CHAPTER 11

Flexible Budgeting and the Management of

Overhead and Support Activity Costs

ANSWERS TO REVIEW QUESTIONS

11-1 A static budget is based on only one level of activity. A flexible budget allows for
several different levels of activity.

11-2 The advantage of a flexible budget is that it is responsive to changes in the activity
level. It enables a comparison between actual costs incurred at the actual level of
activity and the standard allowed costs that should have been incurred at the actual
level of activity.

11-17 The control purpose of a standard-costing system is to provide benchmarks against

which to compare actual costs. Then management by exception is used to follow up
on significant variances and take corrective action. The product-costing purpose of
the standard-costing system is to determine the cost of producing goods and
services. Product costs are needed for a variety of purposes in both managerial and
financial accounting.

SOLUTIONS TO EXERCISES
EXERCISE 11-22 (20 MINUTES)

1. Variable-overhead spending variance = actual variable overhead – (AH × SVR)

= $607,500 – (60,750 × $9.00)
= $60,750 U

2. Variable-overhead efficiency variance = SVR(AH – SH)

= $9.00(60,750 – 54,000*)
= $60,750 U

*SH = 54,000 hrs. = 13,500 cases × 4 hours per case

3. Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead

= $183,000 – $180,000
= $3,000 U
4. Fixed-overhead volume variance = budgeted fixed overhead – applied fixed overhead
= $180,000 – $162,000†
= $18,000 (positive)**

⎛ predetermined fixed ⎞ ⎛ standard allowed ⎞

†Applied fixed overhead = ⎜⎜ ⎟⎟ × ⎜⎜ ⎟⎟
⎝ overhead rate ⎠ ⎝ hours ⎠
⎛ $180,000 ⎞
= ⎜ ⎟ × (13,500 × 4)
⎝ 15,000 × 4 ⎠
= $162,000

**Consistent with the discussion in the text, we choose not to interpret the volume variance
as either favorable or unfavorable. Some accountants would designate a positive volume
variance as "unfavorable" and a negative volume variance as "favorable."

EXERCISE 11-30 (10 MINUTES)

1. Flexible budgeted amounts, using activity-based flexible budget:

a. Indirect material: $33,000 ($18,000 + $3,000 + $3,000 + $9,000)

b. Utilities: $6,000 ($4,500 + $1,500)

c. Inspection: $3,300

d. Test kitchen: $2,400

e. Material handling: $3,000

f. Total overhead cost: $64,800 ($45,000 + $7,800 + $2,400 + $3,000 + $6,600)

2. Variance for setup cost:

a. Using the activity-based flexible budget: $1,000 F (actual cost minus flexible budget =
$3,500 – $4,500)

b. Using the conventional flexible budget: $500 U (actual cost minus flexible budget =
$3,500 – $3,000)

EXERCISE 11-31 (45 MINUTES)

Budgeted fixed overhead.................................................................... $ 25,000

Actual fixed overhead ........................................................................ $ 32,500a
Budgeted production in units ............................................................ 12,500
Actual production in units ................................................................. 12,000c
Standard machine hours per unit of output ..................................... 4 hours
Standard variable-overhead rate per machine hour ........................ $8.00
Actual variable-overhead rate per machine hour............................. $9.00b
Actual machine hours per unit of output .......................................... 3d
Variable-overhead spending variance .............................................. $ 36,000 U
Variable-overhead efficiency variance .............................................. $ 96,000 F
Fixed-overhead budget variance ....................................................... $ 7,500 U
Fixed-overhead volume variance....................................................... $ 1,000g (positive or U*)
Total actual overhead.......................................................................... $356,500
Total budgeted overhead (flexible budget)....................................... $409,000e
Total budgeted overhead (static budget).......................................... $425,000f
Total applied overhead........................................................................ $408,000

*Some accountants would designate a positive fixed-overhead volume variance as unfavorable.

Explanatory Notes:

a. Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead

$7,500 U = X – $25,000
X = $32,500 = actual fixed overhead

b. Total actual overhead = actual variable overhead + actual fixed overhead

$356,500 = X + $32,500
X = $324,000 = actual variable overhead
Variable-overhead spending variance = actual variable overhead – (AH × SR)
$36,000 U = $324,000 – (AH × $8)
$8AH = $288,000
AH = 36,000
Actual variable-overhead actual variable overhead
rate per machine hour =
actual hours
$324,000
= = $9 per hour
36,000
EXERCISE 11-31 (CONTINUED)

budgeted fixed overhead

c. Fixed-overhead rate =
budgeted machine hours
$25,000
=
(12,500 units)(4 hrs. per unit)
= $.50 per hr.
Total standard
overhead rate = standard variable overhead rate + fixed-overhead rate
$8.50 = $8.00 + $.50

Total applied overhead = total standard hours × total standard overhead rate
$408,000 = X × $8.50
X = 48,000 = total standard hrs.
total standard hrs.
Actual production =
standard hrs. per unit
48,000
= = 12,000 units
4

total actual machine hrs.

d. Actual machine hrs. per unit of output =
actual production
36,000 hrs.
= = 3 hrs. per unit
12,000 units

e. Total budgeted overhead (flexible budget)

= budgeted fixed overhead + (SVR × SH)
= $25,000 + ($8.00 × 12,000 units × 4 hrs. per unit)
= $409,000
EXERCISE 11-31 (CONTINUED)

f. Total budgeted overhead (static budget)

⎛ total standard ⎞⎛ budgeted ⎞⎛ standard hrs. ⎞
= ⎜⎜ ⎟⎟⎜⎜ ⎟⎟⎜⎜ ⎟⎟
⎝ overhead rate ⎠⎝ production ⎠⎝ per unit ⎠
= ($8.50)(12,500)(4)
= $425,000

g. Fixed overhead volume variance

= budgeted fixed overhead – applied fixed overhead
= $25,000 – ($.50)(12,000 × 4)
= $1,000 (positive)*

*Consistent with the discussion in the text, we choose not to interpret the volume variance as
either favorable or unfavorable. Some accountants would designate a positive volume
variance as "unfavorable" and a negative volume variance as "favorable."

PROBLEM 11-44 (40 MINUTES)

1. Susan Porter recommended that EduSoft use flexible budgeting in this situation because a
flexible budget would allow Mark Fletcher to compare EduSoft's actual selling expenses
(based on current month's actual activity) with budgeted selling expenses. In general, flexible
budgets:
• Provide management with the tools to evaluate the effects of varying levels of activity on
costs, revenues, and profits.
• Enable management to improve planning and decision making.
• Improve the analysis of actual results.

2. EDUSOFT CORPORATION
REVISED MONTHLY SELLING EXPENSE REPORT FOR OCTOBER

Flexible
Budget Actual Variance
Advertising ...................................................... $3,300,000 $3,320,000 $20,000 (U)
Staff salaries ................................................... 250,000 250,000 0
Sales salariesa ................................................. 230,400 230,800 400 (U)
Commissionsb ................................................. 992,000 992,000 0
Per diem expensec .......................................... 316,800 325,200 8,400 (U)
Office expensesd ............................................. 732,000 716,800 15,200 (F)
 Shipping expensese ........................................ 1,985,000 1,953,000 32,000 (F)
Total expenses................................................ $7,806,200 $7,787,800 $18,400 (F)

Supporting calculations:

aMonthly salary for salesperson

$216,000 ÷ 90 = $2,400.

Budgeted amount
$2,400 × 96 = $230,400.

bCommission rate
$896,000 ÷ $22,400,000 = .04.

Budgeted amount
$24,800,000 × .04 = $992,000.

c($297,000 ÷ 90) ÷ 15 days = $220 per day.

($220 × 15) × 96 = $316,800.

d($8,160,000 – 6,000,000) ÷ 54,000 = $40 per order.

($6,000,000 ÷ 12) + ($40 × 5,800) = $732,000.

e[$13,500,000 – ($6 × 2,000,000)] ÷ 12 = $125,000

monthly fixed expense.

$125,000 + ($6 × 310,000) = $1,985,000.

PROBLEM 11-45 (45 MINUTES)

Missing amounts for case A:

2. $21.00a per hour

3. $28.50b per hour

6. $294,150c

9. $7,500 Ud

10. $9,000 Fe
11. $(126,000) (Negative)f (The negative sign means that applied fixed overhead
exceeded budgeted fixed overhead.)

12. $24,150 underappliedg

13. $135,000 overappliedh

16. 6,000 unitsi

19. $270,000j

20. $756,000k

Explanatory notes for case A:

aBudgeted direct-labor hours

= budgeted production × standard direct-labor hours per unit

= 5,000 units × 6 hrs. = 30,000 hrs.

budgeted fixed overhead
Fixed overhead rate =
budgeted direct-labor hours
$630,000
= = $21per hr.
30,000 hrs.

bTotal standard overhead rate

= variable overhead rate + fixed overhead rate
= $7.50 + $21.00 = $28.50

cVariable-overhead spending variance

= actual variable overhead – (actual direct-labor hours
× standard variable overhead rate)
$16,650 U = actual variable overhead – (37,000 × $7.50)
Actual variable overhead = $294,150

dVariable-overhead efficiency variance

= SVR(AH – SH)
 = $7.50(37,000 – 36,000)
= $7,500 U

eFixed-overhead budget variance

= actual fixed overhead – budgeted fixed overhead
= $621,000 – $630,000
= $9,000 F

fFixed-overhead volume variance

= budgeted fixed overhead – applied fixed overhead
= $630,000 – (36,000 × $21)
= $126,000 (negative sign)

gUnderapplied variable overhead

= actual variable overhead – applied variable overhead
= $294,150 – (36,000 × $7.50)
= $24,150 underapplied

hOverapplied fixed overhead

= actual fixed overhead – applied fixed overhead
= $621,000 – (36,000 × $21)
= $135,000 overapplied

standard allowed direct-labor hours

iActual production =
standard hrs. per unit
36,000
= = 6,000 units
6

jApplied variable overhead

= SH × SVR
= 36,000 × $7.50
= $270,000
 kApplied fixed overhead
= SH × fixed overhead rate
= 36,000 × $21
= $756,000

Missing amounts for case B:

1. $4.00a per hour

2. $9.00b per hour

4. $25,600c

5. $72,000d

6. $32,000e

7. $76,320f

12. $6,400 underappliedg

13. $18,720 underappliedh

14. 1,000 unitsi

16. 800 unitsj

19. $25,600k

20. $57,600l

Explanatory notes for case B:

aTo find the standard variable overhead rate:

Variable-overhead efficiency variance

= SVR(AH – SH)
$1,600 F = SVR(6,000 – 6,400)
SVR = $4
bStandard fixed-overhead rate
= total standard overhead rate – SVR
= $13 – $4 = $9

cFlexible budget for variable overhead

= SH × SVR
= 6,400 × $4 = $25,600

dFlexible budget for fixed overhead

= applied fixed overhead + volume variance
= (6,400 × $9) + $14,400
= $72,000

eActual variable overhead

= applied variable overhead + spending variance + efficiency variance
= (6,400 × $4) + $8,000 U – $1,600 F
= $32,000

fActual fixed overhead

= budgeted fixed overhead + fixed-overhead budget variance
= $72,000 + $4,320 U
= $76,320

gUnderapplied variable overhead

= spending variance + efficiency variance
= $8,000 U* + $1,600 F*
= $6,400 underapplied

*Note that the signs cancel when adding variances of different signs.

hUnderapplied fixed overhead

= fixed-overhead budget variance + volume variance

= $4,320 U + $14,400 (positive)

= $18,720 underapplied
 budgeted fixed overhead
iBudgeted direct-labor hours =
fixed-overhead rate
= $72,000
$9
= 8,000
budgeted direct-labor hours
Budgeted production =
standard hours per unit
8,000
= = 1,000 units
8

standard allowed hours

jActual production =
standard hours per unit
6,400
= = 800 units
8

kApplied variable overhead

= SH × SVR = 6,400 × $4
= $25,600

lApplied fixed overhead

= SH × standard fixed-overhead rate
= 6,400 × $9
= $57,600