# Calculation of Price Volume Variance Analysis

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```					Exercise 8-23
Given:
The Singapore division of a Canadian telecommunications company uses a standard-costing system for its machine-paced production of telephone equipment.

Data regarding production during June are as follows:
VMOH costs incurred                                                       \$155,100       Standard          Standard        Standard Cost         Standard          Total
VMOH cost rate (per standard machine-hour)                                     \$12         Cost            Quantity             Per              Cost per        Budgeted
FMOH costs incurred                                                       \$401,000         Card            Hrs./Unit        Mach. Hrs.             Unit          Std. Cost
Budgeted FMOH                                                             \$390,000        VMOH                    0.30                 \$12            \$3.60      \$156,000
Denominator level in machine-hours                                          13,000        FMOH                    0.30                 \$30            \$9.00      \$390,000
BFMOH cost rate (per standard machine-hour)                                    \$30        Actual            Actual          Actual Cost           Actual          Actual
Standard machine-hour allowed per unit of output                              0.30         Cost            Quantity             Per              Cost per          Cost
Budgeted units of output                                                    43,333         Card            Hrs./Unit        Mach. Hrs.             Unit          Incurred
Actual units of output                                                      41,000        VMOH                    0.32       \$11.66165                \$3.78      \$155,100
Actual machine-hour used                                                    13,300        FMOH                    0.32       \$30.15038                \$9.78      \$401,000
Actual machine-hours used per unit of output                                  0.32
EWIP inventory                                                                   0

1. Prepare an analysis of all manufacturing overhead variances Use the 4-way analysis of variance.
VMOH
Actual Costs                                               Flex. Budget                    Applied VMOH                             Static
AXA          \$11.66         AXS             12,300       SQA X S         12,300           SQA X S            13,000              Budget
13,300 X \$11.66              13,300 X \$12              (41,000 X .30) X \$12               41,000 X .30 X \$12                    43,333 X .30 X \$12
\$155,100                  \$159,600                       \$147,600                           \$147,600                              \$156,000
(\$4,500)                      \$12,000                         \$0                                (\$8,400)
Favorable                     Unfavorable                  Always Zero                          Favorable
4-way                    Spending                       Efficiency               Production-Volume                Operating-Income Volume
Variance                      Variance                     Variance                            Variance
\$7,500                                                         (\$8,400)        (Cost Portion)
\$7,500                                                         (\$8,400)
Unfavorable                                                      Favorable
Flexible-budget                                                 Sales-Volume
Variance                                                       Variance
(Cost Portion)
\$7,500                                                           (\$8,400)
\$7,500                                                          Favorable
Underapplied VMOH                                              Operating-Income Volume
Variance
(\$900)                                            (Cost Portion)
(\$900)
(\$900)
(\$900)
Favorable
Static-Budget
Variance

FMOH     Actual Costs                    BFMOH                          BFMOH                            Applied FMOH                            Static
AXA                             for                            for                             SQA X S                              Budget
13,300 Hours                 13,300 Hours                     12,300 SQA                        12,300 Hours                        13,000 Hours
41,000 X .32 X \$30.150376                                                                          41,000 X .30 X \$30                    43,333 X .3 X \$30
13,300 X \$30.150376                                                                                12,300 X \$30                         13,000 X \$30
\$401,000                     \$390,000                        \$390,000                           \$369,000                              \$390,000
\$11,000                            \$0                           \$21,000                             (\$21,000)
Unfavorable                     Always Zero                     Unfavorable                          Favorable
4-way                   Spending                         Efficiency                  Production-Volume               Operating-Income Volume
Variance                        Variance                        Variance                            Variance
(Cost Portion)
\$11,000                                                              \$0
\$11,000                                                              \$0
Unfavorable                                                        Always Zero
Flexible-budget                                                    Sales-Volume
Variance                                                          Variance
(Cost Portion)

\$32,000                                                             (\$21,000)
\$32,000                                                             Favorable
Underapplied FMOH                                                Operating-Income Volume
Variance
\$11,000                                            (Cost Portion)
\$11,000
\$11,000
\$11,000
Unfavorable
Static-Budget
Variance
Alternative calculation of production-volume variance:
Denominator hours used to calculate FMOH rate                                       13,000
Std. quantity allowed for actual level of production                                12,300
Difference: SQA less than static budgeted amount                                       700
FMOH cost rate (per standard machine-hour)                                             \$30
Unfavorable production-volume variance                                             \$21,000
or
Budgeted units of production                                                        43,333
Actual units produced                                                               41,000
Ineffectiveness                                                                      2,333
FMOH rate per unit (\$30 X .30)                                                       \$9.00
Unfavorable production-volume variance                                             \$21,000

Actual Costs               Flexible-Budget                   Flexible-Budget                  Applied TMOH                    Static Budget
AXA                          AXS                            SQA X S                           SXS                           BQA X BP
VMOH        \$155,100    (\$4,500)          \$159,600      \$12,000           \$147,600          \$0            \$147,600      (\$8,400)           \$156,000
FMOH         401,000     11,000            390,000         0               390,000        21,000           369,000      (21,000)            390,000
TMOH        \$556,100                      \$549,600                        \$537,600                        \$516,600   (Cost Portion)        \$546,000
\$6,500                         \$12,000                          \$21,000                       (\$29,400)
Unfavorable                     Unfavorable                      Unfavorable                    Favorable
3-way                  Spending                         Efficiency                   Production-Volume          Operating-Income Volume
Variance                        Variance                         Variance                      Variance

\$18,500                                          \$21,000                       (\$29,400)
Unfavorable                                       Unfavorable                    Favorable
2-way                                Flexible-Budget                                 Production-Volume          Operating-Income Volume
Variance                                         Variance                      Variance

\$39,500                                                (\$29,400)
1-way                                                     Underapplied TMOH                                            Favorable
Operating-Income Volume
Variance

2. Prepare journal entries for MOH. Use the 4-way of analysis of variance. (Ignore explanations.)
Note: The following variances are not normally recorded in journal entries:
Operating-Income Volume Variance
Sales-Volume Variance
Static - Budget Variance
DR             CR
Miscellaneous Accounts                                                \$155,100

Work-in-Process Control                                        \$147,600

Variable Manufacturing Overhead Efficiency Variance             \$12,000
Variable Mfg. Overhead Spending Variance                                \$4,500

Miscellaneous Accounts                                                 \$401,000

Work-in-Process, Control                                       \$369,000

Fixed Manufacturing Overhead Spending Variance                  \$11,000
Fixed Manufacturing Production-Volume Variance                  \$21,000

3. Describe how individual VMOH and FMOH items are controlled from
day to day.

VMOH:      The control of VMOH requires the identification of the cost drivers
for such items as energy, supplies, and repairs. Control often
entails monitoring nonfinancial measures that affect each cost
item, one by one. Examples are kilowatts used, quantities of
lubricants used, repair parts used, and hours used. The most
convincing way to discover why overhead performance did not
agree with a budget is to investigate possible causes, line item by
line item.
FMOH:      Individual FMOH items are not usually affected very much by day-
to-day control. Instead, they are controlled periodically through
planning decisions and budgeting procedures that may sometimes
have horizons covering six months or a year (for example, mgmt.
salaries) and sometimes covering many years (for example, long-
term leases and depreciation on plant and equipment).

4. Discuss possible causes of the variable MOH variances.

The VMOH spending variance is favorable. This means the actual VMOH rate
is lower than the budgeted variable manufacturing overhead rate. Since VMOH
consist of several different costs, this could be for a variety of reasons:
1. utility rate per KWH could be less than budgeted
2. Indirect material cost per unit could be lower than budgeted
3. Indirect labor wage rates could be lower than budgeted.

The VMOH efficiency variance is unfavorable. Since the denominator activity is
machine hours, this variance results from the inefficient use of manufacturing
equipment. For example, production runs could be poorly scheduled resulting in
machinery being idol. Machines might be poorly maintained resulting in work
stoppages resulting from machine breakdowns. Machine operators may be
unavailable when needed for production resulting in idol machinery.
ephone equipment.

Static    Denominator
Budgeted      Level
Units     Machine Hrs.
43,333.33       13,000
43,333.33       13,000
Actual       Actual
Units of     Level of
Output    Machine Hrs.
41,000       13,300
41,000       13,300
Exercise 8-24
Given:
Meals on Wheels (MOW) operates a home meal delivery service. It has agreements with 20
restaurants to pick up and deliver meals to customers who phone or fax orders to MOW. MOW
is currently examining its overhead costs for May 2009.

Applied overhead allocation base is delivery time for both VOH and FOH
Budgeted VOH (per hour of home delivery time) for May 2009 is                                             \$1.50
Budgeted FOH for May 2009 is                                                                            \$35,000
Budgeted number of home deliveries (MOW's output measure)                                                10,000
Budgeted FOH (per home delivery) for May 2009 is                                                          \$3.50
Budgeted delivery time per delivery in hours                                                               0.70
Budgeted FOH (per hour of home delivery time) for May 2009 is                                             \$5.00           \$5.00
Actual VOH for May 2009 was                                                                             \$10,296
Actual FOH for May 2009 was                                                                             \$38,600
Actual number of home deliveries                                                                          8,800
Actual delivery time in hours                                                                             5,720
Actual delivery time per delivery in hours                                                                 0.65

Required:
1. Compute spending and efficiency variances for MOW's VOH in May 2009.
VMOH
Actual Costs                                         6,160                                   Applied VMOH                    Static Budget
\$1.80      AXA                            AXS                          SQA X S                           SXS                           BQA X BP
5,720 X \$1.80                 5,720 X \$1.50               8,800 X .70 X \$1.50           8,800 X .70 X \$1.50               10,000 X .70 X \$1.50
\$10,296                        \$8,580                            \$9,240                       \$9,240                         \$10,500
\$1,716                         (\$660)                            \$0                          (\$1,260)
Unfavorable                     Favorable                      Always Zero                    Favorable
4-way                      Spending                        Efficiency                  Production-Volume              Operating- Income
Variance                       Variance                        Variance                       Variance
\$1,056                                                         (\$1,260)
\$1,056                                                         (\$1,260)
Unfavorable                                                     Favorable
Flexible-budget                                                Sales-Volume
Variance                                                       Variance
\$1,056                                               (\$1,260)
\$1,056                                              Favorable
Underapplied VMOH                                        Operating- Income
Variance
(\$204)
(\$204)
(\$204)
(\$204)
Favorable
Static Budget Variance

2. Compute the spending variance and production-volume variance for MOW's FOH in May 2009.
FMOH
Actual Costs                  5,720 Hours                       6,120 Hours                  Applied FMOH                     7,000 Hours
\$6.75      AXA                           BFMOH                            BFMOH            6,160          SXS                         Static Budget
8,800 X .65 X \$6.75            10,000 X .70 X \$5                 10,000 X .70 X \$5              8,800 X .70 X \$5               10,000 X .70 X \$5
5,720 X \$6.75                  7,000 X \$5                        7,000 X \$5                     6,160 X \$5                     7,000 X \$5
\$38,600                        \$35,000                          \$35,000                       \$30,800                         \$35,000
\$3,600                           \$0                            \$4,200                        (\$4,200)
Unfavorable                     Always Zero                    Unfavorable                      Favorable
4-way                      Spending                         Efficiency                 Production-Volume              Operating- Income
Variance                        Variance                         Variance                      Variance
\$3,600                                                            \$0
\$3,600                                                            \$0
Unfavorable                                                     Always Zero
Flexible-budget                                                 Sales-Volume
Variance                                                       Variance
\$7,800                                                 (\$4,200)
\$7,800                                                 Favorable
Underapplied FMOH                                        Operating- Income
Variance
\$3,600                                     (Cost Portion)
\$3,600
\$3,600
\$3,600
Unfavorable
Static Budget Variance

Alternative calculation of production-volume variance:
Denominator hours used to calculate FMOH rate                                    7,000 10,000 X .7
Std. quantity allowed for actual level of production                             6,160 8,800 X .7
Difference: Denominator hrs. > than allowed hrs.                                   840
FMOH cost rate (per standard machine-hour)                                       \$5.00
Unfavorable production-volume variance                                          \$4,200
or
Budgeted production                                                             10,000
Actual production                                                                8,800
Ineffectiveness in terms of units                                                1,200
FMOH rate per unit                                                               \$3.50
Unfavorable production-volume variance                                          \$4,200

Actual Costs               Flexible Budget                   Flexible Budget               Applied TMOH                 Static Budget
AXA                           AXS                            SQA X S                       SXS                        BQA X BP
VMOH         \$10,296       \$1,716            \$8,580        (\$660)             \$9,240       \$0             \$9,240       (\$1,260)       \$10,500
FMOH           38,600      3,600             35,000          0                35,000      4,200           30,800        (4,200)        35,000
TMOH         \$48,896                        \$43,580                          \$44,240                     \$40,040 (Cost Portion)       \$45,500

\$5,316                          (\$660)                        \$4,200                     (\$5,460)
Unfavorable                     Unfavorable                   Unfavorable                  Favorable
3-way                    Spending                         Efficiency                Production-Volume       Operating-Income Volume
Variance                        Variance                       Variance                   Variance

\$4,656                                         \$4,200                     (\$5,460)
Unfavorable                                    Unfavorable                  Favorable
2-way                                  Flexible-Budget                              Production-Volume       Operating-Income Volume
Variance                                       Variance                   Variance

\$8,856                                          (\$5,460)
1-way                                                      Underapplied FMOH                                        Favorable
Operating-Income Volume
Variance
3. How might MOW manage its VOH costs differently from its FOH costs?

MOW best manages its FOH costs by long-term planning of capacity rather
than day-to-day decisions. This involves planning to undertake only value-added
FOH activities and then determining the appropriate level for those activities.
Most FOH costs are committed well before they are incurred.

In contrast, for VOH, a mix of long-run planning and daily monitoring of the use
of individual items is required to manage costs efficiently. MOW plans to
undertake only value-added VOH activities (a long-run focus) and then manage
the costs drivers of those activities in the most efficient way (a short-run focus).
Exercise 8-28: Flexible-budget Variances
Given:
David James is a cost accountant and business analyst for Doorknob Design Company (DDC),
which manufactures expensive brass doorknobs. DDC uses two direct cost categories: DM and
DML. James feels that MOH is most closely related to material usage. Therefore, DDC
allocates MOH to production based upon pounds of materials used.

At the beginning of 2009, DDC budgeted production of 100,000 doorknobs and adopted the
following standards for each doorknob:
Units      Cost/Unit   Std. Cost
Direct materials (brass -- in pounds)             0.50        \$20       \$10.00
Direct manufacturing labor (in hours)             0.25        \$30        \$7.50
Variable                                       0.50        \$10        \$5.00
Fixed                                          0.50         \$5        \$2.50
Standard Cost per Doorknob                                        \$25.00

Actual results for April 2009 were:
Production (doorknobs)                                   95,000
DM purchased (pounds)                                    50,000          \$22      \$1,100,000
DM used (pounds)                                         45,000
DML                                                      20,000      \$32.50         \$650,000
VMOH                                                                                \$400,000
FMOH                                                                                \$350,000

Required:
1. For the month of April, compute the following variances, indicating whether each is favorable
(F) or unfavorable (U).
a. DM Purchase Price Variance
b. DM Efficiency Variance
c. DML Price Variance
d. DML Efficiency Variance
e. VMOH Spending Variance
f. VMOH Efficiency Variance
g. FMOH Production-volume Variance
h. FMOH Spending Variance

DM        Actual Costs
Aqp X Ap                         Aqp X Sp
50,000 X \$22                      50,000 X \$20
\$1,100,000                        \$1,000,000
\$100,000
Unfavorable
Purchase Price
Variance

Actual Costs                                       47,500                         50,000
Aqu X Ap                         Aqu X Sp                      SQA X S
45,000 X \$22                      45,000 X \$20               95,000 X .5 X \$20           100,000 X .5 X \$20
\$990,000                        \$900,000                       \$950,000
\$90,000                       (\$50,000)                       (\$50,000)
Unfavorable                    Favorable                       Favorable
Usage Price                     Efficiency                    Sales-Volume
Variance                       Variance                         Variance
(Cost portion)
\$40,000
\$40,000                                         (\$50,000)
Unfavorable                                       Favorable
Flexible-budget                                 Sales-Volume
Variance                                        Variance
(\$10,000)
(\$10,000)
(\$10,000)
Favorable
Static Budget Variance

DML        Actual Costs                                       23,750                          25,000
\$32.50       AXA                           AXS                             SQA X S
20,000 X \$32.50                 20,000 X \$30                   95,000 X .25 X \$30          100,000 X .25 X \$30
\$650,000                     \$600,000                           \$712,500
\$50,000                        (\$112,500)                       (\$37,500)
Unfavorable                     Favorable                        Favorable
4-way                        Rate                         Efficiency                    Sales-Volume
Variance                       Variance                         Variance
(Cost Portion)
(\$62,500)
(\$62,500)                                        (\$37,500)
Favorable                                        Favorable
Flexible-budget                                 Sales-Volume
Variance                                        Variance
(\$100,000)
(\$100,000)
(\$100,000)
Favorable
Static Budget Variance

VMOH       Actual Costs                                       47,500
\$8.8889       AXA                           AXS                             SQA X S
45,000 X \$8.8889                45,000 X \$10                   95,000 X .5 X \$10               95,000 X .5 X \$10
\$400,000                    \$450,000                           \$475,000
(\$50,000)                      (\$25,000)                           \$0
Favorable                      Favorable                      Always Zero
4-way                      Spending                       Efficiency                  Production-Volume
Variance                       Variance                         Variance
(\$75,000)
(\$75,000)
Favorable
Flexible-budget
Variance
(\$75,000)
(\$75,000)
Underapplied VMOH
(\$100,000)
(\$100,000)
(\$100,000)
(\$100,000)
Favorable
Static Budget Variance

FMOH       Actual Costs
\$7.78       AXA                           BFMOH                               BFMOH             47,500
95,000 X .5 X \$5
45,000 X \$7.78
\$350,000                      \$250,000                           \$250,000
\$100,000                            \$0                                 \$12,500
Unfavorable                     Always Zero                         Unfavorable
4-way                     Spending                         Efficiency                      Production-Volume
Variance                        Variance                              Variance

\$100,000
\$100,000
Unfavorable
Flexible-budget
Variance
\$112,500
\$112,500
Underapplied FMOH

\$100,000
\$100,000
\$100,000
\$100,000
Unfavorable
Static Budget Variance

2. Can James use any of the variances to help explain any of the other variances? Give
examples?

The direct materials price variance indicates that DDC paid more for brass than they had planned.
If this is because they purchased a higher quality of brass, it may explain why they used less brass
than expected (leading to a favorable material efficiency variance). In turn, since variable manufacturing
overhead is assigned based on pounds of materials used, this directly led to the favorable variable
overhead efficiency variance. The purchase of a better quality of brass may also explain why it took
less labor time to produce the doorknobs than expected (the favorable direct labor efficiency variance).
Finally, the unfavorable direct labor price variance could imply that the workers who were hired were
more experienced than expected, which could also be related to the positive direct material and direct
labor efficiency variances.
ach is favorable

Static Budget
BQA X BP
100,000 X .5 X \$20
\$1,000,000
Static Budget
BQA X BP
100,000 X .25 X \$30
\$750,000

Applied VMOH                     Static Budget
SXS                            BQA X BP
95,000 X .5 X \$10             100,000 X .50 X \$10
\$475,000                      \$500,000
(\$25,000)
Favorable
Production-Volume               Operating- Income
Variance
(\$25,000)
(\$25,000)
Favorable
Sales-Volume
Variance
(\$25,000)
Favorable
Operating- Income
Variance
Applied FMOH
SXS                         Static Budget
95,000 X .5 X \$5
47,500 X \$5
\$237,500                          \$250,000
(\$12,500)
Favorable
Production-Volume                 Operating- Income
Variance

\$0
\$0
Always Zero
Sales-Volume
Variance
(\$12,500)
Favorable
Operating- Income
Variance

sed less brass
iable manufacturing
rable variable
plain why it took
ficiency variance).
were hired were
material and direct
Exercise 8-29
Given:
Kitchen Whiz manufactures premium food processors. The following is some manufacturing overhead
data for Kitchen Whiz for the year ended December 31, 2010:

Flexible
Budget
MOH               Actual       (For Achieved     Applied
Type               Costs           Output)       Amount
VMOH                 \$76,608          \$76,800          \$76,800
FMOH                \$350,208         \$348,096      \$376,320

Budgeted number of output units:                                           888
Planned machine-hours required per processor manufactured                   2
Actual number of machine hours used during 2010                         1,824
The static-budgeted VMOH costs for 888 processors                     \$71,040

Required:
Compute the following quantities:
1. Budgeted # of machine-hours planned.
Static-budgeted processors                                              888
Multiplied by budgeted machine hours per unit                             2
Planned machine-hours                                                 1,776

2. Budgeted FMOH costs per machine-hour.
Budgeted FMOH                                                     \$348,096
Divided by planned machine-hours                                     1,776
Budgeted FMOH costs per machine-hour                                  \$196

3. Budgeted VMOH costs/machine-hour
Static budgeted VMOH                                               \$71,040
Divided by planned machine-hours                                     1,776
Budgeted VMOH costs per machine-hour                                   \$40

4. Budgeted number of machine-hours allowed
for actual output produced
Adjusted (for Actual Output) budgeted VMOH                         \$76,800
Divided by budgeted VMOH costs per machine-hour                        \$40
Budgeted # of MHrs. allowed for actual production                    1,920

5. Actual number of output units
Budgeted # of MHrs. allowed for actual production                     1,920
Divided by the budgeted machine hours per unit                            2
Actual number of output units                                           960

6. Actual number of machine-hours used per processor
Actual number of machine hours used during 2010 was                   1,824
Divided by the actual number of output units                            960
Actual number of machine-hours used per panel                          1.90
Exercise 8-30 (Continuation of 8-29)
Required:
1. Prepare journal entries for variable and fixed MOH

Actual Costs Incurred                      \$42           Flexible Budget
Actual Input X Actual Price                          Actual Input X Standard Price
1,824 X \$42                                           1,824 X \$40
VMOH
\$76,608                                               \$72,960
\$3,648
Unfavorable
Spending Variance

Actual Costs Incurred                                    Flexible Budget
Actual Input X Actual Price                          Actual Input X Standard Price

FMOH
\$350,208                                              \$348,096
\$2,112
Unfavorable
Budget Variance

1 Variable Manufacturing Overhead Control                                                   76,608
Accounts Payable Control and Other Accounts
To record actual variable mfg. overhead incurred.

2 Work-in-Process Control                                                                   76,800
To record applied VMOH.

3 Variable Manufacturing Overhead Applied                                                   76,800
Variable Manufacturing Overhead Spending Variance                                          3,648

4 Fixed Manufacturing Overhead Control                                                     350,208
Accounts Payable Control and Other Accounts
To record actual fixed mfg. overhead incurred.

5 Work-in-Process Control                                                                  376,320
To record applied FMOH.

6 Fixed Manufacturing Overhead Applied                                                     376,320
Fixed Manufacturing Overhead Budget Variance                                               2,112

2. Overhead variances are written off to COGS at the end of the
fiscal year. COGS is then entered in the income statement.
Show how COGS is adjusted through journal entries.

7 Variable Manufacturing Overhead Efficiency Variance                        3,840
Fixed Manufacturing Overhead Production-Volume Variance                   28,224
Cost of Goods Sold
To close the mfg. overhead variances to COGS
1,370,880

FMOH Control                 VMOH Control
JE 4     350,208             JE 1     76,608
JE 6               350,208   JE 3

0                           0

FMOH Applied                 VMOH Applied
JE 5               376,320   JE 2
JE 6     376,320             JE 3     76,800

0                           0
1,920                Flexible Budget                          1,920               Applied Overhead
put X Standard Price                          Standard Quantity Allowed X Standard Price                    Standard Quantity Allowed X Standard Price
(960 X 2) X \$40                                               (960 X 2) X \$40
1,920 X \$40                                                   1,920 X \$40
\$76,800                                                       \$76,800
(\$3,840)                                                      \$0
Favorable                                                 Always Zero
Efficiency Variance                                     Production-Volume Variance

put X Standard Price                          Standard Quantity Allowed X Standard Price                    Standard Quantity Allowed X Standard Price
(960 X 2) X (\$348,096/(888 X 2)
(1,920 X (\$348,096/1,776)
1,920 X \$196
\$348,096                                                      \$376,320
\$0                                                      (\$28,224)
Always Zero                                                 Favorable
Efficiency Variance                                     Production-Volume Variance

Units
Actual Production                                    960
76,608                                                 Planned Production                                   888
Difference                                            72
Budgeted FMOH Rate/Unit                             \$392
Production-Volume Variance                      \$28,224
76,800

3,840
76,608

350,208

376,320

28,224
350,208
2,112
3,648
26,304

1,370,880

VMOH Control             VMOH Spending Var.            FMOH Budget Variance
JE 3   3,648                  JE 6      2,112
76,608   JE 7                3,648     JE 7                 2,112

0                               0

VMOH Applied               VMOH Efficiency Var.        FMOH Volume Variance
76,800   JE 3                  3,840   JE 3              28,224
JE 7     3,840                JE 7     28,224

0                               0
ty Allowed X Standard Price

ty Allowed X Standard Price
X (\$348,096/(888 X 2)
X (\$348,096/1,776)

Mhrs.
1,920
1,776
144
\$196
\$28,224
Exercise 8-37:         Activity-based costing, batch-level variance analysis
Given:
Jo Nathan Publishing Company specializes in printing specialty textbooks for a small but
profitable college market. Due to the high setup costs for each batch printed, Jo Nathan
holds the book requests until demand for a book is approximately 500. At that point Jo Nathan
will schedule the setup and production of the book. For rush orders, Jo Nathan will produce
smaller batches for an additional charge of \$700 per setup.

Static-Budget     Actual
2009 Data                                        Amounts        Amounts
Number of books produced                             200,000     216,000
Average # of books per setup (Batch size)                500         480         450 setups
Hours to set up printers                                  6.0         6.5      2,925 setup hours
VOH cost per setup-hour                                 \$100         \$90
Total fixed setup overhead costs                     \$72,000     \$79,000        \$27
FOH cost per setup-hour                                  \$30         \$27

Required:
1. What is the static budget number of setups?

Number of books expected to be produced                      200,000
Expected average # of books per setup                            500
Static budget number of setups                                    400

2. What is the flexible budget number of setups?

Number of books produced                                     216,000
Expected average # of books per setup                            500
Static budget number of setups                                    432

3. What is the actual number of setups of setups?

Number of books produced                                     216,000
Expected average # of books per setup                            480
Static budget number of setups                                    450

4. Assuming fixed setup overhead costs are allocated using set-up hours, what is the
predetermined fixed setup overhead allocation rate?

Budgeted fixed setup overhead costs                                      \$72,000
Static budget number of setups                                    400
Budgeted hours to set up printers                                 6.0      2,400
Predetermined fixed setup overhead allocation rate                           \$30

5. Does Jo Nathan's charge of \$700 cover the budgeted variable overhead cost of an order?

Yes.

VOH cost per setup-hour                                                    \$100
Budgeted hours to set up printers                                            6.0
Budgeted variable costs per special setup                                  \$600
Does Jo Nathan's charge of \$700 cover the budgeted total overhead cost of an order?

No
VOH        FOH           TOH
Overhead cost per setup-hour                                                       \$100        \$30          \$130
Budgeted hours to set up printers                                                    6.0        6.0           6.0
Budgeted overhead costs per special setup                                          \$600       \$180          \$780

The special setup has an estimated total overhead cost of \$780. Jo Nathan's charge is
only \$700 for a special setup.

6. For variable testing overhead costs, compute the efficiency and spending variances.

Given:                                                  Static-Budget      Actual
2009 Data                                              Amounts         Amounts
Number of books produced                                   200,000      216,000
Average # of books per setup (Batch size)                      500          480
Hours to set up printers                                        6.0          6.5
VOH cost per setup-hour                                       \$100          \$90
Total fixed setup overhead costs                           \$72,000      \$79,000
FOH cost per setup-hour                                        \$30    \$27.00855

Actual Costs Incurred                       Flexible Budget                                       Flexible Budget
Actual Input X Actual Price             Actual Input X Standard Price                Standard Quantity Allowed X Standard Price
(216,000/480) X 6.5 X \$90                   (216,000/480) X 6.5 X \$100                            (216,000/500) X 6.0 X \$100
450 X 6.5 X \$90                             450 X 6.5 X \$100                                      432 X 6.0 X \$100
2,925 X \$90                                 2,925 X \$100                                          2,592 X \$100
\$263,250                                     \$292,500                                              \$259,200
VMOH                     (\$29,250)                                                  \$33,300
Favorable                                                Unfavorable
Spending Variance                                         Efficiency Variance

7. For fixed testing overhead costs, compute the spending and the production-volume variances.

Actual Costs Incurred                       Flexible Budget                                       Flexible Budget
Actual Input X Actual Price            Actual Input Level (450 hours)                Standard Quantity Allowed Level (432 hours)
(216,000/480) X 6.5 X \$27.00855
450 X 6.5 X \$27.00855
2,925 X \$27.00855
\$79,000                                    \$72,000                                               \$72,000
FMOH                        \$7,000                                                    \$0
Unfavorable                                              Always Zero
Budget Variance                                        Efficiency Variance

The production-volume variance of \$5,760 F can be understood by looking at an alternative way to calculate it:

PVV =            (216,000 - 200000)/500 X 6.0 X \$30 = 16,000/500 X6.0 X \$30 = 32 X 6.0 X \$30 = 192 X \$30 = \$5,
\$5,760
Therefore, the PVV is caused by the increase in production volume of 16,000 books which caused FOH to be ove
The 32 extra batches caused the standard hours allowed to increase by 192 hours (32 X 6.0) and since FOH is a
hours allowed, then FOH is overapplied by \$5,760 (192 X \$30).

8 What qualitative factors should Jo Nathan consider before accepting or rejecting a special offer?

Rejecting an order may have implications for future orders -- professors may be reluctant to order books
from this publisher again if orders are rejected.

Jo Nathan should consider past history with the customer and consider potential for future business
with the special order customer.

If the book is relatively new, Jo Nathan might consider running a full batch and holding the extra books
for future sales to other potential customers. Note: inventory carrying costs and obsolesce risk should
be considered before producing for inventory.

If the special order comes at heavy volume times, Jo Nathan should look at the opportunity cost of
filling the order. Will accepting the order interfere with or delay the printing of regular customers' orders?
Flexible Budget                                     Applied Overhead                                      Static Budget
ntity Allowed X Standard Price          Standard Quantity Allowed X Standard Price                         (231 hours)
00/500) X 6.0 X \$100                           (216,000/500) X 6.0 X \$100                          (200,000/500) X 6.0 X \$100
32 X 6.0 X \$100                                     432 X 6.0 X \$100                                    400 X 6.0 X \$100
2,592 X \$100                                         2,592 X \$100                                        2,400 X \$100
\$259,200                                            \$240,000
\$0                                              \$19,200
Always Zero                                         Favorable
Production-Volume Variance                     Operating-Income Volume Variance
(cost portion)

Flexible Budget                                     Applied Overhead                                      Static Budget
ntity Allowed Level (432 hours)         Standard Quantity Allowed X Standard Price                         (400 hours)
(216,000/500) X 6.0 X \$30                            (200,000/500) X 6.0 X \$30
432 X 6.0 X \$30                                      400 X 6.0 X \$30
2,592 X \$30                                          2,400 X \$30
\$77,760                                              \$72,000
(\$5,760)                                          \$5,760
Favorable                                        Unfavorable
Production-Volume Variance                     Operating-Income Volume Variance
(cost portion)

ay to calculate it:

0 X \$30 = 192 X \$30 = \$5,760
hich caused FOH to be overapplied by \$5,760.
X 6.0) and since FOH is applied based on standard
0/500) X 6.0 X \$100
0 X 6.0 X \$100

00/500) X 6.0 X \$30
00 X 6.0 X \$30
Exercise 8-38:     Production-Volume Variance and Sales -Volume Variance
Given:
Dawn Floral Creations, Inc. makes jewelry in the shape of flowers. Each piece is hand-made and takes
an average of 1.5 hours to produce because of the intricate design and scrollwork. Dawn uses direct
labor hours to allocate the overhead cost to production. Fixed overhead costs, including rent,
depreciation, supervisory salaries and other production expenses, are budgeted at \$9,000 per month.
These costs are incurred for a facility large enough to produce 1,000 pieces of jewelry a month.

During the month of February, Dawn produced 600 pieces of jewelry and actual fixed costs were \$9,200.

Required:

1. Calculate the fixed overhead spending variance and indicate if it is favorable (F) or unfavorable (U).
2. If Dawn used DLHs available at capacity to calculate the budgeted fixed overhead rate, what is the
production-volume variance? Indicate whether it is favorable or unfavorable.

Actual Costs                     BFMOH                          BFMOH                       Applied FMOH
AXA                              for                            for                        SQA X S

?                              ?                             900                            900
Hours                          Hours                          Hours                         Hours
600 X ? X \$ ?                                                                               600 X 1.5 X \$6         1,000 X 1.5 X (\$9,000/1,50
600 X ? X \$ ?                                                                                 900 X \$6
\$9,200                         \$9,000                          \$9,000                        \$5,400
\$200                              \$0                          \$3,600                         (\$3,600)
FMOH                       Unfavorable                     Always Zero                   Unfavorable                     Favorable
4-way                   Spending                         Efficiency               Production-Volume        Operating-Income Volume
Variance                        Variance                      Variance                        Variance
(Q1)                                                          (Q2)                        (Cost Portion)
\$200                                                           \$0
\$200                                                           \$0
Unfavorable                                                   Always Zero
Flexible-budget                                               Sales-Volume
Variance                                                     Variance
(Cost Portion)

\$3,800                                                       (\$3,600)
\$3,800                                                      Favorable
Underapplied FMOH                                        Operating-Income Volume
Variance
\$200                                        (Cost Portion)
\$200
\$200
\$200
Unfavorable
Static-Budget
Variance

Alternative calculation of production-volume variance:
Denominator hours used to calculate FMOH rate                                     1,500
Std. quantity allowed for actual level of production                                900
Difference: SQA less than static budgeted amount                                    600
FMOH cost rate (per standard machine-hour)                       \$6
Unfavorable production-volume variance                       \$3,600
or
Budgeted units of production                                  1,000
Actual units produced                                           600
Ineffectiveness                                                 400
FMOH rate per unit (\$6 X 1.5)                                 \$9.00
Unfavorable production-volume variance                       \$3,600

3. An unfavorable production-volume variance is a measure of the under-allocation of fixed overhead
cost caused by production levels at less than capacity. It therefore could be interpreted as the
economic cost of unused capacity. Why would Dawn be willing to incur this cost? Your answer
should separately consider the following two unrelated factors:

a. Demand could vary from month to month while available capacity remains constant.
b. Dawn would not want to produce at capacity unless it could sell all the units produced. What
does Dawn need to do to raise demand and what effect would this have on profit?

An unfavorable production-volume variance measures the cost of unused capacity. Production at capacity
would result in a P-V variance of -0- since the fixed overhead rate is based upon expected hours at capacity
production.

However, the existence of an unfavorable P-V variance does not necessarily imply that management is doing
a poor job or incurring unnecessary costs.

Regarding "a." above: For most products, demand varies from month to month while commitment to the
factors that determine capacity, e.g. size of workshop or supervisory staff, tends to remain relatively
constant. If a company wants to meet demand in a high demand months, it will have excess capacity in low
demand months. In addition, forecasts of future demand contain uncertainty due to unknown future factors.
Having some excess capacity would allow a company to produce enough to cover peak demand as well as
slack to deal with unexpected demand surges in non-peak months.

Regarding "b." above: Basic economics provides a demand curve that shows a tradeoff between price
charged and quantity demanded. Potentially, Dawn could have a lower net revenue if they produce at
capacity and sell at a lower price than if they sell at a higher price at some level below capacity.

In addition, the unfavorable P-V variance may not represent a feasible cost savings associated with lower
capacity. Even if Dawn could shift to lower fixed costs by lowering capacity, the fixed cost may behave as
a step function. If so, fixed costs would decrease in fixed amounts associated with a range of production
capacity, not a specific production volume. The P-V variance would only accurately identify potential cost
savings if the fixed cost function is continuous, not discrete.

4. Dawn's budgeted variable cost per unit is \$25 and she expects to sell her jewelry for \$55 a piece.
Compute the sales-volume variance and reconcile it with the production-volume variance
calculated in requirement #2. What does each concept mean?

Acctg. Records
Flexible              Applied VMOH
Budget                Applied FMOH
Actual Costs                                    SQA X S                  SQA X S
AXA                          AXS                      600 units                   600 units
Sales                                                                    \$33,000                     \$33,000    (\$22,000)
Var. Costs                                                                15,000                       15,000   (\$10,000)
C/M                                                                      \$18,000                     \$18,000
Fixed Costs                                U - underapplied FMOH           9,000       \$3,600           5,400    (\$3,600)
Operating Income                                                          \$9,000       (\$3,600)      \$12,600     (\$8,400)

(\$3,600)                  (\$8,400)
Unfavorable-reduced OI       Unfavorable-reduced OI
Production-Volume        Operating-Income Volume
Variance                    Variance
(Total)                    (Total)
(\$12,000)
(\$12,000)
Unfavorable-reduced OI
Sales-Volume Variance
(Total)

The total sales-volume variance represents the difference between the static-budget OI and the flexible-budget OI.
The total sales-volume captures the fact that when Dawn sells 600 units instead of the static budgeted 1,000 units
only the revenue and the variable costs are affected. Fixed costs remain unchanged.

Sales Volume Variance = Budgeted CM X (Actual Units Sold - Static Budget Units)
S V V = (\$55-\$25) X (1,000 - 600) = \$30 X 400 = \$12,000 Unfavorable

S V V = is a measure of the change in TCM resulting solely by virtue of a change in the level of sales. All costs and
prices are held constant at budgeted values.

The total production-volume variance captures only the portion of the budgeted fixed overhead expected to be
unabsorbed because of the 400-unit shortfall. It represents the difference between operating income based on the
budgeted profit per unit and the flexible-budget operating income

Calculation of budgeted profit per unit consistent with static budget:
Budgeted SP                                                 \$55
Budgeted unit VC                             \$25
Budgeted unit FC                                  9          34
Budgeted unit profit                                        \$21
Actual volume                                               600
OI based on budgeted profit per unit                  \$12,600 (Same as above)
Flexible budget OI                                      9,000
Unfavorable Product-Volume Variance                   \$3,600

P V V = is a measure of the amount of over/under costing resulting from over/under application of FMOH caused
solely by virtue of a change in the level of production from the originally budgeted production level.

P V V = BFMOH - Applied FMOH = \$9,000 - \$5,400 =                          \$3,600 underapplied

P V V = FMOH rate X (Actual Units Produced - Static Budget Units)

P V V = \$9 X (600 - 1,000)
P V V = \$9 X (-400) =
PVV=          (\$3,600)         Unfavorable (less production)

P V V = Actual Production X [(FMOH Rate based on Static Budget Volume) - (FMOH Rate based on Flexible Budget Volume)]

P V V = 600 X [(\$9,000/1,000) - (\$9,000/600)]
P V V = 600 X [(\$9) - (\$15)]
P V V = 600 X [-\$6]
PVV=          (\$3,600)         Unfavorable

The total operating-income volume variance represents the difference between the operating
income based on the budgeted profit per unit and the static-budget operating income.

Operating-income Volume Variance = S V V - P V V = (-\$12,000) - (-\$3,600) = -\$8,400 unfavorable         (\$8,400)

Summary                                                    Oper. Income
Flexible                       Budgeted                    Static
Budget                        Profit/Unit                 Budget
Sales/Production Level          600                            600                      1,000
Operating Income                   \$9,000                      \$12,600                   \$21,000
(\$3,600)                   (\$8,400)
Unfavorable                   Unfavorable
Production-Volume         Operating-Income Volume
Variance                     Variance

(\$12,000)
Unfavorable
Sales-Volume
Variance
were \$9,200.

Static
Budget

1,500
Hours
1,000 X 1.5 X (\$9,000/1,500)
1,500 X \$6
\$9,000

ating-Income Volume

(Cost Portion)

ating-Income Volume

(Cost Portion)
rs at capacity

ement is doing

mmitment to the

ss capacity in low
wn future factors.
mand as well as

between price

Static
Budget
1,000 Units
\$55,000      U - lost sales
25,000   F - saved costs
\$30,000
9,000   F - saved costs
\$21,000

avorable-reduced OI
ating-Income Volume
ble Budget Volume)]
Exercise 8-35
Given:
Morano Company prepared its budgeted production and sales at its maximum capacity of
20,000 units for 2006. Other data for 2006 follows:

Budgeted Sales and Production                20,000 (capacity)
Actual Sales and Production                  18,000
Beginning Inventories                             0
Ending Inventories                                0
Budgeted FMOH                              \$500,000
Budgeted selling price                         \$100
Budgeted variable cost per unit                 \$40

Required:
1. Calculate the static-budget operating income (A), the flexible-budget operating income (B), and the
operating income based on the budgeted profit per unit (C).
(B)            (C)
Flexible     Operating
Budget      Profit Based
Based on      on Budgeted
Actual Sales    Profit/Unit
Volume (in units sold)                                                    18,000          18,000
Budgeted selling price                                         \$100
Budgeted variable cost per unit                                  40
Budgeted CM/unit                                                \$60           60
Total Contribution                                                    \$1,080,000
Budgeted FOH                                                             500,000
OI based on the actual volume & budgeted volume                         \$580,000
Budgeted profit per unit                                                                     35
Operating income based on budgeted profit per unit                                     \$630,000

Alternative calculation of budgeted profit per unit:
Budgeted selling price                                                              \$100
Budgeted FMOH                                                   \$500,000
Budgeted Sales and Production (capacity)                          20,000
Budgeted FMOH per unit of capacity                                   \$25
Budgeted variable cost per unit                                       40
Budgeted total cost per unit of capacity                                              65
Budgeted profit per unit                                                             \$35

2. Compute the sales-volume variance, the production-volume, and the operating-
income volume variance. What do each of these variances measure?

18,000        20,000
Sales-Volume Variance                     Flexible       Static
Budget        Budget        Difference
Operating Income           \$580,000      \$700,000      (\$120,000) (Oper. Income)
Unfavorable

Sales Volume Variance = Budgeted CM X (Actual Units Sold - Static Budget Units)
S V V = \$60 X (18,000 - 20,000)
S V V = \$60 X (-2,000) =
SVV=         (\$120,000) U (less sales)

S V V = is a measure of the change in TCM resulting solely by virtue of a
change in the level of sales. (All costs and prices are held constant
at budgeted values).

Production-Volume Variance                     Applied          Static
FOH            Budget       Difference
Fixed overhead                \$450,000        \$500,000     (\$50,000)          (Cost)
\$450,000                     Unfavorable

Oper. Income    Oper. Income
18,000          Based on
Flexible       Budgeted
Budget         Profit/Unit   Difference
Operating Income              \$580,000        \$630,000     (\$50,000) (Oper. Income)
Unfavorable

Production-Volume Variance = FMOH rate X (Actual Units Produced - Static Budget Units)
FMOH Application rate = \$500,000/20,000 = \$25
P V V = \$25 X (18,000 - 20,000)
P V V = \$25 X (-2,000) =
PVV=          (\$50,000) Unfavorable (less production)

P V V = Actual Production X [(FMOH Rate based on Static Budget Volume) - (FMOH Rate based on Flexible Budget Volume)]
P V V = 18,000 X [(\$500,000/20,000) - (\$500,000/18,000)]
P V V = 18,000 X [(\$25) - (\$27.77777777778)]
P V V = 18,000 X [-\$2.77777777778]
PVV=          (\$50,000) Unfavorable (less production)

P V V = is a measure of the amount of over/under costing resulting from
over/under application of FMOH caused solely by virtue of a change
in the level of production from the originally budgeted production level.

Oper. Income
Based on
Operating-income Vol. Variance                 Budgeted         Static
Profit/Unit     Budget       Difference
\$630,000       \$700,000     (\$70,000)
Unfavorable

Operating-income Volume Variance = S V V - P V V
O V V = (-\$120,000) - (-\$50,000) =
OVV=          (\$70,000) Unfavorable

Oper. Income
Flexible                      Budgeted                         Static
Budget                       Profit/Unit                     Budget
Sales/Production Level           18,000                        18,000                         20,000
Operating Income   \$580,000                  \$630,000               \$700,000
(\$50,000)                (\$70,000)
Unfavorable               Unfavorable
Production-Volume      Operating-Income Volume
Variance                  Variance

(\$120,000)
Unfavorable
Sales-Volume
Variance
ncome (B), and the

(A)
Static
Budget
Based on
Capacity
20,000

60
\$1,200,000
500,000
\$700,000
Flexible Budget Volume)]

oduction level.
Exercise 8-28
Given:
The Monthly Herald budgets to produce 300,000 copies of its monthly newspaper (the output unit) for August 2008. It is budgeted to have
50 print pages per paper. Actual production was 320,000 copies with 17,280,000 print pages run. Each paper was only 50 print pages, but
quality problems with paper led to many pages being unusable.

Variable costs are direct materials, direct labor, and variable indirect costs. Variable and fixed indirect costs are allocated to each copy on
the bases of good print pages. The driver for all variable costs is the number of pages.

Data pertaining to August 2008:                            Static
Budget          Actual
Production Copies                                        300,000         320,000
Pages per copy                                                 50             50
Print pages run                                       15,000,000      17,280,000
Direct materials                                        \$180,000        \$224,640
DM cost per page                                          \$0.012          \$0.013
Pages produced per DL hour                                10,000          10,000 (added data)
Direct labor costs                                       \$45,000         \$50,112 (added data)
Direct labor hours                                         1,500           1,728
Direct labor costs per hour                                  \$30             \$29
Variable indirect costs                                  \$60,000         \$63,936
VOH rate/print page                                      \$0.0040         \$0.0037
Fixed indirect costs                                     \$90,000         \$97,000
FOH rate/print page                                      \$0.0060         \$0.0056

Required:
1. Prepare a comprehensive set of variances for the two direct-cost items and the two indirect-cost items for The Monthly Herald. (Direct
materials price and usage variances, direct-labor rate and efficiency variances, variable overhead spending and efficiency variances,
and fixed budget and production-volume variances. Use the post method. Show how you got all of your post values.

Actual Costs Incurred                                       Flexible Budget               16,000,000                Flexible Budget                                       Static Budget
Actual Input X Actual Price                             Actual Input X Standard Price                    Standard Quantity Allowed X Standard Price           Standard Quantity Allowed X Standard Price
17,280,000 X \$.013                                        17,280,000 X \$.012                                   (320,000 X 50) X \$.012                               (300,000 X 50) X \$.012
DM                                                                                                                                    16,000,000 X \$.012                                   15,000,000 X \$.012
\$224,640                                                 \$207,360                                              \$192,000                                             \$180,000
\$17,280                                                   \$15,360                                                \$12,000
Unfavorable                                               Unfavorable                                            Unfavorable
Price Variance                                            Usage Variance                                     Sales Volume Variance
Actual Costs Incurred                                       Flexible Budget                    1,600                Flexible Budget                 1,500                 Static Budget
Actual Input X Actual Price                             Actual Input X Standard Price                    Standard Quantity Allowed X Standard Price           Standard Quantity Allowed X Standard Price
1,728 X \$29                                              1,728 X \$30                                    (320,000 X 50)/10,000 X \$30                         (300,000 X 50)/10,000 X \$30
DL                                                                                                                                        1,600 X \$30                                        1,500 X \$30
\$50,112                                                  \$51,840                                                \$48,000                                             \$45,000
(\$1,728)                                                    \$3,840                                              \$3,000
Favorable                                                  Unfavorable                                          Unfavorable
Rate Variance                                           Efficiency Variance                                 Sales Volume Variance

Actual Costs Incurred                                       Flexible Budget               16,000,000                Flexible Budget                                     Applied Overhead
Actual Input X Actual Price                             Actual Input X Standard Price                    Standard Quantity Allowed X Standard Price           Standard Quantity Allowed X Standard Price
17,280,000 X \$.0037                                      17,280,000 X \$.0040                                   (320,000 X 50) X \$.0040                              (320,000 X 50) X \$.0040
VMOH                                                                                                                                  16,000,000 X \$.0040                                  16,000,000 X \$.0040
\$63,936                                                  \$69,120                                               \$64,000                                              \$64,000
(\$5,184)                                                    \$5,120                                                \$0
Favorable                                                 Unfavorable                                         Always Zero
Spending Variance                                         Efficiency Variance                              Production-Volume Variance
Actual Costs Incurred                                       Flexible Budget                                         Flexible Budget                                     Applied Overhead
Actual Input X Actual Price                           Actual Input X Standard Price                  Standard Quantity Allowed X Standard Price        Standard Quantity Allowed X Standard Price
(320,000 X 50) X \$.0060
FMOH                                                                                                                                                                              16,000,000 X \$.0060
\$97,000                                                \$90,000                                               \$90,000                                        \$96,000
\$7,000                                                \$0                                               (\$6,000)
Unfavorable                                         Always Zero                                         Favorable
Budget Variance                                   Efficiency Variance                            Production-Volume Variance
Summary of Variances:
Direct Materials
Price                               \$17,280 U
Usage                               \$15,360 U
Direct Labor
Rate                                (\$1,728) F
Efficiency                           \$3,840 U
Spending                            (\$5,184) F
Efficiency                           \$5,120 U
Budget                               \$7,000 U
Production-Volume                   (\$6,000) F

2. Explain the cause of the unfavorable variable overhead efficiency variance.

The VMOH efficiency variance results from using 1,280,000 extra pages than allowed.
Note the extra use of direct materials causes the VMOH efficiency variance to be unfavorable.
This result is because the allocation base is good print pages.
uantity Allowed X Standard Price
00,000 X 50) X \$.012
15,000,000 X \$.012

uantity Allowed X Standard Price
000 X 50)/10,000 X \$30

uantity Allowed X Standard Price      Budgeted Quantity Allowed X Budgeted Price
20,000 X 50) X \$.0040                         (300,000 X 50) X \$.0040
6,000,000 X \$.0040                             15,000,000 X \$.0040
\$60,000
\$4,000
Unfavorable
Operating-Income Variance
uantity Allowed X Standard Price      Budgeted Quantity Allowed X Budgeted Price
0,000 X 50) X \$.0060
6,000,000 X \$.0060
\$90,000
\$6,000
Unfavorable
Operating-Income Variance
Exercise 8-37
Given:
Asma Surgical Instruments, Inc., makes a special line of forceps, SFA, in batches.
Asma randomly selects forceps from each SFA batch for quality-testing purposes.
Quality testing costs are batch-level costs.
A separate quality-testing section is responsible for SFA quality testing.
Quality testing costs consist of some variable and some fixed costs in relation to
quality-testing hours.
Static-Budget     Actual
2007 Data                                          Amounts        Amounts
Units of SFA produced and sold                          21,000      22,000
Batch size (number of units/batch)                         500         550            40
Testing-hours per batch                                     5.5         5.4          216
VOH cost per testing-hour                                  \$40         \$42
Total fixed testing overhead costs                     \$28,875     \$27,216         \$126
FOH cost per testing-hour                                 \$125        \$126
Required:
1. For variable testing overhead costs, compute the efficiency and spending variances.

Actual Costs Incurred                     Flexible Budget                                     Flexible Budget
Actual Input X Actual Price           Actual Input X Standard Price                Standard Quantity Allowed X Standard Price
(22,000/550) X 5.4 X \$42                (22,000/550) X 5.4 X \$40                             (22,000/500) X 5.5 X \$40
40 X 5.4 X \$42                          40 X 5.4 X \$40                                       44 X 5.5 X \$40
216 X \$42                               216 X \$40                                            242 X \$40
\$9,072                                  \$8,640                                               \$9,680
VMOH                        \$432                                                (\$1,040)
Unfavorable                                           Favorable
Spending Variance                                    Efficiency Variance

The unfavorable spending variance is due to the actual VOH cost per testing-hour increasing from the budgeted \$40 per h
hour.

The favorable efficiency variance is due to the actual output of 22,000 units (1) requiring fewer batches, 40, than the budg
batch taking less time, 5.4 hours, than the budgeted time of 5.5 hours. Thus, 216 testing hours were used when 242 standa

2. For fixed testing overhead costs, compute the spending and the production-volume variances.

Actual Costs Incurred                     Flexible Budget                                     Flexible Budget
Actual Input X Actual Price          Actual Input Level (216 hours)                Standard Quantity Allowed Level (242 hours)
(22,000/550) X 5.4 X \$126
40 X 5.4 X \$126
FMOH     216 X \$126
\$27,216                                 \$28,875                                             \$28,875
(\$1,659)                                                \$0
Favorable                                            Always Zero
Budget Variance                                     Efficiency Variance

The fixed testing overhead cost budget variance is \$1,659 F because the amount of actual costs (\$27,216) was lower tha

The production-volume variance of \$1,375 F can be understood by looking at an alternative way to calculate it:
PVV =         (22,000 - 21,000)/500 X 5.5 X \$125 = 1,000/500 X5.5 X \$125 = 2 X 5.5 X \$125 = 11 X \$125 = \$1,3
\$1,375

Therefore, the PVV is caused by the increase in production volume of 1,000 units which caused FOH to be overa
The 2 extra batches caused the standard hours allowed to increase by 11 hours (2 X 5.5) and since FOH is applie
hours allowed, then FOH is overapplied by \$1,375 (11 X \$125)
Flexible Budget                                     Applied Overhead                                      Static Budget
ntity Allowed X Standard Price          Standard Quantity Allowed X Standard Price                         (231 hours)
00/500) X 5.5 X \$40                             (22,000/500) X 5.5 X \$40                            (21,000/500) X 5.5 X \$40
44 X 5.5 X \$40                                       44 X 5.5 X \$40                                      42 X 5.5 X \$40
242 X \$40                                           231 X \$40
\$9,680                                              \$9,240
\$0                                               \$440
Always Zero                                        Unfavorable
Production-Volume Variance                     Operating-Income Volume Variance
(cost portion)
rom the budgeted \$40 per hour to the actual rate of \$42 per

batches, 40, than the budgeted amount of 44 and (2) each
were used when 242 standard testing hours were allowed.

Flexible Budget                                     Applied Overhead                                      Static Budget
ntity Allowed Level (242 hours)         Standard Quantity Allowed X Standard Price                         (231 hours)
(22,000/500) X 5.5 X \$125                           (21,000/500) X 5.5 X \$125
44 X 5.5 X \$125                                     42 X 5.5 X \$125
242 X \$125                                          231 X \$125
\$30,250                                             \$28,875
(\$1,375)                                          \$1,375
Favorable                                        Unfavorable
Production-Volume Variance                     Operating-Income Volume Variance
(cost portion)

ts (\$27,216) was lower than the budgeted amount (\$28,875).

ay to calculate it:
X \$125 = 11 X \$125 = \$1,375

ch caused FOH to be overapplied by \$1,375.
5.5) and since FOH is applied based on standard
00/500) X 5.5 X \$40

0/500) X 5.5 X \$125
2 X 5.5 X \$125
Actual Costs                            Flex. Budget
AXA                                     AXS

DM                      DM Price Variance                         DM Usage Variance

DM Flexible Budget Variance

DM Static Budget Variance

Actual Costs                            Flex. Budget
AXA                                     AXS

DL                     DML Rate Variance                       DML Efficiency Variance

DML Flexible Budget Variance

DML Static Budget Variance

Actual Costs                            Flex. Budget
AXA                                     AXS

VMOH                    VMOH Spending                            VMOH Efficiency Variance
4-Way
VMOH Flexible Budget Variance

VMOH Flexible Budget Variance

Under/Over Applied VMOH

VMOH Static Budget Varia

Actual Costs                            Flex. Budget
AXA                                     AXS

Always Zero
FMOH                   FMOH Spending or budget                   FMOH Efficiency Variance
4-Way
FMOH Flexible Budget Variance

FMOH Flexible Budget Variance

Under/Over Applied FMOH

FMOH Static Budget Varia
Actual Costs                             Flex. Budget
AXA                                      AXS

TMOH                   TMOH Spending or budget                  TMOH Efficiency Variance
3-Way
TMOH Flexible Budget Variance

TMOH Flexible Budget Variance

Under/Over Applied TMOH

TMOH Static Budget Varia

Actual Costs                             Flex. Budget
AXA                                      AXS

TMOH                   TMOH Spending or budget                  TMOH Efficiency Variance
2-Way
TMOH Flexible Budget Variance

TMOH Flexible Budget Variance

Under/Over Applied TMOH

TMOH Static Budget Varia

Actual Costs                             Flex. Budget
AXA                                      AXS

TMOH                   TMOH Spending or budget                  TMOH Efficiency Variance
1-Way
TMOH Flexible Budget Variance

TMOH Flexible Budget Variance

Under/Over Applied TMOH

TMOH Static Budget Varia
Flex. Budget                                                                       Static Budget
SQA X S                                                                                BQA X BP

ge Variance                                          DM Sales-Volume Variance

DM Sales-Volume Variance

DM Static Budget Variance

Flex. Budget                                                                       Static Budget
SQA X S                                                                                BQA X BP

ency Variance                                       DML Sales-Volume Variance

DML Sales-Volume Variance

DML Static Budget Variance

Flex. Budget                           Applied VMOH                                Static Budget
SQA X S                                     SQA X S                                    BQA X BP

Always Zero
ficiency Variance              VMOH Production-Volume Variance             VMOH Operating-Income Variance

VMOH Sales-Volume Variance

VMOH Production-Volume Variance             VMOH Operating-Income Variance

Applied VMOH                                                               VMOH Operating-Income Variance

VMOH Static Budget Variance

Flex. Budget                           Applied VMOH                                Static Budget
SQA X S                                     SQA X S                                    BQA X BP

ficiency Variance              FMOH Production-Volume Variance             FMOH Operating-Income Variance

FMOH Sales-Volume Variance

FMOH Production-Volume Variance             FMOH Operating-Income Variance

Applied FMOH                                                               FMOH Operating-Income Variance

FMOH Static Budget Variance
Flex. Budget                           Applied VMOH                                Static Budget
SQA X S                                     SQA X S                                    BQA X BP

ency Variance              TMOH Production-Volume Variance             TMOH Operating-Income Variance

TMOH Sales-Volume Variance

TMOH Production-Volume Variance             TMOH Operating-Income Variance

Applied TMOH                                                           TMOH Operating-Income Variance

TMOH Static Budget Variance

Flex. Budget                           Applied VMOH                                Static Budget
SQA X S                                     SQA X S                                    BQA X BP

ency Variance              TMOH Production-Volume Variance             TMOH Operating-Income Variance

TMOH Sales-Volume Variance

TMOH Production-Volume Variance             TMOH Operating-Income Variance

Applied TMOH                                                           TMOH Operating-Income Variance

TMOH Static Budget Variance

Flex. Budget                           Applied VMOH                                Static Budget
SQA X S                                     SQA X S                                    BQA X BP

ency Variance              TMOH Production-Volume Variance             TMOH Operating-Income Variance

TMOH Sales-Volume Variance

TMOH Production-Volume Variance             TMOH Operating-Income Variance

Applied TMOH                                                           TMOH Operating-Income Variance

TMOH Static Budget Variance
Static Budget
BQA X BP

Static Budget
BQA X BP

Static Budget
BQA X BP

Static Budget
BQA X BP
Static Budget
BQA X BP

Static Budget
BQA X BP

Static Budget
BQA X BP

```
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