ACCT 215 Problems Solutions, Fall 2011

Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Appendix 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Exercise 10A-1 (15 minutes) 1. The total overhead cost at the denominator level of activity must be determined before the predetermined overhead rate can be computed. Total fixed overhead cost per year.................................. $600,000 Total variable overhead cost ($3.50 per DLH × 80,000 DLHs)...................................... 280,000 Total overhead cost at the denominator level of activity............................................................................... $880,000 2. Standard direct labor-hours allowed for the actual output (a)....................... 82,000 DLHs Predetermined overhead rate (b).......... $11.00 per DLH Overhead applied (a) × (b)...................... $902,000 10A-1 Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Exercise 10A-2 (15 minutes) 1. 2. 10A-2 Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Exercise 10A-3 (10 minutes) Company X: This company has an unfavorable volume variance because the standard direct labor-hours allowed for the actual output are less than the denominator activity. Company Y: This company has an unfavorable volume variance because the standard direct labor-hours allowed for the actual output are less than the denominator activity. Company Z: This company has a favorable volume variance because the standard direct labor-hours allowed for the actual output are greater than the denominator activity. 10A-3 Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Exercise 10A-4 (15 minutes) 1. Actual fixed overhead incurred........................... $79,000 Add favorable budget variance........................... 1,000 Budgeted fixed overhead cost............................ $80,000 2. 9,500 units × 2 MHs per unit = 19,000 MHs 3. Alternative solutions to parts 1-3: Fixed Overhead Applied to Work in Process Budgeted Fixed Overhead Actual Fixed Overhead 19,000 MHsb × $4 per MHc = $76,000 $80,000a $79,000* Volume variance = $4,000 U Budget variance = $1,000 F* *Given a$79,000 + $1,000 = $80,000 b9,500 units × 2 MHs per unit = 19,000 MHs c$80,000 ÷ 20,000 denominator MHs = $4 per MH 10A-4 Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Exercise 10A-5 (15 minutes) 1. Variable element: ($1.60 per DLH × 24,000 DLH) ÷ 24,000 DLHs = $38,400 ÷ 24,000 DLHs = $1.60 per DLH Fixed element: $84,000 ÷ 24,000 DLHs = $3.50 per DLH 2. Direct materials, 2 pounds × $4.20 per pound.................... $ 8.40 Direct labor, 3 DLHs* × $12.60 per DLH............................... 37.80 Variable manufacturing overhead, 3 DLHs × $1.60 per DLH........................................................................................ 4.80 Fixed manufacturing overhead, 3 DLHs × $3.50 per DLH.. 10.50 Total standard cost per unit................................................... $61.50 *24,000 DLHs ÷ 8,000 units = 3 DLHs per unit 10A-5 Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Exercise 10A-6 (20 minutes) 1. 2. The standard hours per unit of product are: 8,000 MHs ÷ 3,200 units = 2.5 MHs per unit The standard hours allowed for the actual production would be: 3,500 units × 2.5 MHs per unit = 8,750 MHs 3. Variable overhead variances: Variable overhead rate variance = (AH × AR) – (AH × SR) = ($9,860) – (8,500 MHs × $1.05 per MH) = ($9,860) – ($8,925) = $935 U Variable overhead efficiency variance = SR (AH – SH) = $1.05 per MH (8,500 MHs – 8,750 MHs) = $262.50 F 10A-6 Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Exercise 10A-6 (continued) Fixed overhead budget and volume variances: Fixed Overhead Applied to Work in Process Budgeted Fixed Overhead Actual Fixed Overhead 8,750 standard MHs × $3.10 per MH = $27,125 $24,800* $25,100 Volume variance = $2,325 F Budget variance = $300 U Total Variance = $2,025 F *8,000 denominator MHs × $3.10 per MH = $24,800. Alternative approach to the budget variance: Alternative approach to the volume variance: 10A-7 Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Exercise 10A-7 (15 minutes) 1. 10,000 units × 0.8 DLH per unit = 8,000 DLHs. 2. and 3. Fixed Overhead Applied to Work in Process Budgeted Fixed Overhead Actual Fixed Overhead 8,000 standard DLHs × $6.00 per DLH* = $48,000 $45,000 $45,600* Volume variance = $3,000 F* Budget variance = $600 U *Given. 4. Therefore, the denominator activity was $45,000 ÷ $6.00 per DLH = 7,500 DLHs. 10A-8 Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Problem 10A-10 (45 minutes) 1. 2. 16,000 standard MHs × £5.75 per MH = £92,000 3. Variable manufacturing overhead variances: Standard Hours Allowed for Actual Output, at Standard Rate (SH × SR) Actual Hours of Input, at Standard Rate (AH × SR) Actual Hours of Input, at Actual Rate (AH × AR) 16,000 MHs × £1.75 per MH = £28,000 15,000 MHs × £1.75 per MH = £26,250 £26,500 Variable overhead efficiency variance = £1,750 F Variable overhead rate variance = £250 U Alternative solution: Variable overhead efficiency variance = SR (AH – SH) = £1.75 per MH (15,000 MHs – 16,000 MHs) = £1,750 F Variable overhead rate variance = (AH × AR) – (AH × SR) = (£26,500) – (15,000 MHs × £1.75 per MH) = £250 U 10A-9 Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Problem 10A-10 (continued) Fixed overhead variances: Fixed Overhead Applied to Work in Process Budgeted Fixed Overhead Actual Fixed Overhead 16,000 MHs × £4 per MH = £64,000 £72,000 £70,000 Volume variance = £8,000 U Budget variance = £2,000 F Alternative solution: Verification of variances: Variable overhead efficiency variance............. £1,750 F Variable overhead rate variance....................... 250 U Fixed overhead volume variance...................... 8,000 U Fixed overhead budget variance...................... 2,000 F Underapplied overhead..................................... £4,500 U 10A-10 Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Problem 10A-10 (continued) 4. Variable overhead Variable overhead rate variance: This variance includes both price and quantity elements. The overhead spending variance reflects differences between actual and standard prices for variable overhead items. It also reflects differences between the amounts of variable overhead inputs that were actually used and the amounts that should have been used for the actual output of the period. Because the variable overhead spending variance is unfavorable, either too much was paid for variable overhead items or too many of them were used. Variable overhead efficiency variance: The term “variable overhead efficiency variance” is a misnomer, because the variance does not measure efficiency in the use of overhead items. It measures the indirect effect on variable overhead of the efficiency or inefficiency with which the activity base is utilized. In this company, machine- hours is the activity base. If variable overhead is really proportional to machine-hours, then more effective use of machine-hours has the indirect effect of reducing variable overhead. Because 1,000 fewer machine-hours were required than indicated by the standards, the indirect effect was presumably to reduce variable overhead spending by about £1,750 (£1.75 per machine-hour × 1,000 machine-hours). Fixed overhead Fixed overhead budget variance: This variance is simply the difference between the budgeted fixed cost and the actual fixed cost. In this case, the variance is favorable, which indicates that actual fixed costs were lower than anticipated in the budget. Fixed overhead volume variance: This variance occurs as a result of actual activity being different from the denominator activity that was used in the predetermined overhead rate. In this case, the variance is unfavorable, so actual activity was less than the denominator activity. It is difficult to place much of a meaningful economic interpretation on this variance. It tends to be large, so it often swamps the other, more meaningful variances if they are simply netted against each other. 10A-11 Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System 10A-12