Flexible Budget and Variance

FLEXIBLE AND VARIANCE
1. S Company uses a standard cost system in which manufacturing

overhead costs are applied to units of product on the basis of machine
hours. The company's condensed flexible budget for manufacturing
overhead is given below:
Per Machine Hours o

Machine Hour 20,000 25,000 30,000
Variable overhead costs $3 $ 60,000 $ 75,000 $ 90,000

Fixed overhead costs 300,000 300,000 300,000
Total overhead costs $360,000 $375,000 $390,000
The denominator level of activity is 30,000 machine hours. Standards call

for 2.5 machine hours per unit of output. Actual activity and manufacturing
overhead costs for the year are given below:
Units produced ............ 12,800 units

Machine-hours used ........ 31,600 machine hours
Overhead costs incurred:
Variable costs ......... $ 96,000
Fixed costs ............ $297,000
Required:
a. What are the standard hours allowed for the output?

b. What was the variable overhead spending variance?
c. What was the variable overhead efficiency variance?
d. What was the fixed overhead budget variance?
e. What was the fixed overhead volume variance?
Answer:
a. 12,800 units x 2.5 machine hours per unit = 32,000 machine hours
b. Computation of variable overhead spending variance:

Spending variance = (AH x AR) - (AH x SR)
= ($96,000) - (31,600 MHs x $3)
= $1,200 U
c. Computation of variable overhead efficiency variance:

Spending variance = (AH x SR) - (SH x SR)
= (31,600 MHs x $3) - (32,000 MHs x $3)
= $1,200 F
d. Computation of the fixed overhead budget variance:

Budget variance = Actual fixed overhead - Flexible budget
fixed overhead
= $297,000 - $300,000
= $3,000 F
e. Computation of the fixed overhead volume variance:

Volume variance = Fixed portion of predetermined overhead
rate x (Denominator hours – Standard
hours allowed)
= $10* (30,000 MH - 32,000 MH)
= $20,000 F
*$300,000 ÷ 30,000 MH = $10
The following overhead data are for a department in a large company.
Actual costs Static

incurred budget
Activity level (in units) 250 220
Variable costs:
Indirect materials ...... $8,745 $7,634
Power ................... $2,065 $1,738
Fixed costs:
Supervision ............. $1,560 $1,600
Rent .................... $7,210 $7,300
Required:
Prepare a report that would be useful in assessing how well costs were
controlled in this department.
Answer:
Cost Budget
formula Actual based on
per unit costs actual
of activity incurred activity Variance
Variable costs:
Indirect materials .. $34.70 $ 8,745 $ 8,675 $ 70 U
Power ............... 7.90 2,065 1,975 90 U
Total variable cost $42.60 10,810 10,650 160 U
Fixed costs:
Supervision ......... 1,560 1,600 40 F
Rent ................ 7,210 7,300 90 F
Total fixed cost .. 8,770 8,900 130 F
Total cost ............ $19,580 $19,550 $ 30 U
The following overhead data are for a department in a large company.
Actual costs Static

incurred budget
Activity level (in units) 480 480
Variable costs:
Supplies ................ $16,734 $16,944
Electricity ............. $1,026 $1,056
Fixed costs:
Supervision ............. $8,570 $8,600
Depreciation ............ $5,780 $5,800
Required:
Prepare a report that would be useful in assessing how well costs were
controlled in this department.
Answer:
Cost Budget
formula Actual based on
per unit costs actual
of activity incurred activity Variance
Variable costs:
Supplies ............ $35.30 $16,734 $16,944 $210 F
Electricity ......... 2.20 1,026 1,056 30 F
Total variable cost $37.50 17,760 18,000 240 F
Fixed costs:
Supervision ......... 8,570 8,600 30 F
Depreciation ........ 5,780 5,800 20 F
Total fixed cost .. 14,350 14,400 50 F
Total cost ............ $32,110 $32,400 $290 F

2. N Corporation produces a single product and uses a standard cost

system to help control costs. Overhead is applied to production on
the basis of machine-hours. According to the company's flexible
budget, the following overhead costs should be incurred at an
activity level of 18,000 machine-hours (the denominator activity
level chosen for the current year):
Variable overhead costs ....................... $ 45,000

Fixed overhead costs .......................... 108,000
Total overhead costs .......................... $153,000
During the current year, the following operating results were recorded:
Actual machine-hours worked ................... 15,000

Standard machine-hours allowed ................ 16,000
Actual variable overhead cost incurred ........ $ 38,000
Actual fixed overhead cost incurred ........... $107,100
At the end of the year, the company's Manufacturing Overhead account

showed total debits for actual overhead costs of $145,100 and total credits
for overhead actually applied of $136,000. The difference ($9,100)
represents under-applied overhead, the cause of which management would
like to know.
Required:
a. Compute the predetermined overhead rate that would have been

used during the year, showing separately the variable and fixed
components of the rate.
b. Show how the $136,000 of "Applied Costs" was computed.
c. Analyze the $9,100 under-applied overhead figure in terms of the
variable overhead spending and efficiency variances and the fixed overhead
budget and volume variances.
Answer:
a. The predetermined overhead rate, with variable and fixed elements

identified:
$45,000/18,000 = $2.50
$108,000/18,000 = 6.00
$8.50
b. Applied overhead for the period:
Standard hours allowed X Total overhead rate = 16,000 hrs X

$8.50
= $136,000
c. Variable overhead variances:
Spending variance:
Actual variable overhead cost ................... $38,000
Actual hours X Standard rate:
15,000 hours X $2.50 = ..................... 37,500
Spending variance ............................... $ 500 U
Efficiency variance:
Actual hours X Standard rate:
15,000 hours X $2.50 = ..................... $37,500
Standard hours allowed X Standard rate:
16,000 hours X $2.50 = ..................... 40,000
Efficiency variance ............................. $ 2,500 F
Fixed overhead variances:
Budget variance:
Actual fixed overhead cost ...................... $107,100
Flexible budget fixed overhead cost ............. 108,000
Budget variance ................................. $ 900 F
Volume variance:
Flexible budget fixed overhead cost.............. $108,000
Fixed overhead applied to work in process:
16,000 X $6.00 = ........................... 96,000
Volume variance. ................................ $ 12,000 U
Proof of variances:
Variable overhead spending variance.................. $ 500 U
Variable overhead efficiency variance................ 2,500 F
Fixed overhead budget variance....................... 900 F
Fixed overhead volume variance....................... 12,000 U
Underapplied overhead................................ $ 9,100 U
3. W Manufacturing has established the following master flexible

budget for the current year:
Sales in Units o
80,000 120,000 160,000
Sales................... $1,200,000 $1,800,000 $2,400,000
Less variable expenses:
Raw materials........... 152,000 228,000 304,000
Direct labor............ 160,000 240,000 320,000
Manufacturing overhead.. 120,000 180,000 240,000
Total variable expenses 432,000 648,000 864,000
Contribution margin..... 768,000 1,152,000 1,536,000
Less fixed expenses:
Manufacturing overhead.. 300,000 300,000 300,000
Selling and
administrative........ 192,000 192,000 192,000
Total fixed expenses.... 492,000 492,000 492,000
Net income.............. $ 276,000 $ 660,000 $1,044,000
Manufacturing overhead is applied on the basis of machine-hours. At

standard, each unit of product requires one machine-hour to complete.
Required:
a. The denominator activity level is 120,000 units. What are the

predetermined variable and fixed manufacturing overhead rates?
b. Actual data for the year were as follows:
Actual variable manufacturing overhead cost ....... $159,500
Actual fixed manufacturing overhead cost .......... $305,000
Actual machine-hours incurred ..................... 110,000
Units produced and sold ........................... 105,000
Compute the variable overhead spending and efficiency variances and the
fixed overhead budget and volume variances for the year.
4. Under the two-variance approach, the volume variance is computed

by subtracting ____ based on standard input allowed for the
production achieved from budgeted overhead.
a. applied overhead
b. actual overhead
c. budgeted fixed overhead plus actual variable overhead
d. budgeted variable overhead
5. The overhead variance calculated as total budgeted overhead at the

actual input production level minus total budgeted overhead at the
standard hours allowed for actual output is the
a. efficiency variance.
b. spending variance.
c. volume variance.
d. budget variance.
6. In a just-in-time inventory system,

a. practical standards become ideal standards.
b. ideal standards become expected standards.
c. variances will not occur because of the zero-defects basis of JIT.
d. standard costing cannot be used.
7. A company using very tight (high) standards in a standard cost system

should expect that
a. no incentive bonus will be paid.

b. most variances will be unfavorable.
c. employees will be strongly motivated to attain the standards.
d. costs will be controlled better than if lower standards were used.
C Company
The following information is for C Company’s July production:
Standards:
Material 3.0 feet per unit @ $4.20 per foot
Labor 2.5 hours per unit @ $7.50 per hour
Actual:
Production 2,750 units produced during the month
Material 8,700 feet used; 9,000 feet purchased @ $4.50 per foot
Labor 7,000 direct labor hours @ $7.90 per hour
(Round all answers to the nearest dollar.)
50. Refer to C Company. What is the material price variance (calculated at point
of purchase)?
a. $2,700 U
b. $2,700 F
c. $2,610 F
d. $2,610 U
51. Refer to C Company. What is the material quantity variance?

a. $3,105 F
b. $1,050 F
c. $3,105 U
d. $1,890 U

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What are standard cost variances and how are they calculated?

What are standard cost variances and how are they calculated?

What are the components of a flexible budget?

What are the components of a flexible budget?

FLEXIBLE AND VARIANCE

1. S Company uses a standard cost system in which manufacturing

Per Machine Hours o

Variable overhead costs $3 $ 60,000 $ 75,000 $ 90,000

The denominator level of activity is 30,000 machine hours. Standards call

Units produced ............ 12,800 units

a. What are the standard hours allowed for the output?

b. Computation of variable overhead spending variance:

c. Computation of variable overhead efficiency variance:

d. Computation of the fixed overhead budget variance:

e. Computation of the fixed overhead volume variance:

The following overhead data are for a department in a large company.

Actual costs Static

Total cost ............ $19,580 $19,550 $ 30 U

The following overhead data are for a department in a large company.

Actual costs Static

Total cost ............ $32,110 $32,400 $290 F

2. N Corporation produces a single product and uses a standard cost

Variable overhead costs ....................... $ 45,000

Actual machine-hours worked ................... 15,000

At the end of the year, the company's Manufacturing Overhead account

a. Compute the predetermined overhead rate that would have been

a. The predetermined overhead rate, with variable and fixed elements

b. Applied overhead for the period:

Standard hours allowed X Total overhead rate = 16,000 hrs X

c. Variable overhead variances:

Fixed overhead variances:

3. W Manufacturing has established the following master flexible

Manufacturing overhead is applied on the basis of machine-hours. At

a. The denominator activity level is 120,000 units. What are the

4. Under the two-variance approach, the volume variance is computed

5. The overhead variance calculated as total budgeted overhead at the

6. In a just-in-time inventory system,

7. A company using very tight (high) standards in a standard cost system

a. no incentive bonus will be paid.

(Round all answers to the nearest dollar.)

51. Refer to C Company. What is the material quantity variance?

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