Quiz 11: Flexible Budgets and Overhead Analysis

Discuss the differences between static and flexible budgets.

performance reporting, it is best to compare actual costs with budgeted costs using A) short-term budgets. B) static budgets. C) flexible budgets. D) master budgets. E) none of these.

are flexible budgets superior to static budgets for performance reporting?

create a meaningful performance report, actual costs and expected costs should be compared A) at the actual level of activity. B) weekly. C) at the budgeted level of activity. D) at the average level of activity. E) hourly.

Explain why mixed costs must be broken down into their fixed and variable components before a flexible budget can be developed.

help deal with uncertainty, managers should use A) an after-the-fact flexible budget. B) a master budget. C) a static budget. D) a before-the-fact flexible budget. E) none of these.

is the purpose of a before-the-fact flexible budget?

help assess performance, managers should use A) a static budget. B) a master budget. C) a continuous budget. D) a before-the-fact flexible budget. E) none of these.

is the purpose of an after-the-fact flexible budget?

firm comparing the actual variable costs of producing 10,000 units with the total variable costs of a static budget based on 9,000 units would probably see A) no variances. B) small favorable variances. C) large unfavorable variances. D) large favorable variances. E) small unfavorable variances.

Explain why the variable overhead spending variance is not a pure price variance.

total variable overhead variance is the difference between A) the budgeted variable overhead and the actual variable overhead. B) the actual variable overhead and the applied variable overhead. C) the budgeted variable overhead and the applied variable overhead. D) the applied variable overhead and the budgeted total overhead. E) none of the above.

variable overhead efficiency variance has nothing to do with efficient use of variable overhead. Do you agree or disagree? Why?

variable overhead spending variance can occur because A) prices for individual overhead items have increased. B) prices for individual overhead items have decreased. C) more of an individual overhead item was used than expected. D) less of an individual overhead item was used than expected. E) of all of the above.

Describe the difference between the variable overhead efficiency variance and the labor efficiency variance.

Because the calculation of both variances is based on direct labor hours, a favourable labor efficiency variance implies that A) the variable overhead efficiency variance will be favorable. B) the variable overhead efficiency variance will also be unfavorable. C) there will be no variable overhead efficiency variance. D) the variable overhead spending variance will be unfavorable. E) the variable overhead is overapplied.

Explain why the fixed overhead spending variance is usually very small.

total variable overhead variance can be expressed as the sum of A) the underapplied variable overhead and the spending variance. B) the efficiency variance and the overapplied variable overhead. C) the spending, efficiency, and volume variances. D) the spending and efficiency variances. E) none of these.

is the cause of an unfavorable volume variance?

a performance report that details the spending and efficiency variances, which of the following columns will be found? A) A cost formula for each item B) A budget for actual hours for each item C) A budget of standard hours for each item D) All of these E) Only a and b

the volume variance convey any meaningful information to managers?

total fixed overhead variance is A) the difference between actual and applied fixed overhead costs. B) the difference between budgeted and applied fixed overhead costs. C) the difference between budgeted fixed and variable overhead costs. D) the difference between actual and budgeted fixed overhead costs. E) none of the above.

Which do you think is more important for control of fixed overhead costs: the spending variance or the volume variance? Explain.

total fixed overhead variance can be expressed as the sum of A) the spending and efficiency variances. B) the efficiency and volume variances. C) the spending and volume variances. D) the flexible budget and the volume variances. E) none of these.

Explain how an activity-based budget is prepared.

Because of the nature of fixed overhead items, the difference between the actual fixed overhead cost and the budgeted fixed overhead is A) likely to be small. B) likely to be large. C) usually a major concern. D) often attributable to labor inefficiency. E) none of these.

is the difference between an activity flexible budget and a traditional flexible budget?

unfavorable volume variance can occur because A) too much finished goods inventory was held. B) the company overproduced. C) the actual output was less than expected or practical capacity. D) the actual output was greater than expected or practical capacity. E) of all of the above.

would an activity-based performance report be more accurate than a report based on a traditional flexible budget?

Responsibility for the volume variance usually is assigned to A) the accounting department. B) the receiving department. C) the shipping department. D) the manufacturing department. E) none of these.

activity-based budgeting, costs are classified as variable or fixed with respect to A) only the units budgeted. B) only the units produced. C) only the units sold. D) only the direct labor hours. E) none of these.

Activity flexible budgeting makes it possible to A) predict what activity costs will be as activity output changes. B) improve traditi`onal budgetary performance reporting. C) enhance the ability to manage activities. D) do all these. E) do only a and c.

activity-based budgeting, flexible budget formulas are created using A) only unit-level drivers. B) only nonunit-level drivers. C) both unit-level and nonunit-level drivers. D) only direct labor hours. E) all of these.

Performance Report Bowling Company provided the following information for last year.

Flexible Budget with Different Levels of Production Bowling Company budgeted the following amounts:

Performance Report Bowling Company budgeted the following amounts: At the end of the year, Bowling had the following actual costs for production of 3,800 units:

Total Variable Overhead Variance Aretha Company showed the following information for the year:

Performance Report for Variable Variances Smokey Company provided the following information:

Total Fixed Overhead Variance Ross Company provided the following data:

Static Budget for an Activity Madison Company decided to look more closely at the inspection activity in its factory. The following information for a year was collected: Demand for inspections: 170,000 Resources needed: a. 6 inspectors, capable of inspecting 30,000 units per year; salary is $32,000 each b. Supplies (small tools, oil, rags) expected to cost $0.70 per inspection c. Workbenches, computers, etc.; depreciation $18,300 per year d. Factory space for the inspection station, utilities; $12,600 per year

Activity Flexible Budget Jarend Company provided information on the following four overhead activities. Jarend has found that the following driver levels are associated with two different levels of production.

Activity-Based Performance Report Jarend Company produced 40,000 units last year. The information on the actual costs and budgeted costs at actual production of four activities is provided below.

Performance Report

Flexible Budget for Various Levels of Production Budgeted amounts for the year:

Flexible Budget for Various Levels of Activity Palladium Inc. produces a variety of household cleaning products. Palladium's controller has developed standard costs for the following four overhead items: Next year, Palladium expects production to require 90,000 direct labor hours. Refer to the information for Palladium Inc. on the previous page.

Performance Report Based on Actual Production Palladium Inc. produces a variety of household cleaning products. Palladium's controller has developed standard costs for the following four overhead items: Next year, Palladium expects production to require 90,000 direct labor hours. Refer to the information for Palladium Inc. on the previous page. Assume that actual production required 93,000 direct labor hours at standard. The actual overhead costs incurred were as follows:

Overhead Variances At the beginning of the year, Lopez Company had the following standard cost sheet for one of its chemical products: Lopez computes its overhead rates using practical volume, which is 80,000 units. The actual results for the year are as follows: (a) Units produced: 79,600; (b) Direct labor: 158,900 hours at $18.10; (c) FOH : $831,000; and (d) VOH : $112,400.

Overhead Application, Fixed and Variable Overhead Variances Zepol Company is planning to produce 600,000 power drills for the coming year. The company uses direct labor hours to assign overhead to products. Each drill requires 0.75 standard hour of labor for completion. The total budgeted overhead was $1,777,500. The total fixed overhead budgeted for the coming year is $832,500. Predetermined overhead rates are calculated using expected production, measured in direct labor hours. Actual results for the year are:

Understanding Relationships between Overhead Variances, Budgeted Amounts, and Actual Units Produced and Direct Labor Hours Worked Last year, Gladner Company had planned to produce 140,000 units. However, 143,000 units were actually produced. The company uses direct labor hours to assign overhead to products. Each unit requires 0.9 standard hour of labor for completion. The fixed overhead rate was $11 per direct labor hour and the variable overhead rate was $6.36 per direct labor hour. The following variances were computed:

Performance Report for Variable Overhead Variances Anker Company had the data below for its most recent year, ended December 31:

Activity-Based Budgeting Fermi Company decided to look more closely at the materials receiving activity in its factory. The driver for receiving is the number of receiving orders. The following information for a year was collected: Demand for receiving orders: 130,000 Resources needed: a. 6 workers capable of completing 25,000 receiving orders per year. (The completion of a receiving order requires unloading the materials onto the receiving dock, checking the receiving order against the purchase order and invoice, and carrying the materials to the materials storeroom.) Salary is $27,000 for each worker b. Supplies (paper, greasemarkers, small tools, rags) expected to cost $0.80 per receiving order c. Workbenches, dollies, computers, etc.; depreciation $14,400 per year d. Space for the receiving dock, utilities; $9,800 per year

Activity Flexible Budget Healder Company provided information on the following three overhead activities. Healder has found that the following driver levels are associated with two different levels of production.

Activity-Based Performance Report Inchon produced 312,000 units last year. The information on the actual costs and budgeted costs at actual production of four activities follows.

Overhead Budget for a Particular Level of Activity Ladan Suriman, controller for Healthy Pet Company, has been instructed to develop a flexible budget for overhead costs. The company produces two types of dog food. BasicDiet is a standard mixture for healthy dogs. SpecialDiet is a reduced protein formulation for older dogs with health problems. The two dog foods use common raw materials in different proportions. The company expects to produce 80,000 bags of each product during the coming year. BasicDiet requires 0.20 direct labor hours per bag, and SpecialDiet requires 0.30 direct labor hours per bag. Ladan has developed the following fixed and variable costs for each of the four overhead items: Refer to the information for Healthy Pet Company above.

Flexible Budget for Various Production Levels Ladan Suriman, controller for Healthy Pet Company, has been instructed to develop a flexible budget for overhead costs. The company produces two types of dog food. BasicDiet is a standard mixture for healthy dogs. SpecialDiet is a reduced protein formulation for older dogs with health problems. The two dog foods use common raw materials in different proportions. The company expects to produce 80,000 bags of each product during the coming year. BasicDiet requires 0.20 direct labor hours per bag, and SpecialDiet requires 0.30 direct labor hours per bag. Ladan has developed the following fixed and variable costs for each of the four overhead items: Refer to the information for Healthy Pet Company above.

Performance Report Based on Actual Production Ladan Suriman, controller for Healthy Pet Company, has been instructed to develop a flexible budget for overhead costs. The company produces two types of dog food. BasicDiet is a standard mixture for healthy dogs. SpecialDiet is a reduced protein formulation for older dogs with health problems. The two dog foods use common raw materials in different proportions. The company expects to produce 80,000 bags of each product during the coming year. BasicDiet requires 0.20 direct labor hours per bag, and SpecialDiet requires 0.30 direct labor hours per bag. Ladan has developed the following fixed and variable costs for each of the four overhead items: Refer to the information for Healthy Pet Company above. Assume that Healthy Pet actually produced 100,000 bags of BasicDiet and 90,000 bags of SpecialDiet. The actual overhead costs incurred were as follows:

Overhead Budget, Flexible Budget Spelzig Company manufactures radio-controlled toy cars. Spelzig has developed the following flexible budget for overhead for the coming year. Activity level is measured in direct labor hours. The factory produces two different toy cars. The production budget for November is 30,000 units for Car W23 and 60,000 units for Car Z280. Car W23 requires 12 minutes of direct labor time, and Car Z280 requires 24 minutes. Fixed overhead costs are incurred uniformly throughout the year.

Kicker Speakers, Before-the-Fact Flexible Budgeting, Flexible Budgeting for the New Solo X18 Model Stillwater Designs is considering a new Kicker speaker model: Solo X18, which is a large and expensive subwoofer (projected price is $760 to distributors). The company controls the design specifications of the model and contracts with manufacturers in mainland China to produce the model. Stillwater Designs pays the freight and custom duties. The product is shipped to Stillwater and then sold to distributors throughout the United States. The market for this type of subwoofer is small and competitive. It is expected to have a 3-year life cycle. Market test reviews were encouraging. One potential customer noted that the speaker could make a deaf person hear again. Another remarked that the bass could be heard two miles away. Another customer was simply impressed by the size and watts of the subwoofer (a maximum of 10,000 watts capability). Encouraged by the results of market tests, the Product Steering Committee also wanted to review the financial analysis. The projected revenues and costs at three levels of sales volume are as follows (for the 3-year life cycle):

Flexible Budgeting Quarterly budgeted overhead costs for two different levels of activity follow. The 2,000 level was the expected level from the master budget. The actual activity level was 1,700 hours.

Flexible Budgeting Orchard Fresh Inc. purchases fruit from numerous growers and packs fruit boxes and fruit baskets for sale. Orchard Fresh has developed the following flexible budget for overhead for the coming year. Activity level is measured in direct labor hours.

Performance Reporting Fernando's is a tiny sandwich shop just off the State University campus. Customers enter and place their orders at a small counter area. All orders are take-out because there is no space for dining in. The owner of Fernando's, Luis Azaria, is attempting to construct a series of budgets. He has accumulated the following information: a. The average sandwich (which sells for $4.50) requires 1 roll, 4 ounces of meat, 2 ounces of cheese, 0.05 head of lettuce, 0.25 of a tomato, and a healthy squirt (1 ounce) of secret sauce. b. Each customer typically orders one soft drink (average price $1.50) consisting of a cup and 12 ounces of soda. Refills are free, but this offer is seldom taken advantage of because the typical customer carries out his/her sandwich and soda. c. Use of paper supplies (napkins, bag, sandwich wrap, cups) averages $1,650 per month. d. Fernando's is open for two 4-hour shifts. The noon shift on Monday through Friday requires two workers earning $10 per hour. The evening shift is only worked on Friday, Saturday, and Sunday nights. The two evening shift employees also earn $10 per hour. There are 4.3 weeks in a month. e. Rent is $575 per month. Other monthly cash expenses average $1,800. f. Food costs are: In a normal month when school is in session, Fernando's sells 5,000 sandwiches and 5,000 sodas. In October, State U holds its homecoming celebration. Luis figures that if he adds a noon shift on Saturday and Sunday of homecoming weekend, October sales will be 30% higher than normal. To advertise his noon shifts during homecoming weekend, Luis will buy cups emblazoned with the State U Homecoming schedule. This will add $200 to paper costs for the month. Last year, he added two additional shifts, and his sales goal was realized.

Traditional versus Activity Flexible Budgeting Carly Davis, production manager, was upset and puzzled by the latest performance report, which indicated that she was $100,000 over budget. She and her staff had worked hard to beat the budget. Now she saw that three items-direct labor, power, and setups-were over budget. The actual costs for these three items were as follows: Carly felt that the additional labor and power cost were due to the fact that her team produced more units than originally budgeted. Uncertainty in scheduling had led to more setups than planned. She asked Sean Carpenter, the controller, why the performance report did not take the additional production into account. Sean assured Carly that he did adjust the report for increased production and showed her the budget formulas he used to predict the costs for different levels of activity. The formulas were based on direct labor hours as follows: Carly pointed out that power costs were unrelated to direct labor hours, but that they seemed to vary with machine hours instead. She also pointed out that setup costs were not fixed. They varied with the number of setups-which had increased due to scheduling changes. The increase in setups required her team to work overtime, adding to the costs. Each setup also took supplies that added significantly to overhead costs. Sean agreed that the formulas did not adequately take care of Carly's concerns. He agreed to develop a new set of cost formulas based on better explanatory variables. After a few days, Sean shared the following cost formulas with Carly: The actual measure of each activity driver is as follows:

Flexible Budgeting At the beginning of last year, Jean Bingham, controller for Thorpe Inc., prepared the following budget for conversion costs at two levels of activity for the coming year: During the year, the company worked a total of 112,000 direct labor hours and incurred the following actual costs: Thorpe applied overhead on the basis of direct labor hours. Normal volume of 120,000 direct labor hours is the activity level to be used to compute the predetermined overhead rate.

Overhead Application, Overhead Variances Moleno Company produces a single product and uses a standard cost system. The normal production volume is 120,000 units; each unit requires five direct labor hours at standard. Overhead is applied on the basis of direct labor hours. The budgeted overhead for the coming year is as follows: During the year, Moleno produced 118,600 units, worked 592,300 direct labor hours, and incurred actual fixed overhead costs of $2,150,400 and actual variable overhead costs of $1,422,800.

Overhead Variance Analysis The Lubbock plant of Morril's Small Motor Division produces a major subassembly for a 6.0 horsepower motor for lawn mowers. The plant uses a standard costing system for production costing and control. The standard cost sheet for the subassembly follows: During the year, the Lubbock plant had the following actual production activity: (a) Production of motors totaled 50,000 units; (b) The company used 82,000 direct labor hours at a total cost of $1,066,000; (c) Actual fixed overhead totaled $556,000; and (d) Actual variable overhead totaled $860,000. The Lubbock plant's practical activity is 60,000 units per year. Standard overhead rates are computed based on practical activity measured in standard direct labor hours.

Overhead Variances Extrim Company produces monitors. Extrim's plant in San Antonio uses a standard costing system. The standard costing system relies on direct labor hours to assign overhead costs to production. The direct labor standard indicates that four direct labor hours should be used for every monitor produced. (The San Antonio plant produces only one model.) The normal production volume is 120,000 units. The budgeted overhead for the coming year is as follows: Extrim applies overhead on the basis of direct labor hours. During the year, Extrim produced 119,000 units, worked 487,900 direct labor hours, and incurred actual fixed overhead costs of $1.3 million and actual variable overhead costs of $927,010.

Understanding Relationships, Incomplete Data, Overhead Analysis Lynwood Company produces surge protectors. To help control costs, Lynwood employs a standard costing system and uses a flexible budget to predict overhead costs at various levels of activity. For the most recent year, Lynwood used a standard overhead rate of $18 per direct labor hour. The rate was computed using practical activity. Budgeted overhead costs are $396,000 for 18,000 direct labor hours and $540,000 for 30,000 direct labor hours. During the past year, Lynwood generated the following data: (a) Actual production: 100,000 units; (b) Fixed overhead volume variance: $20,000 U ; (c) Variable overhead efficiency variance: $18,000 F ; (d) Actual fixed overhead costs: $200,000; and (e) Actual variable overhead costs: $310,000.

Flexible Budget, Overhead Variances Shumaker Company manufactures a line of high-top basketball shoes. At the beginning of the year, the following plans for production and costs were revealed: During the year, a total of 50,000 units were produced and sold. The following actual costs were incurred: There were no beginning or ending inventories of raw materials. In producing the 50,000 units, 63,000 hours were worked, 5% more hours than the standard allowed for the actual output. Overhead costs are applied to production using direct labor hours.

Fixed Overhead Spending and Volume Variances, Capacity Management Lorale Company, a producer of recreational vehicles, recently decided to begin producing a major subassembly for jet skis. The subassembly would be used by Lorale's jet ski plants and also would be sold to other producers. The decision was made to lease two large buildings in two different locations: Little Rock, Arkansas, and Athens, Georgia. The company agreed to a 11-year, renewable lease contract. The plants were of the same size, and each had 10 production lines. New equipment was purchased for each line and workers were hired to operate the equipment. The company also hired production line supervisors for each plant. A supervisor is capable of directing up to two production lines per shift. Two shifts are run for each plant. The practical production capacity of each plant is 300,000 subassemblies per year. Two standard direct labor hours are allowed for each subassembly. The costs for leasing, equipment depreciation, and supervision for a single plant are as follows (the costs are assumed to be the same for each plant): After beginning operations, Lorale discovered that demand for the product in the region covered by the Little Rock plant was less than anticipated. At the end of the first year, only 240,000 units were sold. The Athens plant sold 300,000 units as expected. The actual fixed overhead costs at the end of the first year were $2,500,000 (for each plant).

Ethical Considerations; Flexible Budgeting and the Environment Harry Johnson, the chief financial officer of Ur Thrift Inc, a large retailer, had just finished a meeting with the Roger Swasey, the chief financial officer of the large retailer, and Connie Baker, its environmental officer. Over the years, Harry had overseen the development of a number of cost formulas that allowed Ur Thrift to budget the variable costs of a variety of items. For example, packaging for one of its private line of dolls had a cost formula of Y = $2.20X, where X represented the number of dolls sold. The formula was used to calculate the expected packaging costs which were then compared with the actual packaging costs. Over the last several years, the actual costs and budgeted costs were virtually on target, prompting Harry to claim that packaging costs were well controlled. Connie Baker, however, argued that the packaging costs were not well controlled. In fact, she was adamant in her view that the packaging was excessive and that by reducing the packaging, costs could be reduced and the environmental impacts reduced as well. She argued that the company had an ethical obligation to reduce environmental impacts and that cost savings would also be captured, improving the profitability of the company. As another example, Connie discussed the fleet of semitrailer trucks used by Ur Thrift to move goods from its warehouses to retail outlets. The fuel cost formula was $3X, where X represented gallons of fuel consumed. She pointed out that the performance data also revealed that fuel costs were in control. Yet her office had recently recommended the installation of an auxiliary power unit to heat and cool the cabs of the trucks during the mandatory 10-hour breaks required of its drivers. This avoided the need to have the engine idle during this rest period. She claimed that this would significantly reduce fuel costs and easily pay for the new auxiliary units in a short period of time. Connie had also made some comments that caused Harry to pause and do some soul searching. She noted that the financial officers of the company should be more concerned about reducing costs than simply predicting what they should be. Thus (according to her view), cost formulas are useful only to tell us where we currently are so that they can be used to assess how to reduce costs. The so-called flexible budgets are simply a means of enforcing static standards. She also said that the company's managers had an ethical obligation to not overconsume the resources of the planet. She urged both Harry and Roger to help position the company so that it could reduce its environmental impacts.