Instructor’s Solutions Manual for Cost Accounting, Ninth Canadian Edition

CHAPTER 8
FLEXIBLE BUDGETS, VARIANCES, AND
MANAGEMENT CONTROL: II

8-29 (30 min.) Variable manufacturing overhead variance analysis.

1. Denominator level = (3,100,000 × 0.02 hours) = 62,000 hours

2. Actual Flexible
Results Budget Amounts
1. Output units (baguettes) 2,600,000 2,600,000
2. Direct manufacturing Labour-hours 46,800 52,000a
3. Labour-hours per output unit (2 1) 0.018 0.020
4. Variable manuf. overhead (MOH) costs $617,760 $520,000
5. Variable MOH per Labour-hour (4 2) $13.20 $10
6. Variable MOH per output unit (4 1) $0.238 $0.200
a
2,600,000 baguettes 0.02 hours per baguette = 52,000 hours

Variable Manufacturing Overhead Variance Analysis for Sourdough Bread Company for the
year:

Flexible Budget: Allocated:

Actual Costs Budgeted Input Qty. Budgeted Input Qty.
Incurred Allowed for Allowed for
Actual Input Qty. Actual Input Qty. Actual Output Actual Output
× Actual Rate × Budgeted Rate × Budgeted Rate × Budgeted Rate
(1) (2) (3) (4)
(46,800 × $13.20) (46,800 × $10) (52,000 × $10) (52,000 × $10)
$617,760 $468,000 $520,000 $520,000

$149,760 U $52,000 F
Spending variance Efficiency variance Never a variance

$97,760 U
Flexible-budget variance Never a variance
3. Spending variance of $149,760 U. It is unfavourable because variable manufacturing
overhead was 32% higher than planned. A possible explanation could be an increase in
energy rates relative to the rate per standard Labour-hour assumed in the flexible budget.
Efficiency variance of $52,000 F. It is favourable because the actual number of direct
manufacturing Labour-hours required was lower than the number of hours in the flexible
budget. Labour was more efficient in producing baguettes than management had anticipated
 in the budget. This could occur because of improved morale in the company, which could
result from an increase in wages or an improvement in the compensation scheme.
Flexible-budget variance of $97,760 U. It is unfavourable because the favourable
efficiency variance was not sufficient to compensate for the large unfavourable spending
variance.
8-32 (20 min.) Activity-based costing, batch-level variance analysis

1. Static budget number of crates = Budgeted pairs shipped ÷ Budgeted pairs per crate
= 240,000/12
= 20,000 crates

2. Flexible budget number of crates = Actual pairs shipped ÷ Budgeted pairs per crate
= 180,000/12
= 15,000 crates

3. Actual number of crates shipped = Actual pairs shipped ÷ Actual pairs per box
= 180,000/10
= 18,000 crates

4. Static budget number of hours = Static budget number of crates × Budgeted hours per box
= 20,000 × 1.2 = 24,000 hours

Fixed overhead rate = Static budget fixed overhead ÷ Static budget number of hours
= 60,000/24,000
= $2.50 per hour

5. Variable Overhead Variance Analysis for Amir’s Fleet Feet Inc. for the year
Actual Actual hours Budgeted hours allowed for
Variable Overhead ×Budgeted rate Actual output × Budgeted rate
(18,000 × 1 × $21) (18,000 × 1 × $20) (15,000 × 1.2 × $20)
$378,000 $360,000 $360,000

$18,000 U $0
Rate variance Efficiency variance

6. Fixed Overhead Variance Analysis for Amir’s Fleet Feet Inc. for the year

Actual Static Budget Budgeted hours allowed for

Fixed Overhead Fixed Overhead Actual output × Budgeted Rate
(15,000 × 1.2 ×$2.5)
$55,000 $60,000 $45,000

$5,000 F $15,000 U
Rate variance Production volume variance

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 Chapter 8: Flexible Budgets, Variances, and Management Control: II

8-33 (30 min.) Activity-based costing, batch-level variance analysis

1. Static budget number of setups = Budgeted books produced ÷ Budgeted books per setup
= 200,000 ÷ 500 = 400 setups

2. Flexible budget number of setups = Actual books produced ÷ Budgeted books per setup
= 216,000 ÷ 500 = 432 setups

3. Actual number of setups = Actual books produced ÷ Actual books per setup
= 216,000/480 = 450 setups

4. Static budget number of hours = Static budget # of setups × Budgeted hours per setup
= 400 × 6 = 2,400 hours

Fixed overhead rate = Static budget fixed overhead ÷ Static budget number of hours
= 72,000/2,400 = $30 per hour

5. Budgeted variable overhead cost of a setup

= Budgeted variable cost per setup-hour × Budgeted number of setup-hours
= $100 × 6 = $600.

Budgeted total overhead cost of a setup

= $600 + ($30 × 6) = $780.

So, the charge of $700 covers the budgeted incremental (i.e., variable overhead) cost of a
setup, but not the budgeted full cost.

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6. Variable Setup Overhead Variance Analysis for Jo Nathan Publishing Company for the year

Actual Actual hours Standard hours

Variable Overhead × Budgeted rate × Standard rate
(450 × 6.5 × $90) (450 × 6.5 × $100) (432 × 6.0 × $100)
$263,250 $292,500 $259,200

$29,250F $33,300U
Rate variance Efficiency variance

7. Fixed Setup Overhead Variance Analysis for Jo Nathan Publishing Company for the year

Actual Static Budget Standard hours

Fixed Overhead Fixed Overhead × Budgeted Rate
(432 × 6.0 × $30)
$79,000 $72,000 $77,760

$7,000 U $5,760 F
Rate variance Production-volume variance

8. Rejecting an order may have implications for future orders (i.e., professors would be
reluctant to order books from this publisher again). Jo Nathan should consider factors such as
prior history with the customer and potential future sales.
If a book is relatively new, Jo Nathan might consider running a full batch and holding
the extra books in case of a second special order or just hold the extra books until next
semester.
If the special order comes at heavy volume times, Jo Nathan should look at the
opportunity cost of filling it (i.e., accepting the order may interfere with or delay the printing
of other books).

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 Chapter 8: Flexible Budgets, Variances, and Management Control: II

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