Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 37

Factory Overhead Flexible Budget and Variance Analyses Lopez&Co. uses flexible budgets for cost control. During March, Lopez spent 2,850 machine hours to produce 10,800 units and incurred $13,000 in total factory overhead, of which $4,500 was for fixed factory overhead.

The master budget for the year called for production of 150,000 units using 37,500 machine hours and a total factory overhead of $180,000. The total fixed factory overhead in the annual budget was $60,000.

Required Compute the following for March:

1. Flexible budget for total overhead based on output (i.e., units produced).

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2. Factory overhead flexible-budget variance.

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3. All variances, including:

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a. Variable and fixed overhead spending variances.

b. Variable overhead efficiency variance.

c. Fixed overhead production-volume variance.

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4. Reconcile your answers in Requirements 2 and 3 above.

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5. What recommendation do you have regarding the manner in which the fixed-overhead application rate is determined?

Step 1 of 13

Budget is a statement prepared by the management of the business entity which helps them to estimate the expenses, income, receipts, payment, sales and purchases during the period. It is prepared keeping in mind the companies objectives and abilities with respect to resources they have. Often businesses deviate from their budgeted figures either in favourable way or unfavourable way. Such deviations are commonly referred to as variances.