Chapter 15, Problem 32E

1.

To determine

Compute the total flexible-budget variance and the fixed overhead production volume variance for March.

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

A cost variance is the difference between the cost actually incurred and the amount of costs money earmarked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

Overhead costs, sometimes referred to as overhead or operating expenses, are those costs that are associated with running a business that cannot be connected to constructing or manufacturing a product or a service. They are the expenses the business incurs in staying in business, irrespective of its level of achievement.

The total overhead cost variance for the period is equal to the difference between actual overhead cost incurred and the standard overhead cost applied to the production.

The overhead total flexible-budget variance is equal to the difference between the overhead total actual factory overhead cost over a period and the output-based flexible budget overhead overall.

The fixed overhead spending (budget) variance is the difference between budgeted and actual fixed factory costs overhead for the period.

Calculate Standard variable factory overhead rate per direct labor hour (DLH):

$\begin{array}{c}\text{Std}\text{.variable factory overhead rate}=\text{Bgtd}\text{. total variable factory Overhead}÷\text{Bgt}\text{. total DLH}\\ =\$15,000÷\$2,500\text{ hrs}\\ =\$6.00\text{per direct labor hour}\end{array}$

Calculate Standard fixed factory overhead rate per direct-labor hours (DLH):

$\begin{array}{c}\text{Std}\text{. fixed factory overhead DLH}=\text{Bgtd}\text{. Total fixed factory overhead}÷\text{Practical capacity LH}\\ =\$90,000÷\$2,500\\ =\$36.00\text{/direct labor hr}\end{array}$

The standard factory overhead rate per direct labor hour (DLH) is ($6.00 + $36.00).

$42.00 /DLH

Calculate Standard direct-labor hours (DLH) per unit:

$\begin{array}{c}\text{Std}\text{. DLH/unit}=\text{Practical capacity labor hrs}÷\text{Practical capacity in units}\\ =\$2,500÷\$5,000\text{ hrs}\\ =\$0.5\text{ direct labor hour/unit}\end{array}$

The two variance overhead analysis is shown below:

Actual Cost	Flexible Budget Based on Output	Applied (SQ × SP)
15,600	2,400 × $6 = $14,400	2,400 × $42 = $100,800
Add: 92,000	90,000
$107,600	$104,400

The formula to calculate the total flexible-budget variance is as follows:

$\begin{array}{c}\text{Total Flexible budget variance}=\text{Actual overhead}-\text{Flexible budget for Overhead based on Output}\\ \end{array}$

Calculate the total flexible-budget variance:

$\begin{array}{c}\text{Total flexible budget variance}=\$107,600-\$104,400\\ =\$3,200\text{ U}\end{array}$

Hence, the total flexible-budget variance is $3,200 U

The formula to calculate the fixed overhead production volume variance is as follows:

$\text{Fixed overhead production volume variance}=\text{Budgeted fixed overhead}-\text{Applied fixed Overhead}$

Calculate the fixed overhead production volume variance:

$\begin{array}{c}\text{Fixed overhead production volume variance}=\$104,400-\$100,800\\ =\$3,600\text{ U}\end{array}$

Hence, the fixed overhead production volume variance is $3,600 U.

2.

To determine

Compute the flexible-budget variance and the fixed overhead production volume variance for March.

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

Overhead costs, sometimes referred to as overhead or operating expenses, are those costs that are associated with running a business that cannot be connected to constructing or manufacturing a product or a service. They are the expenses the business incurs in staying in business, irrespective of its level of achievement.

A cost variance is the difference between the cost actually incurred and the amount of costs money earmarked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

The formula to calculate the variable overhead spending (budget) variance is as follows:

$\text{Variable overhead spending variance}=\text{Actual variable cost overhead}-\text{Flexible budget based on inputs}$

Calculate the variable overhead spending (budget) variance:

$\begin{array}{c}\text{Variable overhead spending variance}=\left(2700\text{ hrs}\times \$5.7777\text{hr}\right)-\left(2700\times \$\text{6}.00\text{/hr}.\right)\\ =\$15,600-\$16,200\\ =\$600\text{ F}\end{array}$

Hence, the variable overhead spending (budget) variance is $600 F.

The formula to calculate variable overhead efficiency variance is as follows:

$\text{Efficiency variance}=\text{Flexible budgets based on inputs}-\text{Flexible budget based on output}$

Calculate the variable overhead efficiency variance:

$\begin{array}{c}\text{Variable overhead Efficiency variance}=\left(2700\times \$\text{6}.00\text{/hr}\right)-\left(4,800\times 0.5\times \$\text{6}.00\text{/hr}\right)\\ =\$16,200-\$14,400\\ =\$1,800\text{ U}\end{array}$ Hence, the variable overhead efficiency variance is $1,800 U.

The formula to calculate fixed overhead spending (budget) variance is as follows:

$\text{Fixed overhead spending (budget) variance}=\text{Actual fixed overhead}-\text{Budgeted fixed overhead}$

Calculate fixed overhead spending (budget) variance:

$\begin{array}{c}\text{Fixed overhead spending }\left(\text{budget}\right)\text{variance}=\$\text{92},000–\$\text{92},000\\ =\$\text{2},000\text{ F}\end{array}$

Hence, the fixed overhead spending (budget) variance for March is $2,000 F

Fixed variance in the overhead production volume is the difference between the budgeted fixed overhead over the period and the standard fixed overhead applicable to production.

The formula to calculate the fixed overhead production volume variance is as follows:

$\text{Fixed overhead production volume variance}=\text{Budgeted fixed overhead}-\text{Applied fixed Overhead}$

Calculate the fixed overhead production volume variance:

$\begin{array}{c}\text{Fixed overhead production volume variance}=\$\text{9}0,000-\left(4,800\text{ units}\times \text{0}\text{.5 hrs}\times \$\text{36/hr}.\right)\\ =\$90,000-\$86,400\\ =\$3,600\text{ U}\end{array}$ Hence, the fixed overhead production volume variance is $3,600 U.

Calculate Controllable (Flexible) Budget Variance for Overhead:

Particulars
Total Controllable Flexible-budget variance
Variable Overhead Spending Variance	$\$600\text{ F}$
Variable Overhead Efficiency Variance	$1,800\text{ U}$
Fixed overhead Spending variance	$\$2,000\text{ U}$	$\$3,200\text{ U}$
Fixed Overhead Production Volume Variance		$\$3,600\text{ U}$
Total Overhead Variance		$\$6,800\text{ U}$

In other words, three components from the four-variance analysis (i.e., variable overhead spending variance, variable overhead efficiency variance and fixed overhead spending variance) are combined into one variance, the Total Controllable (Flexible) Budget Variance, based on a two-variance analysis. The component of the production volume variance is the same in the two-variance, the three-variance and the four-variance breakdown of the overhead variance overall.

3.

To determine

Mention the details in a two-variance breakdown of the overhead total variance referenced in each of the variances.

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

Overhead costs, sometimes referred to as overhead or operating expenses, are those costs that are associated with running a business that cannot be connected to constructing or manufacturing a product or a service. They are the expenses the business incurs in staying in business, irrespective of its level of achievement.

The two-variance breakdown of the total overhead variance reports two significant overhead cost factors. The (controllable) flexible-budget variance measures the difference between the actual overhead incurred and the overhead incurred based on the actual output of the period. In order to motivate cost-control on the part of managers, the total flexible-budget variance is sometimes referred to as the total "controllable" overhead variance- it indicates to managers the need to control costs against the amounts reflected in the flexible-budget based on outputs for the period. The variance in the production volume, when the fixed overhead application rate is based on practical capacity, reports the organization's effectiveness in utilizing available capacity. Over time, this variance may signal the existence of overcapacity or the need for capacity expansion to managers. In short, this variance helps managers to control the resource spending related to capacity.