200 – 4,000*)
= $1,400 Unfavorable

*SQ = 4,000 pounds = 2,000 units ´ 2 pounds per unit

Direct-material purchase price variance = PQ(AP – SP)

= 6,000($7.30 – $7.00)
= $1,800 Unfavorable

Direct-labor rate variance = AH(AR – SR)

= 6,450*($18.10 – $18.00)
= $645 Unfavorable

*AH = 6,450 hours = $116,745 ÷ $18.10 per hour

Direct-labor efficiency variance = SR(AH – SH)

= $18(6,450 – 6,000*)
= $8,100 Unfavorable

*SH = 6,000 hours = 2,000 units ´ 3 hours per unit

The University of Sydney 2

EXERCISE 10-30

Direct Direct
Labor Material
Standard price or rate per unit of input ............................ $20 per hre $8 per lb
Standard quantity per unit of output ................................ 4 hrs per unitf 2.75 lbs per unitc
Actual quantity used per unit of output ........................... 3.5 hrs 3 lbs per unita
Actual price or rate per unit of input ................................ $21 per hr $7 per lb
Actual output ...................................................................... 10,000 units 10,000 units
Direct-material price variance ........................................... — $30,000 F
Direct-material quantity variance ...................................... — $20,000 Ub
Total of direct-material variances ..................................... — $10,000 F
Direct-labor rate variance .................................................. $ 35,000 Ud —
Direct-labor efficiency variance ........................................ $100,000 F —
Total of direct-labor variances .......................................... $ 65,000 F —

Explanatory notes:

a. Direct-material price variance = PQ(AP – SP)

$30,000 F = PQ($7 – $8)

PQ = 30,000 lbs.

Actual quantity used = quantity purchased

AQ = PQ = 30,000 lbs.

30,000 lbs.
Actual quantity per unit of output = = 3 lbs. per unit
10,000 units

b. Total direct-material variance = price variance + quantity variance

$10,000 F = $30,000 F + quantity variance
Quantity variance = $20,000 U

c. Direct-material quantity variance = SP(AQ – SQ)

$20,000 U = $8(30,000 – SQ)

SQ = 27,500 lbs.
27,500 lbs.
Standard quantity per unit = = 2.75 lbs. per unit
10,000 units

The University of Sydney 3

EXERCISE 10-30 (CONTINUED)

d. Total direct-labor variance = rate variance + efficiency variance

$65,000 F = rate variance + $100,000 F
Rate variance = $35,000 U

e. AH = 10,000 units ´ 3.5 hrs per unit = 35,000 hrs

Direct-labor rate variance = AH(AR – SR)
$35,000 U = 35,000($21 – SR)
SR = $20

f. Direct-labor efficiency variance = SR(AH – SH)

$100,000 F = $20(35,000 – SH)

SH = 40,000 hrs
Standard hrs per unit = 40,000 hrs/10,000 units
= 4 hrs per unit

The University of Sydney 4

EXERCISE 11-22

1. Variable-overhead spending variance = actual variable overhead – (AQ ´ SVR)

= $320,000 – (50,000 ´ $6.00)
= $20,000 U

2. Variable-overhead efficiency variance = SVR(AQ – SQ)

= $6.00(50,000 – 40,000*)
= $60,000 U

*SQ = 40,000 hrs. = 20,000 units ´ 2 hrs. per unit

3. Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead

= $97,000 – $100,000
= $3,000 F

4. Fixed-overhead volume variance = budgeted fixed overhead – applied fixed overhead

= $100,000 – $80,000†
= $20,000 (positive**)

æ predetermined fixed ö æ standard allowed ö

†Applied fixed overhead = çç ÷÷ ´ çç ÷÷
è overhead rate ø è hours ø
æ $100,000 ö
= ç ÷ ´ (20,000 ´ 2)nanny
è 25,000 ´ 2 ø
可
叫
= $80,000 㗊 my

**Consistent with the discussion in the text, we choose not to interpret the volume
variance as either favorable or unfavorable. Some accountants would designate a
positive volume variance as "unfavorable" and a negative volume variance as
"favorable."

The University of Sydney 5

EXERCISE 11-26

1. a. Variable-overhead spending variance = actual variable overhead – (AQ ´ SVR)

= $405,000 – (40,500 ´ $9.00) ⼆
= $40,500 U

b. Variable-overhead efficiency variance = SVR(AQ – SQ)

= $9.00(40,500 – 36,000*)
Steel and
in quantity
= $40,500 U

*SQ = 36,000 hrs. = 9,000 cases ´ 4 hours per case

c. Fixed-overhead budget variance = actual fixed OH – budgeted fixed OH

= $122,000 – $120,000
= $2,000 U

d. Fixed-overhead volume variance = budgeted fixed OH – applied fixed OH

= $120,000 – $108,000†
= $12,000 (positive**)

æ predetermined fixed ö æ standard allowed ö

†Applied fixed overhead = çç
è overhead rate ø è
÷÷ ´ çç
quantity
03 ÷÷

unit_
ø
æ $120,000 ö and
= ç ÷ ´ (9,000 ´ 4)
è 10,000 ´ 4 ø
Thdgmi
= $108,000

**Consistent with the discussion in the text, we choose not to interpret the volume
variance as either favorable or unfavorable. Some accountants would designate a
positive volume variance as "unfavorable" and a negative volume variance as
"favorable."

The University of Sydney 6

EXERCISE 11-30

Standard machine hours per unit of output............................................................ 4 hours

Standard variable-overhead rate per machine hour .............................................. $8.00
Actual variable-overhead rate per machine hour ................................................... $9.00b
Actual machine hours per unit of output ................................................................ 3d
Budgeted fixed overhead..........................................................................................
$50,000
Actual fixed overhead ..............................................................................................
$65,000a
Budgeted production in units ..................................................................................
25,000
Actual production in units .......................................................................................
24,000c
Variable-overhead spending variance ....................................................................
$72,000 U

hnf
Variable-overhead efficiency variance ....................................................................
$192,000 F
Fixed-overhead budget variance .............................................................................
$15,000 U
Fixed-overhead volume variance .............................................................................
$2,000g (positive)
Total actual overhead................................................................................................
$713,000
Total budgeted overhead (flexible budget) .............................................................
$818,000e
iAQLSIAuzsu hn
Total budgeted overhead (static budget) ................................................................
$850,000f
Total applied overhead .............................................................................................
$816,000

Explanatory Notes:

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

$15,000 U = X – $50,000 in
0X
i
= $65,000 = actual fixed overhead

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

$713,000 = X + $65,000
one they
X = $648,000 = actual variable overhead
Variable-overhead spending variance
$72,000 U = $648,000 – (AQ ´ $8)
nxc
= actual variable overhead – (AQ ´ SVR)

$8AQ = $576,000 g munhen.nu

AQ = 72,000
Actual variable-overhead actual variable overhead

噐 ⾄
rate per machine hour = ⼆
actual hours
$648,000
= = $9 per hour
72,000

9Mon
The University of Sydney 7
EXERCISE 11-30 (CONTINUED)

budgeted fixed overhead

c. Fixed-overhead rate =
budgeted machine hours
$50,000
=
(25,000 units)(4 hrs. per unit)
= $.50 per hr.
Total standard
overhead rate = standard variable overhead rate + fixed-overhead rate
$8.50 per hr. = $8.00 + $.50

Total applied overhead = total standard hours ´ total standard overhead rate
$816,000 = X ´ $8.50
X = 96,000 = total standard hrs.
total standard hrs.
Actual production =
standard hrs. per unit
96,000
= = 24,000 units
4

total actual machine hrs.

d. Actual machine hrs. per unit of output =
actual production
72,000 hrs.
= = 3 hrs. per unit
24,000 units

e. Total budgeted overhead (flexible budget) VariableOH

budget
= budgeted fixed overhead + (SVR ´ SQ)
= $50,000 + ($8.00 ´ 24,000 units ´ 4 hrs. per unit)
= $818,000

3how
9 neunǖǚ
_wig_可 ⼆72000 U
65
ooo

enemy
SVRCAH SM.no
no
⼆
8xl7zow 4X
The University of Sydney 8xlfmo8 loo.mg
EXERCISE 11-30 (CONTINUED)

f. Total budgeted overhead (static budget)

æ total standard öæ budgeted öæ standard hrs. ö
= çç ÷÷çç ÷÷çç ÷÷ standout
è overhead rate øè production øè per unit ø
= ($8.50)(25,000)(4)
= $850,000 predominate 器年第
g. Fixed overhead volume variance
Sonow Stand
= budgeted fixed overhead – applied fixed overhead Quern
= $50,000 – ($.50)(24,000 ´ 4)
= $2,000 (positive*)

*Consistent with the discussion in the text, we choose not to interpret the volume
variance as either favorable or unfavorable. Some accountants would designate a
positive volume variance as "unfavorable" and a negative volume variance as
"favorable."

PART C

PROBLEM 11-41

1. Let X = budgeted fixed overhead

X ÷ 20,000 machine hours = $4.00 per hour
X = $80,000

2. Variable-overhead spending variance:

Actual quantity x actual rate
23,100 hours x $2.40*…………………... $55,440
Actual quantity x standard rate
23,100 hours x $2.50……………………. 57,750
Variable-overhead spending variance…... $ 2,310 Favorable

* $55,440 ÷ 23,100 hours

3. Fixed-overhead volume variance:

Budgeted fixed overhead……………………………….. $80,000
Standard quantity allowed x standard rate

The University of Sydney 9

 5,350 hours* x $4.00………………………………….. 21,400
Fixed-overhead volume variance………………………. $58,600

* 10,700 units x .5 hours per unit

The fixed-overhead volume variance is positive;

some managerial accountants would interpret it as
an unfavorable variance.

4. Maxwell spent more than anticipated. Actual fixed overhead amounted to $100,460
($155,900 - $55,440) when the budget was set at $80,000. The fixed-overhead budget
variance is $20,460 unfavorable ($100,460 - $80,000). ⼀
5. Variable overhead is underapplied by $42,065:
Actual overhead: Actual quantity x actual rate
23,100 hours x $2.40………………………………………….. $55,440
Applied overhead: Standard quantity allowed x standard
rate
5,350 hours x $2.50……………………………………………. 13,375
Underapplied variable overhead………………………………... $42,065

6. Without having complete information, it is difficult to be 100% certain. However, by

an analysis of data related to the volume variance, a lengthy strike appears to be a
strong possibility. Maxwell had planned to work 20,000 machine hours during the
period, giving the company the capability of producing 40,000 finished units (20,000
hours x 2 units per hour). Actual production amounted to only 10,700 units, leaving
the firm far shy of its manufacturing goal. A strike is a plausible explanation.

The University of Sydney 10