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Chapter 11 Flexible Budgets and Overhead Analysis

145. Flick Company uses a standard cost system in which manufacturing overhead is
applied to units of product on the basis of standard direct labor-hours. The company's
total budgeted variable and fixed manufacturing overhead costs at the denominator
level of activity are $20,000 for variable overhead and $30,000 for fixed overhead.
The predetermined overhead rate, including both fixed and variable components, is
$2.50 per direct labor-hour. The standards call for two direct labor-hours per unit of
output produced. Last year, the company produced 11,500 units of product and worked
22,000 direct labor-hours. Actual costs were $22,500 for variable overhead and
$31,000 for fixed overhead.

Required:

a. What is the denominator level of activity?


b. What were the standard hours allowed for the output last year?
c. What was the variable overhead spending variance?
d. What was the variable overhead efficiency variance?
e. What was the fixed overhead budget variance?
f. What was the fixed overhead volume variance?

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 11-5


Chapter 11 Flexible Budgets and Overhead Analysis

Ans:

a. Total overhead at the denominator level of activity........ $50,000


Predetermined overhead rate........................................ $2.50/DLH
= Denominator level of activity....................................... 20,000 DLHs

b. Actual output............................... 11,500 units


Standard DLH per unit............. 2 DLH per unit
= Standard DLHs allowed........... 23,000 DLHs

c. Computation of variable overhead spending variance:


Spending variance = (AH AR) (AH SR)
= ($22,500) (22,000 $1.00*) = $500 U
*$20,000 20,000 DLHs = $1.00

d. Computation of variable overhead efficiency variance:


Spending variance = (AH SR) (SH SR)
= (22,000 $1.00) (23,000* $1.00) = $1,000 F
* 2 DLHs per unit 11,500 units = 23,000 DLHs

e. Computation of the fixed overhead budget variance:


Budget variance = Actual fixed overhead Budgeted Fixed overhead
= $31,000 $30,000 = $1,000 U

f. Computation of the fixed overhead volume variance:


Volume variance = Fixed portion of predetermined overhead rate
(Denominator hours Standard hours allowed)
= $1.50* (20,000 23,000) = $4,500 F
*$30,000 20,000 DLH = $1.50 per DLH

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting


LO: 3; 4; 5; 6 Level: Medium

11-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 11 Flexible Budgets and Overhead Analysis

146. Wattis Manufacturing has established the following master flexible budget:

Sales in units..................................... 100,000 150,000 200,000


Sales.................................................. $1,500,000 $2,250,000 $3,000,000
Variable expenses:
Raw materials................................ 220,000 330,000 440,000
Direct labor.................................... 240,000 360,000 480,000
Variable manufacturing overhead. . 180,000 270,000 360,000
Variable selling and administrative 100,000 150,000 200,000
Total variable expenses..................... 740,000 1,110,000 1,480,000
Contribution margin.......................... 760,000 1,140,000 1,520,000
Fixed expenses:
Fixed manufacturing overhead...... 337,500 337,500 337,500
Fixed selling and administrative.... 250,000 250,000 250,000
Total fixed expenses.......................... 587,500 587,500 587,500
Net operating income........................ $ 172,500 $ 552,500 $ 932,500

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


standard, each unit of product requires one machine-hour to complete.

Required:

a. The denominator activity level is 150,000 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................. $211,680


Actual fixed manufacturing overhead cost..................... $343,000
Actual machine-hours incurred....................................... 126,000
Units produced and sold.................................................. 120,000

Compute the variable overhead spending and efficiency variances and the fixed
overhead budget and volume variances for the year.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 11-7


Chapter 11 Flexible Budgets and Overhead Analysis

Ans:

a. Predetermined variable overhead rate = $270,000 150,000 machine-hours


= $1.80 per machine-hour

Predetermined fixed overhead rate = $337,500 150,000 machine-hours


= $2.25 per machine-hour

b. Variable overhead variances:


Spending variance = AH (AR SR) = 126,000 ($1.68* $1.80) = $15,120 F
*AR = $211,680 126,000 actual machine-hours = $1.68

Efficiency variance = SR (AH SH) = $1.80 (126,000 120,000*) = $10,800 U


*SH = 120,000 units 1 hour per unit = 120,000 hours

Fixed overhead variances:


Budget variance = Actual fixed overhead Budgeted fixed overhead
= $343,000 $337,500 = $5,500 U

Volume variance = Fixed rate (Denominator hours Standard hours)


= $2.25 (150,000 120,000*) = $67,500 U
*Standard hours = 120,000 units 1 hour per unit = 120,000 hours

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting


LO: 3; 4; 5; 6 Level: Hard

11-8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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