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

variableUnfavorable
overhead cost $960,000
*Actual variable-overhead rate (AVR) $19.20 per hour
actual hours 50,000
Variable-overhead Variable-overhead 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)(2 hrs per unit)

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

EXERCISE 11-31 (45 MINUTES)

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

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

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

$356,500 = X + $32,500
X = $324,000 = actual variable overhead
Variable-overhead spending variance = actual variable overhead (AH SR)
$36,000 U = $324,000 (AH $8)
$8AH = $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
= (12,500 units)(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
12,000 units
= 4
 total actual machine hrs.
d. Actual machine hrs. per unit of output = actual production
36,000 hrs.
3 hrs. per unit
= 12,000 units

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)

toalsndar budget standrhs.

=

o verhad teproductin 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. $21.00a per hour

3. $28.50b per hour

6. $294,150c

9. $7,500 Ud
10. $9,000 Fe

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

12. $24,150 underappliedg

13. $135,000 overappliedh

16. 6,000 unitsi

19. $270,000j

20. $756,000k

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.
= 30,000 hrs.
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
6,000 units
= 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 = 6,200 units
= $113.87 per unit (rounded)

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

= $22 per machine hour

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

5. Standard variable-overhead rate per machine hour =

$1,294,400 - $1,254,000 $40,400

32,000 - 30,000 2,000 hours = $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 = 30,000 hours

= $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 = $76X + $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 $495,000a $12,000 U
Variable production costs:....................................
Direct material................................................... $ 69,300 $ 72,000b $2,700 F
Direct labor........................................................ 54,900 54,000c 900 U
Machine time..................................................... 57,600 58,500d 900 F
Manufacturing overhead................................... 123,000 126,000e 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 variance = PQ(AP SP)
= 15,000($2.20* $2.00)
= $3,000 Unfavorable

*$2.20 = $33,000 15,000

Direct-material quantity variance = SP(AQ SQ)

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

*14,500 lbs. = 725 20 lbs. per unit

Direct-labor rate variance = AH(AR SR)

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

*$18.90 = $75,600 4,000

Direct-labor efficiency variance = SR(AH SH)

= $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 variance = SVR(AH SH)

= $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 variance = budgeted fixed overhead applied fixed 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(2,325,0002,250,000).... $ 1,500 U
Milk chocolate..................... $.15(1,330,0001,125,000).... 30,750 U
Almonds............................... $.50(240,000225,000).......... 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(225,000225,000).......... $ 0
Baking.................................. $.30(400,000450,000).......... 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.
actual
budgeted actual
Sales-price variance = 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 Colonials 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.