Connect - Managerial Accounting Chapter 8

1.

Tempo Company’s fixed budget (based on sales of 7,000 units) for the first quarter of calendar year 2015 reveals the following.

			Fixed Budget
Sales (7,000 units)						$	2,800,000
Cost of goods sold
Direct materials		$	280,000
Direct labor			490,000
Production supplies			175,000
Plant manager salary			65,000				1,010,000
Gross profit							1,790,000
Selling expenses
Sales commissions			140,000
Packaging			154,000
Advertising			125,000				419,000
Administrative expenses
Administrative salaries			85,000
Depreciation—office equip.			35,000
Insurance			20,000
Office rent			36,000				176,000
Income from operations						$	1,195,000

Complete the following flexible budgets for sales volumes of 6,000, 7,000, and 8,000 units.

TEMPO COMPANY Flexible Budgets For Quarter Ended March 31, 2015 ------Flexible Budget------ ------Flexible Budget at ------ Variable Amount per Unit Total Fixed Cost 6,000 units 7,000 units 8,000 units Sales $400.00 $2,400,000 $2,800,000 $3,200,000 Variable costs: Direct materials 40.00 240,000 280,000 320,000 Direct labor 70.00 420,000 490,000 560,000 Production supplies 25.00 150,000 175,000 200,000 Sales commissions 20.00 120,000 140,000 160,000 Packaging 22.00 132,000 154,000 176,000 Total variable costs 177.00 1,062,000 1,239,000 1,416,000 Contribution margin $223.00 1,338,000 1,561,000 1,784,000 Fixed costs: Plant manager salary 65,000 65,000 65,000 65,000 Advertising 125,000 125,000 125,000 125,000 Administrative salaries 85,000 85,000 85,000 85,000 Depreciation—office equip. 35,000 35,000 35,000 35,000 Insurance 20,000 20,000 20,000 20,000 Office rent 36,000 36,000 36,000 36,000 Total fixed costs 366,000 366,000 366,000 366,000 Income from operations $972,000 $1,195,000 $1,418,000

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2.

Solitaire Company’s fixed budget performance report for June follows. The $315,000 budgeted expenses include $294,000 variable expenses and $21,000 fixed expenses. Actual expenses include $27,000 fixed expenses.

	Fixed Budget			Actual Results			Variances
Sales (in units)		8,400			10,800
Sales (in dollars)	$	420,000		$	540,000		$	120,000	F
Total expenses		315,000			378,000			63,000	U
Income from operations	$	105,000		$	162,000		$	57,000	F

Prepare a flexible budget performance report showing any variances between budgeted and actual results. List fixed and variable expenses separately.

	SOLITAIRE COMPANY Flexible Budget Performance Report For Month Ended June 30 Flexible Budget Actual Results Variances Favorable/ Unfavorable Sales $540,000 $540,000 No variance Variable expenses 378,000 351,000 27,000 Favorable Contribution margin 162,000 189,000 27,000 Favorable Fixed expenses 21,000 27,000 6,000 Unfavorable Income from operations $141,000 $162,000 $21,000 Favorable

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3.

A manufactured product has the following information for June.

	Standard	Actual
Direct materials	(6 lbs. @ $8 per lb.)		48,500	lbs. @ $8.10 per lb.
Direct labor	(2 hrs. @ $16 per hr.)		15,700	hrs. @ $16.50 per hr.
Overhead	(2 hrs. @ $12 per hr.)	$	198,000
Units manufactured			8,000

Compute the direct materials price variance and  the direct materials quantity variance. Indicate whether each variance is favorable or unfavorable.

	Actual Cost 4850 4000 Standard Cost AQ x AP AQ x SP SQ x SP 48,500 x $8.10 48,500 x $8.00 48,000 x $8.00 $392,850 $388,000 $384,000 $4,850 8850 $4,000 Direct materials price variance $4,850 Unfavorable Direct materials quantity variance 4,000 Unfavorable Total direct materials variance $8,850 Unfavorable

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4.

A manufactured product has the following information for June.

	Standard	Actual
Direct materials	(6 lbs. @ $8 per lb.)		48,500	lbs. @ $8.10 per lb.
Direct labor	(2 hrs. @ $16 per hr.)		15,700	hrs. @ $16.50 per hr.
Overhead	(2 hrs. @ $12 per hr.)	$	198,000
Units manufactured			8,000

Compute the direct labor rate variance and the direct labor efficiency variance. Indicate whether each variance is favorable or unfavorable.

	Actual Cost 7850 -4800 Standard Cost AH AR AH SR SH SR 15,700 $16.50 15,700 $16.00 16,000 $16.00 $259,050 $251,200 $256,000 $7,850 3050 $4,800 Direct labor rate variance $7,850 Unfavorable Direct labor efficiency variance 4,800 Favorable Total direct labor variance $3,050 Unfavorable

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5.

Sedona Company set the following standard costs for one unit of its product for 2015.

Direct material (20 Ibs. @ $2.50 per Ib.)		$	50
Direct labor (10 hrs. @ $8.00 per hr.)			80
Factory variable overhead (10 hrs. @ $4.00 per hr.)			40
Factory fixed overhead (10 hrs. @ $1.60 per hr.)			16
Standard cost		$	186

The $5.60 ($4.00 1 $1.60) total overhead rate per direct labor hour is based on an expected operating level equal to 75% of the factory’s capacity of 50,000 units per month. The following monthly flexible budget information is also available.

		Operating Levels (% of capacity)
Flexible Budget			70%				75%				80%
Budgeted output (units)			35,000				37,500				40,000
Budgeted labor (standard hours)			350,000				375,000				400,000
Budgeted overhead (dollars)
Variable overhead		$	1,400,000			$	1,500,000			$	1,600,000
Fixed overhead			600,000				600,000				600,000
Total overhead		$	2,000,000			$	2,100,000			$	2,200,000

During the current month, the company operated at 70% of capacity, employees worked 340,000 hours, and the following actual overhead costs were incurred. (Do not round intermediate calculations. Round "OH costs per hour" to 2 decimal places.)

Variable overhead costs		$	1,375,000
Fixed overhead costs			628,600
Total overhead costs		$	2,003,600

(1) Compute the predetermined overhead application rate per hour for variable overhead, fixed overhead, and total overhead at 75% of capacity. Predetermined OH Rate Variable overhead costs $4.00 per DL hr. Fixed overhead costs 1.60 per DL hr. Total overhead costs $5.60 per DL hr. (2) Compute the total variable and total fixed overhead variances. --------At 70% of Operating Capacity-------- Predetermined OH Rate Standard DL Hours Overhead Costs Applied Actual Results Variance Fav./Unf. Variable overhead costs $4.00 350,000 $1,400,000 $1,375,000 $25,000 Favorable Fixed overhead costs 1.60 350,000 560,000 628,600 68,600 Unfavorable Total overhead costs $5.60 $1,960,000 $2,003,600 $43,600 Unfavorable

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6.

James Corp. applies overhead on the basis of direct labor hours. For the month of May, the company planned production of 8,000 units (80% of its production capacity of 10,000 units) and prepared the following overhead budget:

	Operating Levels
Overhead Budget	80%
Production in units		8,000
Standard direct labor hours		24,000
Budgeted overhead
Variable overhead costs
Indirect materials	$	15,000
Indirect labor		24,000
Power		6,000
Maintenance		3,000
Total variable costs		48,000
Fixed overhead costs
Rent of factory building		15,000
Depreciation—machinery		10,000
Supervisory salaries		19,400
Total fixed costs		44,400
Total overhead costs	$	92,400

During May, the company operated at 90% capacity (9,000 units) and incurred the following actual overhead costs:

Overhead Costs
Indirect materials	$	15,000
Indirect labor		26,500
Power		6,750
Maintenance		4,000
Rent of factory building		15,000
Depreciation—machinery		10,000
Supervisory salaries		22,000
Total actual overhead costs	$	99,250

1.	Compute the overhead controllable variance.

	Controllable Variance Total actual overhead $99,250 Flexible budget overhead Variable $54,000 Fixed 44,400 Total 98,400 Overhead controllable variance $850 Unfavorable

2.	Compute the overhead volume variance.

	Volume Variance Total budgeted fixed OH $44,400 Total fixed overhead applied 49,950 Volume variance $5,550 Favorable

3.	Prepare an overhead variance report at the actual activity level of 9,000 units.

JAMES CORP. Overhead Variance Report For Month Ended May 31 Expected production volume 80% of capacity Production level achieved 90% of capacity Volume variance $5,550 Favorable Controllable Variance Flexible Budget Actual Results Variances Fav./Unfav. Variable overhead costs: Indirect materials 16,875 15,000 1,875 Favorable Indirect labor 27,000 26,500 500 Favorable Power 6,750 6,750 No variance Maintenance 3,375 4,000 625 Unfavorable Total variable costs 54,000 52,250 1,750 Favorable Fixed overhead costs: Rent of factory building 15,000 15,000 No variance Depreciation—Machinery 10,000 10,000 No variance Supervisory salaries 19,400 22,000 2,600 Unfavorable Total fixed costs 44,400 47,000 2,600 Unfavorable Total overhead costs $98,400 $99,250 $850 Unfavorable

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7.

Trico Company set the following standard unit costs for its single product.

Direct materials (30 Ibs. @ $4 per Ib.)	$	120.00
Direct labor (5 hrs. @ $14 per hr.)		70.00
Factory overhead—variable (5 hrs. @ $8 per hr.)		40.00
Factory overhead—fixed (5 hrs. @ $10 per hr.)		50.00
Total standard cost	$	280.00

The predetermined overhead rate is based on a planned operating volume of 80% of the productive capacity of 60,000 units per quarter. The following flexible budget information is available.

	Operating Levels
		70%		80%		90%
Production in units		42,000		48,000		54,000
Standard direct labor hours		210,000		240,000		270,000
Budgeted overhead
Fixed factory overhead	$	2,400,000	$	2,400,000	$	2,400,000
Variable factory overhead	$	1,680,000	$	1,920,000	$	2,160,000

During the current quarter, the company operated at 90% of capacity and produced 54,000 units of product; actual direct labor totaled 265,000 hours. Units produced were assigned the following standard costs:

Direct materials (1,620,000 Ibs. @ $4 per Ib.)	$	6,480,000
Direct labor (270,000 hrs. @ $14 per hr.)		3,780,000
Factory overhead (270,000 hrs. @ $18 per hr.)		4,860,000
Total standard cost	$	15,120,000

Actual costs incurred during the current quarter follow:

Direct materials (1,615,000 Ibs. @ $4.10 per lb.)	$	6,621,500
Direct labor (265,000 hrs. @ $13.75 per hr.)		3,643,750
Fixed factory overhead costs		2,350,000
Variable factory overhead costs		2,200,000
Total actual costs	$	14,815,250

Required:
(a)	Compute the variable overhead spending and efficiency variances.

	Actual Variable OH Cost 1 Flexible Budget -1 Standard Cost (VOH applied) AH x AVR AH x SVR SH x SVR 265,000 x $8.30 265,000 x $8.00 270,000 x $8.00 $2,200,000 $2,120,000 $2,160,000 $80,000 0 $40,000 1 Variable overhead spending variance $80,000 Unfavorable Variable overhead efficiency variance 40,000 Favorable Total variable overhead variance $40,000 Unfavorable

(b)	Compute the fixed overhead spending and volume variances.

	Actual Fixed OH Cost -1 Budgeted Overhead -1 Standard Cost (FOH applied) AH x AFR SH x SFR 265,000 x $8.87 270,000 x $10.00 $2,350,000 $2,400,000 $2,700,000 $50,000 2 $300,000 -1 Fixed overhead spending variance $50,000 Favorable Fixed overhead volume variance 300,000 Favorable Total fixed overhead cost variance $350,000 Favorable

(c)	Compute the total overhead controllable variance.

	Overhead Controllable Variance Variable overhead spending variance $80,000 Unfavorable Variable overhead efficiency variance 40,000 Favorable Fixed overhead spending variance 50,000 Favorable Total overhead controllable variance $10,000 Favorable

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Sanchez Company's output for the current period was assigned a $200,000 standard direct materials cost. The direct materials variances included a $5,000 favorable price variance and a $3,000 unfavorable quantity variance. What is the actual total direct materials cost for the current period?
$198,000.

Regarding overhead costs, as volume increases:
Unit fixed cost decreases, unit variable cost remains constant.

Fletcher Company collected the following data regarding production of one of its products. Compute the direct materials quantity variance.

Direct materials standard (6 lbs. @ $2/lb.)	$12 per finished unit
Actual direct materials used	243,000 lbs.
Actual finished units produced	40,000 units
Actual cost of direct materials used	$483,570

$6,000 unfavorable.

Standard material costs, standard labor costs, and standard overhead costs can be obtained from standard cost tables published by the Institute of Management Accountants.
False

Fletcher Company collected the following data regarding production of one of its products. Compute the fixed overhead cost variance.

Direct labor standard (2 hrs. @ $12.75/hr.)	$25.50 per finished unit
Actual direct labor hours	81,500 hrs.
Budgeted units	42,000 units
Actual finished units produced	40,000 units
Standard variable OH rate (2 hrs. @ $14.30/hr.)	$28.60 per finished unit
Standard fixed OH rate ($336,000/42,000 units)	$8.00 per unit
Actual cost of variable overhead costs incurred	$1,140,000
Actual cost of fixed overhead costs incurred	$338,000

$18,000 unfavorable.

Jefferson Co. uses the following standard to produce a single unit of its product: variable overhead $6 (2 hrs. per unit @ $3/hr.). Actual data for the month show variable overhead costs of $150,000, and 24,000 units produced. The total variable overhead variance is:
$6,000U.

When there is a difference between the actual volume of production and the standard volume of production, which of the following, based solely on fixed overhead, occurs?
Volume variance.

A flexible budget expresses all costs on a per unit basis, regardless of cost behavior.
False

Product A has a sales price of $10 per unit. Based on a 10,000-unit production level, the variable costs are $6 per unit and the fixed costs are $3 per unit. Using a flexible budget for 12,500 units, what is the budgeted operating income from Product A?
$20,000.

Cavern Company's output for the current period results in a $5,250 unfavorable direct material price variance. The actual price per pound is $56.50 and the standard price per pound is $55.00. How many pounds of material are used in the current period?
3,500.

A flexible budget is based on a single predicted amount of sales or other activity measure.
False

Identify the situation below that will result in a favorable variance.
Actual revenue is higher than budgeted revenue.

The difference between the actual cost incurred and the standard cost is called the:
Cost variance.

Variable budget is another name for a flexible budget.
True

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Claymore Corp. has the following information about its standards and production activity for September. 

Actual total factory overhead incurred	$28,175
Standard factory overhead:
Variable overhead	$3.10 per unit produced
Fixed overhead
($12,000/6,000 estimated units to be produced)	$2 per unit
Actual units produced	4,800 units

The volume variance is:
$2,400U.

The controllable variance is:
$1,295U.