PROBLEM 11-35 (45 MINUTES)

VARIABLE-OVERHEAD SPENDING AND EFFICIENCY VARIANCES

(Hours = Direct-Labor Hours)
(1) (2) (3) (4)†
VARIABLE OVERHEAD
ACTUAL VARIABLE FLEXIBLE BUDGET: APPLIED TO
OVERHEAD VARIABLE OVERHEAD WORK-IN-PROCESS
Standard Standard
Actual Actual Actual Standard Allowed Standard Allowed x Standard
Hours x Rate Hours x Rate x Rate
Hours Hours Rate
(AQ) (AVR) (AQ) (SVR) (SQ) (SVR) (SQ) (SVR)
8,500 x $12 8,500 x $11 8,000 x $11 8,000 x $11
hours per hours per hours per hours per
hour* hour hour hour
$102,000 $93,500 $88,000 $88,000

$8,500 Unfavorable $5,500 Unfavorable

Variable-overhead Variable-overhead No difference
spending variance efficiency variance

actual variable overhead cost $102,000

*Actual variable-overhead rate (AVR) = actual direct labor hours
=
8,500
= $12 per direct - labor hour

†
Column (4) is not used to compute the variances. It is included to point out that the flexible-budget amount for  variable
overhead, $88,000, is the amount that will be applied to Work-in-Process Inventory for product costing purposes.
 FIXED-OVERHEAD BUDGET AND VOLUME VARIANCES
(Hours = Direct-Labor Hours)
(1) (2) (3)
ACTUAL BUDGETED FIXED OVERHEAD
FIXED FIXED APPLIED TO
OVERHEAD OVERHEAD WORK IN PROCESS
Standard
Standard Fixed-
Allowed  Overhead
Hours Rate
8,000 $18.00 per

hours hour

$145,000 $162,000* $144,000

$17,000 Favorable $18,000 U†

Fixed-overhead Fixed-overhead
budget variance volume variance

*Budgeted fixed overhead = 9,000 direct-labor hrs.  $18 per hour.

†
Some accountants would designate a positive volume variance as "unfavorable."

PROBLEM 11-37 (40 MINUTES)

1. a. Units produced during March..................................................... 66,000

Overhead application rate per unit
(budgeted overhead per unit at expected level of output).....      $12
Applied overhead costs............................................................... $792,000

b. Variable-overhead spending variance........................................ $   300 U*

c. Fixed-overhead budget variance................................................ 12,000 U  
d. Variable-overhead efficiency variance....................................... 17,700 F  
e. Fixed-overhead volume variance................................................ 36,600 F†

*U denotes unfavorable; F denotes favorable.

†
Some accountants would designate a negative volume variance as "favorable."

Supporting calculations are presented in the following schedule:

 Flexible
Budget
Actual Spending Projected Efficiency (Applied
Variable Overhead Overhead Variance Overhead Variance Overhead)
Indirect material............. $222,000 $.68 $.68
Indirect labor.................  150,000       .50       .50
$1.18 $1.18
Machine hours*..............  315,000  330,000
$372,000 $300 U $ 371,700 $17,700 F $ 389,400

Actual Budget Flexible Volume Applied

Fixed Overhead Overhead Variance Budget Variance Overhead
Supervision.................... $102,000 $108,000 $.36
Utilities........................... 108,000 90,000 .30
Depreciation..................  168,000  168,000       .56
$1.22
Machine hours*..............  330,000
$378,000 $12,000 U $366,000 $36,600 F** $ 402,600

*3,600,000 machine hrs / 720,000 units = 5 hrs per unit; 5 x 66,000 units = 330,000 hrs

**SOME ACCOUNTANTS WOULD DESIGNATE A NEGATIVE

VOLUME VARIANCE AS FAVORABLE.

3. The graph differs from the exhibit in the text, because in Wilmington Composites’ case,
the efficiency variance is favorable. The example in the text included an unfavorable
efficiency variance.

PROBLEM 11-39 (25 MINUTES)

1. Let X = budgeted fixed overhead

X ÷ 2,000 machine hours = $20.00 per hour
X = $40,000

2. Variable-overhead spending variance:

Actual machine hours x actual rate
2,200 hours x $11.50*…………………... $ 25,300
Actual machine hours x standard rate
2,200 hours x $12.00……………………. 26,400
Variable-overhead spending variance…... $ 1,100 Favorable
 * $25,300 ÷ 2,200 hours

3. Fixed-overhead volume variance:

Budgeted fixed overhead……………………………… $ 40,000
Standard machine hours allowed x standard rate
750 hours* x $20.00……………………………… 15,000
Fixed-overhead volume variance…………………… $ 25,000 U†

* 1,500 units x .5 machine hours per unit

†
The fixed-overhead volume variance is positive;
some managerial accountants would interpret it as
an unfavorable variance.

4. Lackawanna Licorice Company spent more than anticipated. Actual fixed

overhead amounted to $50,500 ($75,800 - $25,300) when the budget was set at
$40,000. The fixed-overhead budget variance is $10,500 unfavorable ($50,500 -
$40,000).

5. Variable overhead is underapplied by $16,300:

Actual overhead: Actual machine hours x actual rate
2,200 hours x $11.50………………………………………….. $ 25,300
Applied overhead: Standard machine hours allowed x
standard rate
750 hours x $12.00……………………………………………. 9,000
Underapplied variable overhead………………………………... $ 16,300

Without having complete information, it is difficult to be 100% certain.

However, by an analysis of data related to the volume variance, a lengthy strike
appears to be a strong possibility. Lackawanna had planned to work 2,000
machine hours during the period, giving the company the capability of
producing 4,000 finished units (2,000 hours x 2 units per hour). Actual
production amounted to only 1,500 units, leaving the firm far shy of its
production goal. A strike is a plausible explanation

PROBLEM 11-45 (45 MINUTES)

Missing amounts for case A:

2. $21.00a per direct-labor hour

3. $28.50b per direct-labor 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:

a
Budgeted 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 direct - labor hr.
= 30,000 hrs.
b
Total standard overhead rate
= variable overhead rate + fixed overhead rate
= $7.50 + $21.00 = $28.50
c
Variable-overhead spending variance
= actual variable overhead – (actual direct-labor hours
 standard variable overhead rate)
$16,650 U = actual variable overhead – (37,000 direct-labor hrs 
$7.50)
Actual variable overhead = $294,150
d
Variable-overhead efficiency variance
= SVR(AQ – SQ)
= $7.50(37,000 direct-labor hrs – 36,000 direct-labor hrs)
= $7,500 U
e
Fixed-overhead budget variance
= actual fixed overhead – budgeted fixed overhead
= $621,000 – $630,000
= $9,000 F

f
Fixed-overhead volume variance
= budgeted fixed overhead – applied fixed overhead
= $630,000 – (36,000 direct-labor hrs  $21)
= $126,000 F

(Some accountants would designate a negative volume variance

as “favorable.”)
g
Underapplied variable overhead
= actual variable overhead – applied variable overhead
= $294,150 – (36,000 direct-labor hrs  $7.50)
= $24,150 underapplied
h
Overapplied fixed overhead
= actual fixed overhead – applied fixed overhead
= $621,000 – (36,000 direct-labor hrs  $21)
= $135,000 overapplied

standard allowed direct-labor hours

i
Actual production = standard hrs. per unit

36,000
 6,000 units
= 6

j
Applied variable overhead
= SQ  SVR
= 36,000 direct-labor hrs  $7.50
= $270,000
k
Applied fixed overhead
= SQ  fixed overhead rate
= 36,000 direct-labor hrs  $21
= $756,000

Missing amounts for case B:

1. $4.00a per direct-labor hour

2. $9.00b per direct-labor 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