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# CHAPTER 8

## FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND

MANAGEMENT CONTROL
8-16 (20 min.) Variabl !a"#\$a%&#ri"' ()r*a+, )aria"% a"al,-i-.
1. Variable Manufacturing Overhead Variance Analysis for Esuire !lothing for "une 200#
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
1 A%&#al Ra&
213
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
(\$%&'( ) *11.&0)
*&2%1(\$
(\$%&'( ) *12)
*&\$%\$'2
(\$ ) 1%0+0 ) *12)
*&1%+\$0
(\$ ) 1%0+0 ) *12)
*&1%+\$0
2. Esuire had a favorable s,ending variance of *2%2(+ because the actual variable overhead
rate -as *11.&0 ,er direct manufacturing labor.hour versus *12 budgeted. /t had an unfavorable
efficiency variance of *2%&#2 0 because each suit averaged \$.2 labor.hours (\$%&'( hours 1 1%0+0
suits) versus \$.0 budgeted labor.hours.
+.1
*2%2(+ 2
3,ending variance
*2%&#2 0
Efficiency variance
4ever a variance
*'2\$ 0
2le5ible.budget variance
4ever a variance
8-1: (20 min.) Fi5+-!a"#\$a%&#ri"' ()r*a+, )aria"% a"al,-i- 2%("&i"#a&i(" (\$ 8-163.
1 6 2.
rate ,er unit of
allocation base
8
\$ 0\$0 % 1
\$00 % (2 *

8
1(0 % \$
\$00 % (2 *
8 *1& ,er hour
2i5ed Manufacturing Overhead Variance Analysis for Esuire !lothing for "une 200#
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r A%&#al
O#&/#&
1 B#+'&+ Ra&
293
*('%#1( *(2%\$00 *(2%\$00
(\$ 1 1%0+0 1 *1&)
*(\$%+00
*1%&1( 0 *2%\$00 2
3,ending variance 4ever a variance 9roduction.volume variance
*1%&1( 0 *2%\$00 2
2le5ible.budget variance 9roduction.volume variance
:he fi5ed manufacturing overhead s,ending variance and the fi5ed manufacturing
fle5ible budget variance are the same;;*1%&1( 0. Esuire s,ent *1%&1( above the *(2%\$00
budgeted amount for "une 200#.
:he ,roduction.volume variance is *2%\$00 2. :his arises because Esuire utili<ed its
ca,acity more intensively than budgeted (the actual ,roduction of 1%0+0 suits e5ceeds the
budgeted 1%0\$0 suits). :his results in overallocated fi5ed manufacturing overhead of *2%\$00 (\$ )
\$0 ) *1&). Esuire -ould -ant to understand the reasons for a favorable ,roduction.volume
variance. /s the mar=et gro-ing> /s Esuire gaining mar=et share> ?ill Esuire need to add
ca,acity>
+.2
8-18 ('0 min.) Variabl !a"#\$a%&#ri"' ()r*a+ )aria"% a"al,-i-.
1. @enominator level 8 ('%200%000 ) 0.02 hours) 8 (\$%000 hours
2. A%&#al
R-#l&-
Fl5ibl
B#+'& A!(#"&-
1. Out,ut units (baguettes) 2%+00%000 2%+00%000
2. @irect manufacturing labor.hours &0%\$00 &(%000
a
'. Aabor.hours ,er out,ut unit (2 1) 0.01+ 0.020
\$. Variable manuf. overhead (MOB) costs *(+0%\$00 *&(0%000
&. Variable MOB ,er labor.hour (\$ 2) *1'.&0 *10
(. Variable MOB ,er out,ut unit (\$ 1) *0.2\$' *0.200
a
2%+00%000 0.0208 &(%000 hours
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
1 A%&#al Ra&
213
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
(&0%\$00 ) *1'.&0)
*(+0%\$00
(&0%\$00 ) *10)
*&0\$%000
(&(%000 ) *10)
*&(0%000
(&(%000 ) *10)
*&(0%000
'. 3,ending variance of *1C(%\$000. /t is unfavorable because variable manufacturing overhead
-as '&D higher than ,lanned. A ,ossible e5,lanation could be an increase in energy rates
relative to the rate ,er standard labor.hour assumed in the fle5ible budget.
Efficiency variance of *&(%0002. /t is favorable because the actual number of direct
manufacturing labor.hours reuired -as lo-er than the number of hours in the fle5ible budget.
Aabor -as more efficient in ,roducing the baguettes than management had antici,ated in the
budget. :his could occur because of im,roved morale in the com,any% -hich could result from
an increase in -ages or an im,rovement in the com,ensation scheme.
2le5ible.budget variance of *120%\$000. /t is unfavorable because the favorable efficiency
variance -as not large enough to com,ensate for the large unfavorable s,ending variance.
+.'
*1C(%\$00 0
3,ending variance
*&(%000 2
Efficiency variance 4ever a variance
*120%\$00 0
2le5ible.budget variance 4ever a variance
8-1; ('0 min.) Fi5+ !a"#\$a%&#ri"' ()r*a+ )aria"% a"al,-i- 2%("&i"#a&i(" (\$ 8-183.
1. 7udgeted standard direct manufacturing labor used 8 0.02 ,er baguette
7udgeted out,ut 8 '%200%000 baguettes
7udgeted standard direct manufacturing labor.hours
8 '%200%000 ) 0.02
8 (\$%000 hours
8 (\$%000 ) *\$.00 ,er hour
8 *2&(%000
Actual out,ut 8 2%+00%000 baguettes
8 2%+00%000 ) 0.02 ) *\$
8 *22\$%000
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
*2C2%000 *2&(%000 *2&(%000
(2%+00%000 ) 0.02 ) *\$)
*22\$%000
2. :he fi5ed manufacturing overhead is underallocated by *\$+%000.
'. :he ,roduction.volume variance of *'2%0000 ca,tures the difference bet-een the budgeted
'%200%0000 baguettes and the lo-er actual 2%+00%000 baguettes ,roducedEthe fi5ed cost
ca,acity not used. :he s,ending variance of *1(%000 unfavorable means that the actual
aggregate of fi5ed costs (*2C2%000) e5ceeds the budget amount (*2&(%000). 2or e5am,le%
monthly leasing rates for baguette.ma=ing machines may have increased above those in the
budget for 200#.
+.\$
*1(%000 0
3,ending variance 4ever a variance
*'2%000 0
9roduction.volume
variance
*1(%000 0
2le5ible.budget variance
*'2%000 0
9roduction.volume
variance
*\$+%000 0
8-4< ('0;\$0 min.) Ma"#\$a%&#ri"' ()r*a+, )aria"% a"al,-i-.
1. :he summary information isF
T* S(l#&i("- C(r/(ra&i(" 2=#" 4<<;3 A%&#al
Fl5ibl
B#+'&
S&a&i%
B#+'&
Out,uts units (number of assembled units) 21( 21( 200
Bours of assembly time \$11 \$'2
c
\$00
a

Assembly hours ,er unit 1.#0
b
2.00 2.00
Variable mfg. overhead cost ,er hour of assembly time * '0.20
d
* '0.00 * '0.00
Variable mfg. overhead costs *12%\$20 *12%#(0
e
*12%000
f

2i5ed mfg. overhead costs *20%&(0 *1#%200 *1#%200
2i5ed mfg. overhead costs ,er hour of assembly time * &0.02
g
* \$+.00
h

a
200 units 2 assembly hours ,er unit 8 \$00 hours
b
\$11 hours 21( units 8 1.#0 assembly hours ,er unit
c
21( units 2 assembly hours ,er unit 8 \$'2 hours
d
*12%\$20 \$11 assembly hours 8 *'0.22 ,er assembly hour
e
\$'2 assembly hours *'0 ,er assembly hour 8 *12%#(0
f
\$00 assembly hours

## *'0 ,er assembly hour 8 *12%000

g
*20%&(0 \$11 assembly hours 8 *&0 ,er assembly hour
h
*1#%200 \$00 assembly hours 8 *\$+ ,er assembly hour
+.&
Fl5ibl B#+'&6 All(%a&+6
A%&#al C(-&- A%&#al I"/#& 0&,.
B#+'&+ I"/#&
0&,. All(7+ B#+'&+
B#+'&+ I"/#&
0&,. All(7+ B#+'&+
I"%#rr+ B#+'&+ Ra& \$(r A%&#al O#&/#& Ra& \$(r A%&#al O#&/#& Ra&
Variabl \$11 *'0.00 \$'2 *'0.00 \$'2 *'0.00
Ma"#\$a%&#ri"
' assy. hrs. ,er assy. hr. assy. hrs. ,er assy. hr. assy. hrs. ,er assy. hr.
O)r*a+ *12%\$20 *12%''0 *12%#(0 *12%#(0
*#0 0 *('0 2
3,ending variance Efficiency variance 4ever a variance
*&\$0 2
2le5ible.budget variance 4ever a variance
*&\$0 2
Fl5ibl B#+'&6 All(%a&+6
A%&#al C(-&- S&a&i% B#+'& L#!/ S#! S&a&i% B#+'& L#!/ S#!
B#+'&+ I"/#&
All(7+ B#+'&+
I"%#rr+ R'ar+l-- (\$ O#&/#& L)l R'ar+l-- (\$ O#&/#& L)l \$(r A%&#al O#&/#& Ra&
Fi5+ \$'2 *\$+.00
Ma"#\$a%&#ri"
' assy. hrs. ,er assy. hr.
O)r*a+ *20%&(0 *1#%200 *1#%200 *20%C'(
*1%'(0 0 *1%&'( 2
3,ending Variance 4ever a Variance 9roduction.volume variance
*1%'(0 0 *1%&'( 2
2le5ible.budget variance 9roduction.volume variance
*1C( 2
+.(
:he summary analysis isF
S/"+i"'
Varia"%
E\$\$i%i"%,
Varia"%
Pr(+#%&i("-V(l#!
Varia"%
Variable
Manufacturing
*#0 0 *('0 2 4ever a variance
2i5ed Manufacturing
Overhead *1%'(0 0 4ever a variance *1%&'( 2
2. Variabl Ma"#\$a%&#ri"' C(-&- a"+ Varia"%-
12%
\$20
Accounts 9ayable !ontrol and various other accounts 12%\$20
:o record actual variable manufacturing overhead costs
incurred.
b. ?or=.in.9rocess !ontrol 12%#(0
:o record variable manufacturing overhead allocated.
c. Variable Manufacturing Overhead Allocated 12%#(0
Variable Manufacturing Overhead 3,ending Variance #0
Variable Manufacturing Overhead Efficiency Variance ('0
:o isolate variances for the accounting ,eriod.
d. Variable Manufacturing Overhead Efficiency Variance ('0
Variable Manufacturing Overhead 3,ending Variance #0
!ost of Goods 3old &\$0
:o -rite off variable manufacturing overhead variances to cost of goods sold.
+.C
Fi5+ Ma"#\$a%&#ri"' C(-&- a"+ Varia"%-
a. 2i5ed Manufacturing Overhead !ontrol 20%&(0
3alaries 9ayable% Acc. @e,reciation% various other accounts 20%&(0
:o record actual fi5ed manufacturing overhead costs incurred.
b. ?or=.in.9rocess !ontrol 20%C'(
:o record fi5ed manufacturing overhead allocated.
c. 2i5ed Manufacturing Overhead Allocated 20%C'(
2i5ed Manufacturing Overhead 3,ending Variance 1%'(0
2i5ed Manufacturing Overhead 9roduction.Volume Variance 1%&'(
:o isolate variances for the accounting ,eriod.
d. 2i5ed Manufacturing Overhead 9roduction.Volume Variance 1%&'(
2i5ed Manufacturing Overhead 3,ending Variance 1%'(0
!ost of Goods 3old 1C(
:o -rite off fi5ed manufacturing overhead variances to cost of goods sold.
'. 9lanning and control of variable manufacturing overhead costs has both a long.run and a
short.run focus. /t involves 3olutions ,lanning to underta=e only value.added overhead activities
(a long.run vie-) and then managing the cost drivers of those activities in the most efficient -ay
(a short.run vie-). 9lanning and control of fixed manufacturing overhead costs at 3olutions have
for a budgeted level of out,ut. 3olutions ma=es most of the =ey decisions that determine the
level of fi5ed.overhead costs at the start of the accounting ,eriod.
+.+
8-41 (101& min.) 9-)aria"% a"al,-i-, \$ill i" &* bla">-.
Variabl Fi5+
1. 3,ending variance
2. Efficiency variance
'. 9roduction.volume variance
\$. 2le5ible.budget variance
&. 0nderallocated (overallocated) MOB
*\$%200 0
\$%&00 0
4EVEH
+%C00 0
+%C00 0
*'%000 0
4EVEH
(00 0
'%000 0
'%(00 0
:hese relationshi,s could be ,resented in the same -ay as in E5hibit +.\$.
A%&#al C(-&-
I"%#rr+
213
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
Variable
MOB
*'&%C00 *'1%&00 *2C%000 *2C%000
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
2i5ed
MOB
*1+%000 *1&%000 *1&%000 *1\$%\$00
+.#
*\$%200 0
3,ending variance
*\$%&00 0
Efficiency variance
4ever a variance
*'%000 0
3,ending variance 4ever a variance
*(00 0
9roduction.volume variance
*+%C00 0
2le5ible.budget variance 4ever a variance
*+%C00 0
*'%000 0
2le5ible.budget variance
*(00 0
9roduction.volume variance
*'%(00 0
An overvie- of the \$ overhead variances isF
9-Varia"%
A"al,-i-
S/"+i"'
Varia"%
E\$\$i%i"%,
Varia"%
Pr(+#%&i("-V(l#!
Varia"%
Variable
Overhead *\$%200 0 *\$%&00 0 4ever a variance
2i5ed
Overhead *'%000 0 4ever a variance *(00 0
8-44 (20;'0 min.) S&rai'*&\$(r7ar+ 9-)aria"% ()r*a+ a"al,-i-.
1. :he budget for fi5ed manufacturing overhead is \$%000 units ) ( machine.hours ) *1&
machine.hoursIunit 8 *'(0%000.
An overvie- of the \$.variance analysis isF
9-Varia"%
A"al,-i-
S/"+i"'
Varia"%
E\$\$i%i"%,
Varia"%
Pr(+#%&i("-
V(l#! Varia"%
Variable
Manufacturing
*1C%+00 0 *1(%000 0 4ever a Variance
2i5ed
Manufacturing
*1'%000 0 4ever a Variance *'(%000 2
3olution E5hibit +.22 has details of these variances.
A detailed com,arison of actual and fle5ible budgeted amounts isF
A%&#al Fl5ibl B#+'&
Out,ut units (auto ,arts) \$%\$00 \$%\$00
Allocation base (machine.hours) 2+%\$00 2(%\$00
a
Allocation base ,er out,ut unit (.\$&
b
(.00
Variable MOB *2\$&%000 *211%200
c
Variable MOB ,er hour *+.('
d
*+.00
2i5ed MOB *'C'%000 *'(0%000
e
2i5ed MOB ,er hour *1'.1'
f
;
a
\$%\$00 units ) (.00 machine.hoursIunit 8 2(%\$00 machine.hours
b
2+%\$00 1 \$%\$00 8 (.\$& machine.hours ,er unit
c
\$%\$00 units ) (.00 machine.hours ,er unit ) *+.00 ,er machine.hour 8 *211%200
d
*2\$&%000 1 2+%\$00 8 *+.('
e
\$%000 units ) (.00 machine.hours ,er unit ) *1& ,er machine.hour 8 *'(0%000
f
*'C'%000 1 2+%\$00 8 *1'.1'
2. Variable Manufacturing Overhead !ontrol 2\$&%000
Accounts 9ayable !ontrol and other accounts 2\$&%000
+.10
?or=.in.9rocess !ontrol 211%200
Variable Manufacturing Overhead 3,ending Variance 1C%+00
Variable Manufacturing Overhead Efficiency Variance 1(%000
?ages 9ayable !ontrol% Accumulated @e,reciation
!ontrol% etc. 'C'%000
?or=.in.9rocess !ontrol '#(%000
2i5ed Manufacturing Overhead 3,ending Variance 1'%000
2i5ed Manufacturing Overhead 9roduction.Volume Variance '(%000
'. /ndividual fi5ed manufacturing overhead items are not usually affected very much by
day.to.day control. /nstead% they are controlled ,eriodically through ,lanning decisions and
budgeting ,rocedures that may sometimes have hori<ons covering si5 months or a year (for
e5am,le% management salaries) and sometimes covering many years (for e5am,le% long.term
leases and de,reciation on ,lant and eui,ment).
\$. :he fi5ed overhead s,ending variance is caused by the actual reali<ation of fi5ed costs
differing from the budgeted amounts. 3ome fi5ed costs are =no-n because they are
contractually s,ecified% such as rent or insurance% although if the rental or insurance contract
e5,ires during the year% the fi5ed amount can change. Other fi5ed costs are estimated% such as
the cost of managerial salaries -hich may de,end on bonuses and other ,ayments not =no-n at
the beginning of the ,eriod. /n this e5am,le% the s,ending variance is unfavorable% so actual
2OB is greater than the budgeted amount of 2OB.
:he fi5ed overhead ,roduction volume variance is caused by ,roduction being over or
under e5,ected ca,acity. Jou may be under ca,acity -hen demand dro,s from e5,ected levels%
or if there are ,roblems -ith ,roduction. Over ca,acity is usually driven by favorable demand
shoc=s or a desire to increase inventories. :he fact that there is a favorable volume variance
indicates that ,roduction e5ceeded the e5,ected level of out,ut (\$%\$00 units actual relative to a
denominator level of \$%000 out,ut units).
+.11
SOLUTION EXHIBIT 8-44
A%&#al C(-&-
I"%#rr+
213
A%&#al I"/#&
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#&
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#&
All(7+ \$(r
A%&#al O#&/#&
) B#+'&+ Ra&
293
Variable
MOB *2\$&%000
(2+%\$00 ) *+)
*22C%200
(\$%\$00 ) ( ) *+)
*211%200
(\$%\$00 ) ( ) *+)
*211%200
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#&
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
2i5ed
MOB *'C'%000
(\$%000 ) ( ) *1&)
*'(0%000
(\$%000 ) ( ) *1&)
*'(0%000
(\$%\$00 ) ( ) *1&)
*'#(%000
+.12
*1C%+00 0
3,ending variance
*1(%000 0
Efficiency variance 4ever a variance
*1'%000 0
3,ending variance 4ever a variance
*'(%000 2
9roduction.volume
variance
*''%+00 0
2le5ible.budget variance 4ever a variance
*''%+00 0
*1'%000 0
2le5ible.budget variance
*'(%000 2
9roduction.volume variance
*2'%000 2
8-48 ('0\$0 min.) S&rai'*&\$(r7ar+ %()ra' (\$ !a"#\$a%&#ri"' ()r*a+, -&a"+ar+-
%(-&i"' -,-&!.
1. 3olution E5hibit +.2' sho-s the com,utations. 3ummary details areF
A%&#al Fl5ibl B#+'&
Out,ut units \$1%000 \$1%000
Allocation base (machine.hours) 1'%'00 12%'00
a
Allocation base ,er out,ut unit 0.'2
b
0.'0
Variable MOB *1&&%100 *1\$C%(00
c
Variable MOB ,er hour *11.((
d
*12.00
2i5ed MOB *\$01%000 *'#0%000
2i5ed MOB ,er hour *'0.1&
e
;
a
\$1%000 ) 0.'0 8 12%'00
d
*1&&%100 1 1'%'00 8 *11.((
b
1'%'00 1 \$1%000 8 0.'2
e
*\$01%000 1 1'%'00 8 *'0.1&
c
\$1%000 ) 0.'0 ) *12 8 *1\$C%(00
An overvie- of the \$.variance analysis isF
9-Varia"%
A"al,-i-
S/"+i"'
Varia"%
E\$\$i%i"%,
Varia"%
Pr(+#%&i("
V(l#! Varia"%
Variable
Manufacturing
*\$%&00 2 *12%000 0 4ever a variance
2i5ed
Manufacturing
*11%000 0 4ever a variance *21%000 0
+.1'
2. Variable Manufacturing Overhead !ontrol 1&&%100
Accounts 9ayable !ontrol and other accounts 1&&%100
?or=.in.9rocess !ontrol 1\$C%(00
Variable Manufacturing Overhead Efficiency Variance 12%000
Variable Manufacturing Overhead 3,ending Variance \$%&00
?ages 9ayable !ontrol% Accumulated
@e,reciation !ontrol% etc. \$01%000
?or=.in.9rocess !ontrol '(#%000
2i5ed Manufacturing Overhead 3,ending Variance 11%000
Variance 21%000
'. :he control of variable manufacturing overhead reuires the identification of the cost
drivers for such items as energy% su,,lies% and re,airs. !ontrol often entails monitoring
nonfinancial measures that affect each cost item% one by one. E5am,les are =ilo-att.hours used%
uantities of lubricants used% and re,air ,arts and hours used. :he most convincing -ay to
discover -hy overhead ,erformance did not agree -ith a budget is to investigate ,ossible causes%
line item by line item.
\$. :he variable overhead s,ending variance is favorable. :his means the actual rate a,,lied
to the manufacturing costs is lo-er than the budgeted rate. 3ince variable overhead consists of
several different costs% this could be for a variety of reasons% such as the utility rates being lo-er
than estimated or the indirect materials costs ,er unit of denominator activity being less than
estimated.
:he variable overhead efficiency variance is unfavorable% -hich im,lies that the
estimated denominator activity -as too lo-. 3ince the denominator activity is machine hours%
this could be the result of inefficient use of machines% ,oorly scheduled ,roduction runs% or
machines that need maintenance and thus are not -or=ing at the e5,ected level of efficiency.
+.1\$
SOLUTION EXHIBIT 8-48
A%&#al C(-&-
I"%#rr+
213
A%&#al I"/#&
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#&
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#&
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
Variable
Manufacturing
*1&&%100
(1'%'00 ) *12)
*1&#%(00
(12%'00 ) *12)
*1\$C%(00
(12%'00 ) *12)
*1\$C%(00
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#&
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
2i5ed
Manufacturing
*\$01%000 *'#0%000 *'#0%000
(12%'00 ) *'0)
*'(#%000
8
hours . machine 1'%000
*'#0%000
8 *'0 ,er machine.hour.
KAlternative com,utationF 1'%000 denominator hours ; 12%'00 budgeted hours allo-ed 8 C00 hoursL
C00 hours 1 *'0 ,er machine.hour 8 *21%000 0
+.1&
*\$%&00 2
3,ending variance
*12%000 0
Efficiency variance 4ever a variance
*11%000 0
3,ending variance 4ever a variance
*21%000 0K
9roduction.volume variance
*C%&00 0
2le5ible.budget variance 4ever a variance
*C%&00 0
*11%000 0
2le5ible.budget variance
*21%000 0K
9roduction.volume variance
*'2%000 0
8-49 (20;2& min.) O)r*a+ )aria"%-, -r)i% -%&(r.
1.
Mal- (" ?*l-
2Ma, 4<<;3
A%&#al
R-#l&-
Fl5ibl
B#+'&
S&a&i%
B#+'&
Out,ut units (number of deliveries) +%+00 +%+00 10%000
Bours ,er delivery 0.(&
a
0.C0 0.C0
Bours of delivery time &%C20 (%1(0
b
C%000
b
Variable overhead costs ,er delivery hour *1.+0
c
*1.&0 *1.&0
Variable overhead (VOB) costs *10%2#( *#%2\$0
d
*10%&00
d
2i5ed overhead costs *'+%(00 *'&%000 *'&%000
2i5ed overhead cost ,er hour *&.00
e
a
&%C20 hours +%+00 deliveries 8 0.(& hours ,er delivery
b
hrs. ,er delivery number of deliveries 8 0.C0 10%000 8 C%000 hours
c
*10%2#( VOB costs &%C20 delivery hours 8 *1.+0 ,er delivery hour
d
@elivery hours VOB cost ,er delivery hour 8 C%000 *1.&0 8 *10%&00
e
3tatic budget delivery hours 8 10%000 units 0.C0 hoursIunit 8 C%000 hoursL
2i5ed overhead rate 8 2i5ed overhead costs 3tatic budget delivery hours 8 *'&%000 C%000 hours 8 *& ,er hour
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
B#+'&+ Ra&
&%C20 hrs *1.&0 ,er hr. (%1(0 hrs *1.&0 ,er hr.
*10%2#( *+%&+0 *#%2\$0
*1%C1( 0 *((0 2
3,ending variance Efficiency variance
2.
A%&#al C(-&-
I"%#rr+
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$ O#&/#&
L)l
All(%a&+6
B#+'&+ I"/#& 0&,. All(7+ \$(r
A%&#al O#&/#&
B#+'&+ Ra&
+%+00 units 0.C0 hrs.Iunit *&Ihr.
(%1(0 hrs. *&Ihr.
*'+%(00 *'&%000 *'0%+00
*'%(00 0 *\$%200 0
3,ending variance 9roduction.volume variance
+.1(
'. :he s,ending variances for variable and fi5ed overhead are both unfavorable. :his means
that MO? had increases over budget in either or both the cost of individual items (such as
tele,hone calls and gasoline) in the overhead cost ,ools% or the usage of these individual items
,er unit of the allocation base (delivery time). :he favorable efficiency variance for variable
overhead costs results from more efficient use of the cost allocation base;;each delivery ta=es
0.(& hours versus a budgeted 0.C0 hours.
MO? can best manage its fi5ed overhead costs by long.term ,lanning of ca,acity rather
activities and then determining the a,,ro,riate level for those activities. Most fi5ed overhead
costs are committed -ell before they are incurred. /n contrast% for variable overhead% a mi5 of
long.run ,lanning and daily monitoring of the use of individual items is reuired to manage costs
long.run focus) and then manage the cost drivers of those activities in the most efficient -ay (a
short.run focus).
:here is no ,roduction.volume variance for variable overhead costs. :he unfavorable
,roduction.volume variance for fi5ed overhead costs arises because MO? has unused fi5ed
overhead resources that it may see= to reduce in the long run.
+.1C
8-4@ (\$0&0 min.) T(&al ()r*a+, 8-)aria"% a"al,-i-.
1. :his ,roblem has t-o maMor ,ur,osesF (a) to give e5,erience -ith data allocated on a total
overhead basis instead of on se,arate variable and fi5ed bases and (b) to reinforce distinctions
bet-een actual hours of in,ut% budgeted (standard) hours allo-ed for actual out,ut% and
denominator level.
An analysis of direct manufacturing labor -ill ,rovide the data for actual hours of in,ut
and standard hours allo-ed. One a,,roach is to ,lug the =no-n figures (designated by asteris=s)
into the analytical frame-or= and solve for the un=no-ns. :he direct manufacturing labor
efficiency variance can be com,uted by subtracting *'%+&( from *&%CC(. :he com,lete ,icture is
as follo-sF
A%&#al C(-&-
I"%#rr+
A%&#al I"/#&
1 B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#&
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
(\$%+20 hrs. ) *1(.+0)
*+0%#C(
K
(\$%+20hrs. ) *1(.00
K
)
*CC%120
(\$%C00 hrs. ) *1(.00
K
)
*C&%200
K
Given
Direct Labor calculations
Actual in,ut ) 7udgeted rate 8 Actual costs ; 9rice variance
8 *+0%#C( ; *'%+&( 8 *CC%120
Actual in,ut 8 *CC%120 1 7udgeted rate 8 *CC%120 1 *1( 8 \$%+20 hours
7udgeted in,ut ) 7udgeted rate 8 *CC%120 ; Efficiency variance
8 *CC%120 ; *1%#20 8 *C&%200
7udgeted in,ut 8 *C&%200 1 7udgeted rate 8 *C&%200 1 1( 8 \$%C00 hours
K
1 '%200
K
hrs. 8 *+.00 ,er standard labor.hour
8 *C#%0\$0
K
; \$%000
K
) (*+.00) 8 *\$C%0\$0
/f total overhead is allocated at 120D of direct labor.cost% the single overhead rate must
be 120D of *1(.00% or *1#.20 ,er hour. :herefore% the fi5ed overhead com,onent of the rate
must be *1#.20 ; *+.00% or *11.20 ,er direct labor.hour.
+.1+
*'%+&( 0
K
9rice variance
*1%#20 0
Efficiency variance
*&%CC( 0
K
2le5ible.budget variance
Aet @ 8 denominator level in in,ut units
7udgeted fi5ed
,er in,ut unit
8
*11.20 8 *\$C%0\$0 1 @
@ 8 \$%200 direct labor.hours
A summary '.variance analysis for October follo-sF
A%&#al C(-&-
I"%#rr+
A%&#al I"/#&-
1 B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#&
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
All(%a&+6
B#+'&+ I"/#&
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
*##%(00
K
(*\$C%0\$0 N (\$%+20 ) *+.00)
*+&%(00
*\$C%0\$0 N (*+ ) \$%C00)
*+\$%(\$0
(\$%C00 hrs. ) *1#.20)
*#0%2\$0
K
Ono-n figure
An overvie- of the '.variance analysis using the bloc= format in the te5t isF
8-Varia"%
A"al,-i-
S/"+i"'
Varia"%
E\$\$i%i"%,
Varia"%
Pr(+#%&i("
V(l#! Varia"%
:otal Overhead *1\$%000 0 *#(00 *&%(00 2
2. :he control of variable manufacturing overhead reuires the identification of the cost
drivers for such items as energy% su,,lies% eui,ment% and maintenance. !ontrol often entails
monitoring nonfinancial measures that affect each cost item% one by one. E5am,les are =ilo-atts
used% uantities of lubricants used% and eui,ment ,arts and hours used. :he most convincing
-ay to discover -hy overhead ,erformance did not agree -ith a budget is to investigate ,ossible
causes% line item by line item.
/ndividual fi5ed manufacturing overhead items are not usually affected very much by day.
to.day control. /nstead% they are controlled ,eriodically through ,lanning decisions and
budgeting that may sometimes have hori<ons covering si5 months or a year (for e5am,le%
management salaries) and sometimes covering many years (for e5am,le% long.term leases and
de,reciation on ,lant and eui,ment).
+.1#
*1\$%000 0
3,ending variance
*#(0 0
Efficiency variance
*&%(00 2K
9roduction.volume variance
*1\$%#(0 0
2le5ible.budget variance
*&%(00 2K
9roduction.volume variance
8-46 ('0 min.) O)r*a+ )aria"%-, !i--i"' i"\$(r!a&i(".
1. /n the columnar ,resentation of variable overhead variance analysis% all numbers sho-n in
bold are calculated from the given information% in the order (a) . (e).
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
B#+'&+ Ra&
All(7+ \$(r B#+'&+
A%&#al O#&/#& Ra&
2b3 2a3 2%3
1&%000 *(.00 1\$%+&0 *(.00
mach. hrs. ,er mach. hr. mach. hrs. ,er mach. hr.
A8;,64@ A;<,<<< A8;,1<<
*'C& 2 A;<< U 2+3
3,ending variance Efficiency variance
A@4@ U 23
2le5ible.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 = \$900U
e. VOH flexible budget variance = \$900U \$375F = \$525U
Allocated variable overhead -ill be the same as the fle5ible budget variable overhead of
*+#%100. :he actual variable overhead cost is *+#%(2&. :herefore% variable overhead is
underallocated by *&2&.
+.20
2. /n the columnar ,resentation of fi5ed overhead variance analysis% all numbers sho-n in
bold are calculated from the given information% in the order (a) ; (e).
Fl5ibl B#+'&6 All(%a&+6
A%&#al C(-&-
S&a&i% B#+'& L#!/ S#!
R'ar+l-- (\$ O#&/#&
B#+'&+ I"/#& 0&,.
All(7+ \$(r B#+'&+
I"%#rr+ L)l A%&#al O#&/#& Ra&
2a3 2b3
1\$%+&0 A1.6<B 2%3
mach. hrs. ,er mach. hr.
A8<,8:@ A48,8<< A48,:6<
*1%&C& 0 A@,<9< U 2+3
3,ending variance Pr(+#%&i("-)(l#! )aria"%
A1,@:@ U 23
Fl5ibl-b#+'& )aria"%
a. Actual 2OB costs 8 *120%000 total overhead costs ; *+#%(2& VOB costs 8 *'0%'C&
b. 3tatic budget 2OB lum, sum 8 *'0%'C& ; *1%&C& s,ending variance 8 *2+%+00
c. K2OB allocation rate 8 *2+%+00 2OB static.budget lum, sum

## 1+%000 static.budget machine.hours

8 *1.(0 ,er machine.hour
Allocated 2OB 8 1\$%+&0 machine.hours

## *1.(0 ,er machine.hour 8 *2'%C(0

d. 9VV 8 *2+%+00 ; *2'%C(0 8 *&%0\$00
e. 2OB fle5ible budget variance 8 2OB s,ending variance 8 *1%&C& 0
Allocated fi5ed overhead is *2'%C(0. :he actual fi5ed overhead cost is *'0%'C&. :herefore% fi5ed
+.21
8-4: (1& min.) I+"&i\$,i"' \$a)(rabl a"+ #"\$a)(rabl )aria"%-.
Scenario
VOH
Spending
Variance
VOH
Efficiency
Variance
FOH
Spending
Variance
FOH
Production-
Volume Variance
Production output is
5% more than
budgeted, and actual
fixed manufacturing
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
Favorable: output
is more than
budgeted causing
FOH costs to be
overallocated
Production output is
10% more than
budgeted; actual
machine hours are 5%
less than budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Favorable: actual
machine-hours less
than flexible-
budget machine-
hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Favorable: output
is more than
budgeted causing
FOH costs to be
overallocated
Production output is
8% less 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
Unfavorable:
output less than
budgeted will
cause FOH costs to
be underallocated
Actual machine hours
are 15% greater than
flexible-budget
machine hours
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Unfavorable: more
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 10% greater
and actual variable
manufacturing
greater
Unfavorable:
actual VOH rate
greater than
budgeted VOH
rate
Unfavorable: actual
machine-hours
greater 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

+.22
8-48 ('& min.) Fl5ibl-b#+'& )aria"%-, r)i7 (\$ C*a/&r- : a"+ 8.
1. 3olution E5hibit +.2+ contains a columnar ,resentation of the variances for @oor=nob @esign
!om,any (@@!) for A,ril 200#.
SOLUTION EXHIBIT 8-48
A%&#al C(-&-
I"%#rr+6
A%&#al I"/#& 0&,.
A%&#al I"/#& 0&,.
B#+'&+ Pri%
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 A%&#al Ra& P#r%*a-- U-a' 1 B#+'&+ Pri%
@irect
Materials
(&0%000 *22.0)
*1%100%000
(&0%000 *20.0)
*1%000%000
(\$&%000 *20.0)
*#00%000
(\$C%&00 *20.0)
*#&0%000
*100%000 0 *&0%000 2
a. 9rice variance b. Efficiency variance
@irect
Manufacturing
Aabor *(&0%000
(20%000 *'0.0)
*(00%000
(2'%C&0 *'0.0)
*C12%&00
*&0%000 0 *112%&00 2
c. 9rice variance d. Efficiency variance
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
B#+'&+ Ra&
All(%a&+6
2B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
B#+'&+ Ra&3
Variable
Manufacturing
(\$&%000 *10.0)
*\$&0%000
(\$C%&00 *10.0)
*\$C&%000
(\$C%&00 *10.0)
*\$C&%000
*&0%000 2 *2&%000 2
e. 3,ending variance f. Efficiency variance 4ever a variance
2i5ed
Manufacturing
*'&0%000 *2&0%000K *2&0%000
(\$C%&00 *&.0)
*2'C%&00
*100%000 0 *12%&00 0
h. 3,ending variance 4ever a variance g. 9roduction volume variance
K
@enominator level in hoursF 100%000 5 .& 8 &0%000 hours
7udgeted 2i5ed OverheadF &0%000 5 *&Ihr 8 *2&0%000
+.2'
2. :he direct materials ,rice variance indicates that @@! ,aid more for brass than they had
,lanned. /f this is because they ,urchased a higher uality of brass% it may e5,lain -hy they
used less brass than e5,ected (leading to a favorable material efficiency variance). /n turn% since
variable manufacturing overhead is assigned based on ,ounds of materials used% this directly led
to the favorable variable overhead efficiency variance. :he ,urchase of a better uality of brass
may also e5,lain -hy it too= less labor time to ,roduce the door=nobs than e5,ected (the
favorable direct labor efficiency variance). 2inally% the unfavorable direct labor ,rice variance
could im,ly that the -or=ers -ho -ere hired -ere more e5,erienced than e5,ected% -hich could
also be related to the ,ositive direct material and direct labor efficiency variances.
8-4; ('0 min.) C(!/r*"-i) )aria"% a"al,-i-.
1. 7udgeted number of machine.hours ,lanned can be calculated by multi,lying the number
of units ,lanned (budgeted) by the number of machine.hours allocated ,er unitF
+++ units 2 machine.hours ,er unit 8 1%CC( machine.hours.
2. 7udgeted fi5ed MOB costs ,er machine.hour can be com,uted by dividing the fle5ible
budget amount for fi5ed MOB (-hich is the same as the static budget) by the number of
machine.hours ,lanned (calculated in (a.))F
*'\$+%0#( 1 1%CC( machine.hours 8 *1#(.00 ,er machine.hour
'. 7udgeted variable MOB costs ,er machine.hour are calculated as budgeted variable
MOB costs divided by the budgeted number of machine.hours ,lannedF
*C1%0\$0 1 1%CC( machine.hours 8 *\$0.00 ,er machine.hour.
\$. 7udgeted number of machine.hours allo-ed for actual out,ut achieved can be calculated
by dividing the fle5ible.budget amount for variable MOB by budgeted variable MOB
costs ,er machine.hourF
*C(%+00 1 *\$0.00 ,er machine.hour8 1%#20 machine.hours allo-ed
&. :he actual number of out,ut units is the budgeted number of machine.hours allo-ed for
actual out,ut achieved divided by the ,lanned allocation rate of machine hours ,er unitF
1%#20 machine.hours 1 2 machine.hours ,er unit 8 #(0 units.
(. :he actual number of machine.hours used ,er out,ut unit is the actual number of
machine hours used (given) divided by the actual number of units manufacturedF
1%+2\$ machine.hours 1 #(0 units 8 1.# machine.hours used ,er out,ut unit.
+.2\$
8-8< ((0 min.) =(#r"al "&ri- 2%("&i"#a&i(" (\$ 8-4;3.
1. Oey information underlying the com,utation of variances isF
A%&#al
R-#l&-
Fl5ibl-B#+'&
A!(#"&
S&a&i%-B#+'&
A!(#"&
1. Out,ut units (food ,rocessors) #(0 #(0 +++
2. Machine.hours 1%+2\$ 1%#20 1%CC(
'. Machine.hours ,er out,ut unit 1.#0 2.00 2.00
\$. Variable MOB costs *C(%(0+ *C(%+00 *C1%0\$0
&. Variable MOB costs ,er machine.
hour (Ho- \$ 1 Ho- 2) *\$2.00 *\$0.00 *\$0.00
(. Variable MOB costs ,er unit
(Ho- \$ 1 Ho- 1) *C#.+0 *+0.00 *+0.00
C. 2i5ed MOB costs *'&0%20+ *'\$+%0#( *'\$+%0#(
+. 2i5ed MOB costs ,er machine.
hour (Ho- C 1 Ho- 2) *1#2.00 *1+1.'0 *1#(.00
#. 2i5ed MOB costs ,er unit (C 1 1) *'(\$.+0 *'(2.(0 *'#2.00
3olution E5hibit +.'0 sho-s the com,utation of the variances.
=(#r"al "&ri- \$(r )ariabl MOH, ,ar "++ D%!br 81, 4<1<6
Variable MOB !ontrol C(%(0+
Accounts 9ayable !ontrol and Other Accounts C(%(0+
?or=.in.9rocess !ontrol C(%+00
Variable MOB Allocated C(%+00
Variable MOB Allocated C(%+00
Variable MOB 3,ending Variance '%(\$+
Variable MOB !ontrol C(%(0+
Variable MOB Efficiency Variance '%+\$0
=(#r"al "&ri- \$(r \$i5+ MOH, ,ar "++ D%!br 81, 4<1<6
2i5ed MOB !ontrol '&0%20+
?ages 9ayable% Accumulated @e,reciation% etc. '&0%20+
?or=.in.9rocess !ontrol 'C(%'20
2i5ed MOB Allocated 'C(%'20
2i5ed MOB Allocated 'C(%'20
2i5ed MOB 3,ending Variance 2%112
2i5ed MOB !ontrol '&0%20+
2i5ed MOB 9roduction.Volume Variance 2+%22\$
+.2&
2. A+C#-&!"& (\$ COGS
Variable MOB Efficiency Variance '%+\$0
2i5ed MOB 9roduction.Volume Variance 2+%22\$
Variable MOB 3,ending Variance '%(\$+
2i5ed MOB 3,ending Variance 2%112
!ost of Goods 3old 2(%'0\$
SOLUTION EXHIBIT 8-8<
Variabl Ma"#\$a%&#ri"' O)r*a+
A%&#al C(-&-
I"%#rr+
213
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
(1%+2\$ *\$2)
*C(%(0+
(1%+2\$ *\$0)
*C2%#(0
(1%#20 *\$0)
*C(%+00
(1%#20 *\$0)
*C(%+00
Fi5+ Ma"#\$a%&#ri"' O)r*a+
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- O\$
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
(1%#20 ) *1#()
*'&0%20+ *'\$+%0#( *'\$+%0#( *'C(%'20
+.2(
*'%(\$+ 0
3,ending variance
*'%+\$0 2
Efficiency variance 4ever a variance
*2%1120
3,ending variance 4ever a variance
*2+%22\$ 2
9roduction.volume variance
Gra,h for ,lanning
and control ,ur,ose
Gra,h for inventory
costing ,ur,ose
(*1+ ,er machine.hour)
8-81 ('0\$0 min.) Gra/*- a"+ ()r*a+ )aria"%-.
8
8 *1+%000%000I 1%000%000 machine hours
8 *1+ ,er machine.hour
+.2C
:otal
Variable
Manuf.
!osts
*1+%000%000
*#%000%000
Gra,h for ,lanning
and control and inventory
costing
,ur,oses at *#
,er machine.hour
1%000%000
Machine.Bours
:otal
2i5ed
Manuf.
!osts
*1+%000%000
*#%000%000
1%000%000
Machine.Bours
2. (a) Variable Manufacturing Overhead Variance Analysis for 2resh% /nc. for 200#
A%&#al C(-&-
I"%#rr+
213
A%&#al I"/#& Qty.
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
*#%02&%000
(#&0%000 *#)
*+%&&0%000
(+C&%000 *#)
*C%+C&%000
(+C&%000 *#)
*C%+C&%000
(b) 2i5ed Manufacturing Overhead Variance Analysis for 2resh% /nc. for 200#
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
*1+%0&0%000 *1+%000%000 *1+%000%000
(+C&%000 ) *1+)
*1&%C&0%000
K
Alternative com,utationF 1%000%000 denominator hrs. ; +C&%000 budgeted hrs. allo-ed 8 12&%000 hrs.
12&%000 *1+ 8 *2%2&0%000 0
+.2+
*\$C&%000 0
3,ending variance
*(C&%000 0
Efficiency variance 4ever a variance
*1%1&0%000 0
2le5ible.budget variance 4ever a variance
*1%1&0,000 0
*&0%000 0
3,ending variance 4ever a variance
*2%2&0%000 0
K
9roduction.volume variance
*&0%000 0
2le5ible.budget variance
*2%2&0%000 0
K
9roduction.volume variance
*2%'00%000 0
'. :he underallocated manufacturing overhead -asF variable% *1%1&0%000 and fi5ed%
*2%'00%000. :he fle5ible.budget variance and underallocated overhead are al-ays the same
amount for variable manufacturing overhead% because the fle5ible.budget amount of variable
/n contrast% the budgeted and allocated amounts for fi5ed manufacturing overhead only coincide
-hen the budgeted in,ut of the allocation base for the actual out,ut level achieved e5actly euals
the denominator level.
\$. :he choice of the denominator level -ill affect inventory costs. :he ne- fi5ed
manufacturing overhead rate -ould be *1+%000%000 1 C&0%000 8 *2\$ ,er machine.hour. /n turn%
the allocated amount of fi5ed manufacturing overhead and the ,roduction.volume variance
-ould change as seen belo-F
A%&#al B#+'& All(%a&+
*1+%0&0%000 *1+%000%000
+C&%000 ) *2\$ 8
*21%000%000
* &0 %000 0 * ' %000%000 2
K

2le5ible.budget variance 9rodn. volume variance
* 2%#& 0%000 2
K
Alternate com,utationF (C&0%000 ; +C&%000) ) *2\$ 8 *'%000%000 2
:he maMor ,oint of this reuirement is that inventory costs (and% hence% income determination)
can be heavily affected by the choice of the denominator level used for setting the fi5ed
+.2#
8-84 ('0 min.) 9-)aria"% a"al,-i-, \$i"+ &* #">"(7"-.
Ono-n figures denoted by an K
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#&
0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
All(%a&+6
B#+'&+ I"/#&
0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
Ca- A6
Variable
Manufacturing
(1%'2& ) *1&)
*1#%+C&
(1%2&0K ) *1&)
*1+%C&0K
(1%2&0K ) *1&)
*1+%C&0K
2i5ed
Manufacturing
(Aum, sum)
*2&%000K
(Aum, sum)
*2&%000K
(1%2&0 ) *20
a
)
*2&%000K
:otal budgeted manufacturing overhead 8 *1+%C&0 N *2&%000 8 *\$'%C&0
Ca- B6
Variable
Manufacturing
(1%(2& *+.&0K)
*1'%+1'
(1%(2&K *+.&0K)
*1'%+1'
(1%(2&K *+.&0K)
*1'%+1'
2i5ed
Manufacturing
(Aum, sum)
*1C%&00
b
(Aum, sum)
*1C%&00
b
(1%(2&K *10)
*1(%2&0
@enominator level 8 7udgeted 2MOB costs 1 7udgeted 2MOB rate 8 *1C%&00 1 *10 8 1%C&0
hours
+.'0
4ever a variance
*1%12& 0
Efficiency variance
*\$%+C&K 2
3,ending variance
*0
9roduction.volume
variance
4ever a variance
*1%&00 0
3,ending variance
4ever a variance
*0
Efficiency variance
*0K
3,ending variance
*1%2&0 0K
9roduction.volume
variance
4ever a variance
*C&0 2K
3,ending variance
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#&
0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
All(%a&+6
B#+'&+ I"/#&
0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
Ca- C6
Variable
Manufacturing
(2%#2& *&.00K)
*1\$%(2&
(2%+C& *&.00K)
*1\$%'C&
c
(2%+C& *&.00K)
*1\$%'C&
c
2i5ed
Manufacturing
d
:otal budgeted manufacturing overhead 8 *1\$%'C& N *2C%&00 8 *\$1%+C&
a
7udgeted 2MOB rate 8 7udgeted 2MOB costs 1 @enominator level 8 *2&%000 1 1%2&0 8 *20
b
8
7udgeted
N
7udgeted
*'1%'1'K 8 72MOB N (1%(2& *+.&0)
72MOB 8 *1C%&00
c
7udgeted hours allo-ed for actual out,ut achieved must be derived from the out,ut level variance before this figure
can be derived% or% since the fi5ed manufacturing overhead rate is *2C%&00 1 2%C&0 8 *10% and the allocated amount
is *2+%C&0% the budgeted hours allo-ed for the actual out,ut achieved must be 2%+C& (*2+%C&0 *10).
d
2%+C& (*2C%&00K 1 2%C&0K) 8 *2+%C&0
+.'1
4ever a variance
*2&0 0K
Efficiency variance
*+C& 0K
3,ending variance
*1%2&0 2K
9roduction.volume
variance
4ever a variance
*2%&00 0
3,ending variance
8-88 (1&2& min.) Fl5ibl b#+'&-, 9-)aria"% a"al,-i-.
1. 8
8
'%(00%000
C20%000
8 & hours ,er unit
7udgeted @AB allo-ed for May out,ut 8 ((%000 units & hrs.Iunit 8 ''0%000 hrs.
Allocated total MOB 8 ''0%000 :otal MOB rate ,er hour
8 ''0%000 *1.20 8 *'#(%000
2% '% \$% &. 3ee 3olution E5hibit +.''
Variable manuf. overhead rate ,er @AB 8 *0.2& N *0.'\$ 8 *0.&#
2i5ed manuf. overhead rate ,er @AB 8 *0.1+ N *0.1& N *0.2+ 8 *0.(1
2i5ed manuf. overhead budget for May 8 (*(\$+%000 N *&\$0%000 N *1%00+%000) 1 12
8 *2%1#(%000 1 12 8 *1+'%000
or%
2i5ed manuf. overhead budget for May 8 *&\$%000 N *\$&%000 N *+\$%000 8 *1+'%000
0sing the format of E5hibit +.& for variable manufacturing overhead and then fi5ed
Actual variable manuf. overheadF *C&%000 N *111%000 8 *1+(%000
Actual fi5ed manuf. overheadF *&1%000 N *&\$%000 N *+\$%000 8 *1+#%000
An overvie- of the \$.variance analysis using the bloc= format of the te5t isF
9-Varia"%
A"al,-i-
S/"+i"'
Varia"%
E\$\$i%i"%,
Varia"%
Pr(+#%&i("-
V(l#!
Varia"%
Variable
Manufacturing
*1&0 0 *+%+&0 2 4ever a variance
2i5ed
Manufacturing
*(%000 0 4ever a variance *1+%'00 2
+.'2
SOLUTION EXHIBIT 8-88
Variabl Ma"#\$a%&#ri"' O)r*a+
A%&#al C(-&-
I"%#rr+
213
A%&#al I"/#& 0&,.
1 B#+'&+ Ra&
243
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
*1+(%000
('1&%000 *0.&#)
*1+&%+&0
(''0%000 *0.&#)
*1#\$%C00
(''0%000 *0.&#)
*1#\$%C00
Fi5+ Ma"#\$a%&#ri"' O)r*a+
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#&
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
*1+#%000 *1+'%000 *1+'%000
(''0%000 *0.(1)
*201%'00
Alternate com,utation of the ,roduction volume varianceF
8
8 ( )
'% (00% 000
''0%000
12
1 _

1
, ]
) * 0.(1
8 (''0%000 ; '00%000) ) *0.(1 8 *1+%'00 2
+.''
*1&0 0
3,ending variance
*+%+&0 2
Efficiency variance 4ever a variance
*(%000 0
3,ending variance 4ever a variance
*1+%'00 2
9roduction.volume variance
8-89 (20 min.) Dir%& Ma"#\$a%&#ri"' Lab(r a"+ Variabl Ma"#\$a%&#ri"' O)r*a+
Varia"%-
1. @irect Manufacturing Aabor variance analysis for 3arah 7ethPs Art 3u,,ly !om,any
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,. All(7+
\$(r A%&#al O#&/#&
B#+'&+ Pri%
1'%000 ) 0.C& ) 20.2 1'%000 ) 0.C& ) 20 1'%000 ) 0.& ) 20.0
*1#(%#&0 *1#&%000 *1'0%000

*1%#&0 0 *(&%000 0
9rice variance Efficiency variance
2. Variable Manufacturing Overhead variance analysis for 3arah 7ethPs Art 3u,,ly !om,any
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,. All(7+
\$(r A%&#al O#&/#&
B#+'&+ Ra&
1'%000 ) 0.C& ) #.C& 1'%000 ) 0.C& ) 10.0 1'%000 ) 0.& ) 10.0
*#&%0(2.& *#C%&00 *(&%000

*2%\$'C.& 2 *'2%&00 0
3,ending variance Efficiency variance
'. :he favorable s,ending variance for variable manufacturing overhead suggests that less costly
items -ere used% -hich could have a negative im,act on labor efficiency. 7ut note that the
-or=ers -ere ,aid a higher rate than budgeted% -hich% if it indicates the hiring of more ualified
em,loyees% should lead to favorable labor efficiency variances. Moreover% the ,rice variance and
the s,ending variance are both very small% a,,ro5imately 1D and 2.&D res,ectively% -hile the
efficiency variances are very large% each eualing &0D of e5,ected costs. /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 -ere related to direct manufacturing
labor% then 3arah is correct . both the labor efficiency variance and the variable overhead
efficiency variance -ould reflect real cost overruns due to the inefficient use of labor. Bo-ever%
a ,ortion 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 -ill inflate the effect of inefficient labor usage on the variable
overhead efficiency variance. :he real effect on firm ,rofitability -ill be lo-er% and -ill li=ely
be ca,tured in a favorable s,ending variance for variable overhead.
+.'\$
8-8@ ('0 min.) Ca#-- (\$ I"+ir%& Varia"%-
1. Variable Overhead Variance Analysis for BeatherPs Borse 3,a for August 200#
A%&#al A%&#al i"/#& B#+'&+ i"/#& all(7+ \$(r
Variabl O)r*a+ 5 B#+'&+ ra& A%&#al (#&/#& 5 B#+'&+ ra&
(#&0 ) '+ ) *0.2) (#00 ) '+ ) *0.2)
*C%&00 *C%220 *(%+\$0
*2+0 0 *'+0 0
3,ending variance Efficiency variance
2. 2i5ed Overhead Variance Analysis for BeatherPs Borse 3,a for August 200#
A%&#al S&a&i% B#+'& B#+'&+ i"/#& all(7+ \$(r
Fi5+ O)r*a+ Fi5+ O)r*a+ A%&#al (#&/#& 5 B#+'&+ Ra&
(#00 5 \$0 5 *1.&) (#00 ) '+ ) *1.&)
*&0%000 *&\$%000 &1%'00
*\$%000 2 *2%C00 0
3,ending variance 9roduction.volume variance
'. :he variable overhead s,ending variance arises from the fact that the cost of horse feed%
sham,oo% ribbons and other su,,lies -as higher% ,er -eighted average horse.guest -ee=%
than e5,ected (*C%&00I(#&0)'+)lbs 8 *0.20+ ,er lb Q *0.2 ,er lb). 0nli=e the material
and labor ,rice variances% -hich only reflect the ,rices ,aid% the s,ending variance could
have both a cost and usage com,onent. BB3 -ould have a negative s,ending variance if
they ,aid more for feed than e5,ected or if the horses ate more feed than e5,ected.
\$. :he *'+0 unfavorable variable overhead efficiency variance reflects the fact that the
average -eight of a horse -as higher than e5,ected. BB3 e5,ected horses to -eigh an
average of #00 lbs but during August% the horses -eighed an average of #&0 lbs. Aarger
horses are e5,ected to consume more variable overhead% such as horse feed and sham,oo%
hence the unfavorable nature of the variance.
&. 2i5ed overhead is fi5ed -ith res,ect to horse -eight. :his does not mean that it can be
forecasted -ith 100D accuracy. 2or e5am,le% salaries or actual costs for advertising may
have been higher than e5,ected% leading to the *\$%000 unfavorable variance.
(. :he ,roduction.volume variance of *2%C00 e5ists because the fi5ed overhead rate -as
based on the forecasted number of horse guest.-ee=s% \$0% -hile the fi5ed overhead -as
a,,lied using the actual number of horse guest.-ee=s% '+. :he overestimation of the
number of horse guests in August -ould lead to an under.absor,tion of fi5ed overhead%
resulting in the unfavorable ,roduction.volume variance. /f the estimate -as too far off
from the actual number of horses% BB3 might ,otentially not charge enough to cover
their costs.
+.'&
8-86 (20 min.) A%&i)i&,-ba-+ %(-&i"', ba&%*-l)l )aria"% a"al,-i-
1. 3tatic budget number of crates 8 7udgeted ,airs shi,,ed I 7udgeted ,airs ,er crate
8 2\$0%000I12
8 20%000 crates
2. 2le5ible budget number of crates 8 Actual ,airs shi,,ed I 7udgeted ,airs ,er crate
8 1+0%000I12
8 1&%000 crates
'. Actual number of crates shi,,ed 8 Actual ,airs shi,,ed I Actual ,airs ,er bo5
8 1+0%000I10
8 1+%000 crates
\$. 3tatic budget number of hours 8 3tatic budget number of crates ) budgeted hours ,er bo5
8 20%000 ) 1.2 8 2\$%000 hours
2i5ed overhead rate 8 3tatic budget fi5ed overhead I static budget number of hours
8 (0%000I2\$%000
8 *2.&0 ,er hour
&. Variable Overhead Variance Analysis for HicaPs 2leet 2eet /nc. for 200+
A%&#al A%&#al *(#r- B#+'&+ *(#r- all(7+ \$(r
Variabl O)r*a+ 5 B#+'&+ ra& A%&#al (#&/#& 5 B#+'&+ ra&
(1+%000 ) 1.1 ) *21) (1+%000 ) 1.1 ) *20) (1&%000 ) 1.2 ) *20)
*\$1&%+00 *'#(%000 *'(0%000
*1#%+00 0 *'(%000 0
3,ending variance Efficiency variance
(. 2i5ed Overhead Variance Analysis for HicaPs 2leet 2eet /nc. for 200+

A%&#al S&a&i% B#+'& B#+'&+ *(#r- all(7+ \$(r
Fi5+ O)r*a+ Fi5+ O)r*a+ A%&#al (#&/#& 1 B#+'&+ Ra&
(1&%000 ) 1.2 )*2.&)
*&&%000 *(0%000 *\$&%000
*&%000 2 *1&%000 0
3,ending variance 9roduction volume variance
+.'(
8-8: ('0 min.) A%&i)i&,-ba-+ %(-&i"', ba&%*-l)l )aria"% a"al,-i-
1. 3tatic budget number of setu,s 8 7udgeted boo=s ,roducedI 7udgeted boo=s ,er setu,
8 200%000 1 &00 8 \$00 setu,s
2. 2le5ible budget number of setu,s 8 Actual boo=s ,roduced I 7udgeted boo=s ,er setu,
8 21(%000 1 &00 8 \$'2 setu,s
'. Actual number of setu,s 8 Actual boo=s ,roduced I Actual boo=s ,er setu,
8 21(%000I\$+0 8 \$&0 setu,s
\$. 3tatic budget number of hours 8 3tatic budget R of setu,s ) 7udgeted hours ,er setu,
8 \$00 ) ( 8 2%\$00 hours
2i5ed overhead rate 8 3tatic budget fi5ed overhead I 3tatic budget number of hours
8 C2%000I2%\$00 8 *'0 ,er hour
&. 7udgeted variable overhead cost of a setu,
8 7udgeted variable cost ,er setu,.hour ) 7udgeted number of setu,.hours
8 *100 ) ( 8 *(00.

7udgeted total overhead cost of a setu,
8 7udgeted variable overhead cost N 2i5ed overhead rate ) 7udgeted number of setu,.hours
8 *(00 N *'0 ) ( 8 C+0.
3o% the charge of *C00 covers the budgeted incremental (i.e.% variable overhead) cost of a
setu,% but not the budgeted full cost.
(. Variable 3etu, Overhead Variance Analysis for "o 4athan 9ublishing !om,any for 200#
A%&#al A%&#al *(#r- S&a"+ar+ *(#r-
Variabl O)r*a+ 5 B#+'&+ ra& 5 S&a"+ar+ ra&
(\$&0 ) (.& ) *#0) (\$&0 ) (.& ) *100) (\$'2 ) (.0 ) *100)
*2('%2&0 *2#2%&00 *2&#%200
*2#%2&02 *''%'000
3,ending variance Efficiency variance
+.'C
C. 2i5ed 3etu, Overhead Variance Analysis for "o 4athan 9ublishing !om,any for 200#
A%&#al S&a&i% B#+'& S&a"+ar+ *(#r-
Fi5+ O)r*a+ Fi5+ O)r*a+ 5 B#+'&+ Ra&
(\$'2 ) (.0 ) *'0)
*C#%000 *C2%000 *CC%C(0
*C%000 0 *&%C(0 2
3,ending variance 9roduction.volume variance
+. HeMecting an order may have im,lications for future orders (i.e.% ,rofessors -ould be
reluctant to order boo=s from this ,ublisher again). "o 4athan should consider factors
such as ,rior history -ith the customer and ,otential future sales.
/f a boo= is relatively ne-% "o 4athan might consider running a full batch and holding the
e5tra boo=s in case of a second s,ecial order or Must hold the e5tra boo=s until ne5t
semester.
/f the s,ecial order comes at heavy volume times% "o should loo= at the o,,ortunity cost
of filling it% i.e.% acce,ting the order may interfere -ith or delay the ,rinting of other
boo=s.
+.'+
8-88 ('& min.) Pr(+#%&i("-V(l#! Varia"% A"al,-i- a"+ Sal- V(l#! Varia"%.
1. and 2. 2i5ed Overhead Variance Analysis for @a-n 2loral !reations% /nc. for 2ebruary
A%&#al Fi5+ S&a&i% B#+'& S&a"+ar+ H(#r-
O)r*a+ Fi5+ O)r*a+ 1 B#+'&+ Ra&
((00 ) 1.& ) *(K)
*#%200 *#%000 *&%\$00
*200 0 *'%(00 0
3,ending variance 9roduction.volume variance
K fi5ed overhead rate 8 (budgeted fi5ed overhead)I(budgeted @A hours at ca,acity)
8 *#%000I(1000 5 1.& hours)
8 *#%000I1%&00 hours
8 *(Ihour
'. An unfavorable ,roduction.volume variance measures the cost of unused ca,acity. 9roduction
at ca,acity -ould result in a ,roduction.volume variance of 0 since the fi5ed overhead rate is
based u,on e5,ected hours at ca,acity ,roduction. Bo-ever% the e5istence of an unfavorable
volume variance does not necessarily im,ly that management is doing a ,oor Mob or incurring
unnecessary costs. 0sing the suggestions in the ,roblem% t-o reasons can be identified.
a. 2or most ,roducts% demand varies from month to month -hile commitment to the
factors that determine ca,acity% e.g. si<e of -or=sho, or su,ervisory staff% tends to remain
relatively constant. /f @a-n -ants to meet demand in high demand months% it -ill have
e5cess ca,acity in lo- demand months. /n addition% forecasts of future demand contain
uncertainty due to un=no-n future factors. Baving some e5cess ca,acity -ould allo-
@a-n to ,roduce enough to cover ,ea= demand as -ell as slac= to deal -ith une5,ected
demand surges in non.,ea= months.
b. 7asic economics ,rovides a demand curve that sho-s a tradeoff bet-een ,rice charged
and uantity demanded. 9otentially% @a-n could have a lo-er net revenue if they
,roduce at ca,acity and sell at a lo-er ,rice than if they sell at a higher ,rice at some
level belo- ca,acity.
/n addition% the unfavorable ,roduction.volume variance may not re,resent a
feasible cost savings associated -ith lo-er ca,acity. Even if @a-n could shift to
lo-er fi5ed costs by lo-ering ca,acity% the fi5ed cost may behave as a ste,
function. /f so% fi5ed costs -ould decrease in fi5ed amounts associated -ith a range
of ,roduction ca,acity% not a s,ecific ,roduction volume. :he ,roduction.
volume variance -ould only accurately identify ,otential cost savings if
the fi5ed cost function is continuous% not discrete.
+.'#
\$. :he static.budget o,erating income for 2ebruary isF
Hevenues *&& ) 1%000 *&&%000
Variable costs *2& ) 1%000 2&%000
3tatic.budget o,erating income * 21%000
:he fle5ible.budget o,erating income for 2ebruary isF
Hevenues *&& ) (00 *''%000
Variable costs *2& ) (00 1&%000
2le5ible.budget o,erating income * #%000
:he sales.volume variance re,resents the difference bet-een the static.budget o,erating income
and the fle5ible.budget o,erating incomeF
3tatic.budget o,erating income *21%000
2le5ible.budget o,erating income #%000
3ales.volume variance *12%000 0
Euivalently% the sales.volume variance ca,tures the fact that -hen @a-n sells (00 units instead
of the budgeted 1%000% only the revenue and the variable costs are affected. 2i5ed costs remain
unchanged. :herefore% the shortfall in ,rofit is eual to the budgeted contribution margin ,er
unit times the shortfall in out,ut relative to budget.
8 ; )
D (*&& ; *2&) ) \$00 8 *'0 ) \$00 8 *12%000 0
/n contrast% -e com,uted in reuirement 2 that the ,roduction.volume variance -as *'%(000.
:his ca,tures only the ,ortion of the budgeted fi5ed overhead e5,ected to be unabsorbed because
of the \$00.unit shortfall. :o com,are it to the sales.volume variance% consider the follo-ingF
7udgeted selling ,rice *&&
7udgeted variable cost ,er unit *2&
7udgeted fi5ed cost ,er unit (*#%000 1 1%000) #
7udgeted cost ,er unit '\$
7udgeted ,rofit ,er unit * 21
O,erating income based on budgeted ,rofit ,er unit
*21 ,er unit ) (00 units *12%(00
+.\$0
:he *'%(00 0 ,roduction.volume variance e5,lains the difference bet-een o,erating income
based on the budgeted ,rofit ,er unit and the fle5ible.budget o,erating incomeF
O,erating income based on budgeted ,rofit ,er unit *12%(00
9roduction.volume variance '%(00 0
2le5ible.budget o,erating income * #%000
3ince the sales.volume variance re,resents the difference bet-een the static. and fle5ible.budget
o,erating incomes% the difference bet-een the sales.volume and ,roduction.volume variances%
-hich is referred to as the o,erating.income volume variance isF
O,erating.income volume variance
8 3ales.volume variance ; 9roduction.volume variance
8 3tatic.budget o,erating income . O,erating income based on budgeted ,rofit ,er unit
8 *21%000 0 ; *12%(00 0 8 *+%\$00 0.
:he o,erating.income volume variance e5,lains the difference bet-een the static.budget
o,erating income and the budgeted o,erating income for the units actually sold. :he static.
budget o,erating income is *21%000 and the budgeted o,erating income for (00 units -ould have
been *12%(00 (*21 o,erating income ,er unit

## (00 units). :he difference% *+%\$00 0% is the

o,erating.income volume variance% i.e.% the \$00 unit dro, in actual volume relative to budgeted
volume -ould have caused an e5,ected dro, of *+%\$00 in o,erating income% at the budgeted
o,erating income of *21 ,er unit. :he o,erating.income volume variance assumes that *&0%000
in fi5ed cost (*# ,er unit

## \$00 units) -ould be saved if ,roduction and sales volumes decreased

by \$00 units.
+.\$1
8-8; ('0\$0 min.) C(!/r*"-i) r)i7 (\$ C*a/&r- : a"+ 8, 7(r>i"' ba%>7ar+ \$r(!
'i)" )aria"%-.
1. 3olution E5hibit +.'# outlines the !ha,ter C and + frame-or= underlying this solution.
a. 9ounds of direct materials ,urchased 8 *1C(%000 1 *1.10 8 1(0%000 ,ounds
b. 9ounds of e5cess direct materials used 8 *(#%000 1 *11.&0 8 (%000 ,ounds
c. Variable manufacturing overhead s,ending variance 8 *10%'&0 ; *1+%000 8 *C%(&0 2
d. 3tandard direct manufacturing labor rate 8 *+00%000 1 \$0%000 hours 8 *20 ,er hour
Actual direct manufacturing labor rate 8 *20 N *0.&0 8 *20.&0
Actual direct manufacturing labor.hours 8 *&22%C&0 1 *20.&0
8 2&%&00 hours
e. 3tandard variable manufacturing overhead rate 8 *\$+0%000 1 \$0%000
8 *12 ,er direct manuf. labor.hour
Variable manuf. overhead efficiency variance of *1+%000 1 *12 8 1%&00 e5cess hours
Actual hours ; E5cess hours 8 3tandard hours allo-ed for units ,roduced
2&%&00 ; 1%&00 8 2\$%000 hours
f. 7udgeted fi5ed manufacturing overhead rate 8 *(\$0%000 1 \$0%000 hours
8 *1( ,er direct manuf. labor.hour
2i5ed manufacturing overhead allocated 8 *1( 2\$%000 hours 8 *'+\$%000
9roduction.volume variance 8 *(\$0%000 ; *'+\$%000 8 *2&(%000 0
2. :he control of variable manufacturing overhead reuires the identification of the cost drivers
for such items as energy% su,,lies% and re,airs. !ontrol often entails monitoring nonfinancial
measures that affect each cost item% one by one. E5am,les are =ilo-atts used% uantities of
lubricants used% and re,air ,arts and hours used. :he most convincing -ay to discover -hy
overhead ,erformance did not agree -ith a budget is to investigate ,ossible causes% line item by
line item.
/ndividual fi5ed overhead items are not usually affected very much by day.to.day control.
/nstead% they are controlled ,eriodically through ,lanning decisions and budgeting ,rocedures
that may sometimes have ,lanning hori<ons covering si5 months or a year (for e5am,le%
management salaries) and sometimes covering many years (for e5am,le% long.term leases and
de,reciation on ,lant and eui,ment).
+.\$2
SOLUTION EXHIBIT 8-8;
A%&#al C(-&-
I"%#rr+
2A%&#al I"/#& 0&,.
A%&#al Ra&3
A%&#al I"/#& 0&,.
B#+'&+ Ra&
P#r%*a-- U-a'
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
B#+'&+ Ra&
@irect
Materials
1(0%000 *10.\$0
*1%((\$%000
1(0%000 *11.&0
*1%+\$0%000
#(%000 *11.&0
*1%10\$%000
' '0%000 *11.&0
*1%0'&%000
@irect
Manuf.
Aabor
0.+& '0%000 *20.&0
*&22%C&0
0.+& '0%000 *20
*&10%000
0.+0 '0%000 *20
*\$+0%000
A%&#al C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
A%&#al Ra&
A%&#al I"/#& 0&,.
B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
B#+'&+ Ra&
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
B#+'&+ Ra&
Variable
MOB
0.+& '0%000 *11.C0
*2#+%'&0
0.+& '0%000 *12
*'0(%000
0.+0 '0%000 *12
*2++%000
0.+0 '0%000 *12
*2++%000
A%&#al C(-&-
I"%#rr+
213
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
243
Fl5ibl B#+'&6
Sa! B#+'&+
L#!/ S#!
2a- i" S&a&i% B#+'&3
R'ar+l-- (\$
O#&/#& L)l
283
All(%a&+6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 B#+'&+ Ra&
293
2i5ed
MOB *&#C%\$(0 *(\$0%000
0.+0 ) &0%000 ) *1(
*(\$0%000
0.+0 5 '0%000 ) *1(
*'+\$%000
+.\$'
*1C(%000 2
9rice variance
*(#%000 0
Efficiency variance
*12%C&0 0
9rice variance
*'0%000 0
Efficiency variance
*\$2%C&0 0
2le5ible.budget variance
*C%(&0 2
3,ending variance
*1+%000 0
Efficiency
variance
4ever a variance
*10%'&0 0
2le5ible.budget variance 4ever a variance
*2&(%000 0
*\$2%&\$0 2
2le5ible.budget variance
*2&(%000 0
9roduction volume variance
4ever a variance
*\$2%&\$0 2
3,ending variance
volume variance
8-9< ('0&0 min.) R)i7 (\$ C*a/&r- : a"+ 8, 8-)aria"% a"al,-i-.
1. :otal standard ,roduction costs are based on C%+00 units of out,ut.
@irect materials% C%+00 *1&.00
C%+00 ' lbs. *&.00 (or 2'%\$00 lbs. *&.00) * 11C%000
@irect manufacturing labor% C%+00 *C&.00
C%+00 & hrs. *1&.00 (or '#%000 hrs. *1&.00) &+&%000
Variable% C%+00 *'0.00 (or '#%000 hrs. *(.00) 2'\$%000
2i5ed% C%+00 *\$0.00 (or '#%000 hrs. *+.00) '12%000
:otal *1%2\$+%000
:he follo-ing is for later useF
2i5ed manufacturing overhead% a lum,.sum budget *'20%000
K
K
*+.00 8
7udget
\$0%000 hours
7udget 8 \$0%000 hours *+.00 8 *'20,000
2. 3olution E5hibit +.\$0 ,resents a columnar ,resentation of the variances. An overvie- of
the '.variance analysis using the bloc= format of the te5t isF
8-Varia"%
A"al,-i-
S/"+i"'
Varia"%
E\$\$i%i"%,
Varia"%
Pr(+#%&i("
V(l#! Varia"%
:otal Manufacturing
*'#%\$00 0 *(%(00 0 *+%000 0
+.\$\$
SOLUTION EXHIBIT 8-9<
A%&#al C(-&-
I"%#rr+6
A%&#al I"/#& 0&,.
A%&#al I"/#& 0&,.

B#+'&+ Pri%
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
1 A%&#al Ra& P#r%*a-- U-a' 1 B#+'&+ Pri%
@irect
Materials
(2&%000 *&.20)
*1'0%000
(2&%000 *&.00)
*12&%000
(2'%100 *&.00)
*11&%&00
(2'%\$00 *&.00)
*11C%000
*&%000 0 *1%&00 2
a. 9rice variance b. Efficiency variance
@irect
Manuf.
Aabor
(\$0%100 *1\$.(0)
*&+&%\$(0
(\$0%100 *1&.00)
*(01%&00
('#%000 *1&.00)
*&+&%000
*1(%0\$0 2 *1(%&00 0
c. 9rice variance d. Efficiency variance
A%&#al
C(-&-
I"%#rr+
A%&#al I"/#& 0&,.
B#+'&+ Ra&
Fl5ibl B#+'&6
B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
B#+'&+ Ra&
All(%a&+6
2B#+'&+ I"/#& 0&,.
All(7+ \$(r
A%&#al O#&/#&
B#+'&+ Ra&3
Variable
Manuf.
(\$0%100 *(.00)
*2\$0%(00
('#%000 *(.00)
*2'\$%000
('#%000 *(.00)
*2'\$%000
*(%(00 0
Efficiency variance 4ever a variance
2i5ed
Manuf.
('#%000 *+.00)
*'12%000
*+%000 0
K
4ever a variance 9rodn. volume variance
:otal
Manuf.
(given)
*(00%000
(*2\$0%(00 N *'20%000)
*&(0%(00
(*2'\$%000 N *'20%000)
*&&\$%000
(*2'\$%000 N *'12%000)
*&\$(%000
*'#%\$00 0 *(%(00 0 *+%000 0
e. 3,ending variance f. Efficiency variance g. 9rodn. volume variance
K
@enominator level in hours \$0%000
9roduction volume in standard hours allo-ed '#%000
9roduction.volume variance 1%000 hours 5 *+.00 8 *+%000 0
+.\$&
8-91 (20 minutes) N("-\$i"a"%ial )aria"%-
1. Variance Analysis of /ns,ection Bours for @aisy !anine 9roducts for May
A%&#al P(#"+- S&a"+ar+ P(#"+- I"-/%&+
A%&#al H(#r- I"-/%&+EB#+'&+ \$(r A%&#al O#&/#& EB#+'&+
F(r I"-/%&i("- P(#"+- /r *(#r P(#"+- /r *(#r
200%000lbsI1%000 lbs ,er hour (2%2&0%000 5 .1)I1%000 lbs ,er hour
210 hours 200 hours 22& hours
10 hours 0 2& hours 2
E\$\$i%i"%, Varia"% 0#a"&i&, Varia"%
2. Variance Analysis of 9ounds 2ailing /ns,ection for @aisy !anine 9roducts for May
A%&#al /(#"+- S&a"+ar+ P(#"+- I"-/%&+
A%&#al P(#"+- I"-/%&+ 5 B#+'&+ \$(r A%&#al O#&/#& 5 B#+'&+
Faili"' I"-/%&i("- I"-/%&i(" Fail#r Ra& I"-/%&i(" Fail#r Ra&
(200%000lbs 5 .02) (2%2&0%000 5 .1 5 .02)
'%&00 lbs \$%000 lbs \$%&00 lbs
500 lbs F 500 lbs F
E\$\$i%i"%, Varia"% 0#a"&i&, Varia"%
+.\$(
8-94 (20 minutes) N("-\$i"a"%ial /r\$(r!a"% !a-#r-
1. :he cost of the ball bearings -ould be indirect materials if it is either not ,ossible to trace
the costs to individual ,roducts% or if the cost is so small relative to other costs that it is
im,ractical to do so. 3ince @e,artment 7 ma=es a fairly constant number of finished ,roducts
(\$00 units) each day% it -ould be easy to trace the cost of bearings to the -heels com,leted daily.
Bo-ever% the fact that Hollie measures ball bearings by -eight and discards leftover bearings at
the end of each day suggests that they are a relatively ine5,ensive item and not -orth the effort
to restoc= or trac= in inventory. As such% it could be argued that ball bearings should be classified
2. 4on.financial ,erformance measures for @e,artment 7 might includeF
4umber or ,ro,ortion of -heels sent bac= for re-or= andIor amount or ,ro,ortion of
time s,ent on re-or=L
4umber of -heels thro-n a-ay% ratio of -heels thro-n a-ay to -heels re-or=ed% andIor
ratio of bad to good -heelsL
Amount of do-n time for bro=en machines during the dayL
?eight of ball bearings discarded% or ratio of -eights used and discarded.
'. /f the number of -heels thro-n a-ay is significant relative to the number of re-or=ed
-heels% then it is not efficient to re-or= them and so Hollie should re.e5amine the re-or= ,rocess
or even Must thro- a-ay all the bad -heels -ithout re-or=.
/f the amount of re-or= is significant then the original ,rocess is not turning out uality
goods in a timely manner. Hollie might slo- do-n the ,rocess in @e,artment 7 so it ta=es a
little longer to ma=e each good -heel% but the number of good -heels -ill be higher and may
even save time overall if re-or= time dro,s considerably. :hey might also need to service the
machines more often than Must after the total daily ,roduction run% in -hich case they -ill trade
off intentional do-n time for more efficient ,rocessing.
/f the amount of unintentional do-n time is significant they might bring in the mechanics
during the day to fi5 a machine that goes do-n during a ,roduction run.
2inally% Hollie might consider determining a better measure of ball bearings to reuisition
each day so that fe-er are discarded% and might also =ee, any leftover ball bearings for use the
ne5t day.
+.\$C
C(llab(ra&i) Lar"i"' Pr(bl!
8-98 (\$& min.) O)r*a+ )aria"%-, &*i%-.
1. a. :otal budgeted overhead *'1%2&0%000
(*10 budgeted rate ,er machine.hour ) 2%&00%000
budgeted machine.hours) 2&%000%000
7udgeted fi5ed OB rate
*(%2&0%000 budgeted amount
8 *2.&0 ,er machine.hour
2%&00%000 budgeted machine.hours

## b. 2i5ed overhead s,ending variance 8 Actual costs incurred ; 7udgeted amount.

7ecause fi5ed overhead s,ending variance is unfavorable% the amount of actual costs is
higher than the budgeted amount.
Actual cost 8 *(%2&0%000 N *1%&00%000
8 *C%C&0%000
c. 9roduction.volume variance 8
8 *(%2&0%000 ; (*2.&0 ,er machine.hour ) 2 machine.hours ,er unit
K
) 1%2\$&%000
units)
8 *(%2&0%000 ; *(%22&%000
8 *2&%000 0
K
7udgeted variable overhead ,er unit 8 *20
7udgeted variable overhead rate 8 *10 ,er machine.hour
:herefore% budgeted machine hours allo-ed ,er unit 8 *20I*10 8 2 machine.hours

Actual variable
,er unit of cost
allocation base
;
7udgeted variable
,er unit of
cost.allocation base
)
Actual uantity
cost.allocation base
used for actual out,ut
*2&%200%000 budget amount
*10 ,er machine.hour 2% \$00% 000 machine.hours
2%\$00%000 actual machine.hours
1

1
]

8 (*10.&0 ; *10) ) 2%\$00%000
8 *1%200%000 0
+.\$+
Actual units of 7udgeted units of 7udgeted
cost.allocation ; cost.allocation base ) overhead
base used for allo-ed for rate
actual out,ut actual out,ut
8 (2%\$00%000 ; (2 ) 1%2\$&%000)) ) *10
8 (2%\$00%000 ; 2%\$#0%000) ) *10
8 *#00%000 2
'. 7y mani,ulating% Hemich has created a si<able unfavorable fi5ed overhead s,ending
variance or% at least% has increased its magnitude. "ac= HemichPs action is clearly unethical.
Variances dra- attention to the areas that need management attention. /f the to, management
relies on Hemich% due to his e5,ertise% to inter,ret and e5,lain the reasons for the unfavorable
variance% it is li=ely that his re,ort -ill be biased and misleading to the to, management. :he to,
management may erroneously conclude that Monroe is not able to manage his fi5ed overhead
costs effectively. Another ,robable adverse outcome of HemichPs actions -ill be that Monroe
-ill have even less confidence in the usefulness of accounting re,orts. :his% of course% defeats
the ,ur,ose of ,re,aring the re,orts. /n summary% HemichPs unethical actions -ill -aste to,
managementPs time and may lead to -rong decisions.
+.\$#