Chapter 11 Flexible Budgets and Overhead Analysis True/False Questions 1. A key feature of a flexible budget is that actual results can be compared to budgeted costs at the same level of activity. Ans: True 2. Direct would generally be a better measure of activity for a flexible budget than direct labor cost. Ans: True 3. In a flexible budget, when the activity declines, the variable costs per unit also declines. Ans: False 4. costs should not be included in a flexible budget because they do not change when the level of activity changes. Ans: False 5. To assess how well a production manager has controlled costs, actual costs should be compared to what the costs should have been for the planned level of production. Ans: False 6. The overhead spending variance is not affected by excessive usage or waste of overhead materials. Ans: False 7. The variable overhead efficiency variance provides a measure of how efficiently the activity base which underlies the flexible budget is being utilized in production. Ans: True 8. A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. The company's choice of the denominator level of activity affects the fixed overhead volume variance. Ans: True LO: 5; 6 9. The higher the denominator activity level used to compute the predetermined overhead rate, the higher the predetermined overhead rate.
Budgeted 3,600 Actual machine-hours: 3,900 Standard machine-hours allowed: 3,890 Cost Formula (per MH) (1) Budget Based on 3,900 MHs (AH × SR) (2) Budget Based on 3,890 MHs (SH × SR) (1) − (2) Efficiency Variance Overhead Costs Variable overhead costs: Supplies $ 3.10 $12,090 * $12,059 $ 31 U Indirect labor 7.30 28,470 ** $28,397 73 U $10.40 $40,560 $104 U *3,900 machine-hours × $3.10 per machine-hour = $12,090 **3,900 machine-hours × $7.30 per machine-hour = $28,470 45. Mongar Corporation applies manufacturing overhead to products on the basis of standard machine-hours. Budgeted and actual overhead costs for the most recent month appear below: Original Budget Actual Costs Variable overhead costs: Supplies $ 7,980 $ 8,230 Indirect labor 29,820 29,610 Total variable overhead cost $37,800 $37,840 The original budget was based on 4,200 machine-hours. The company actually worked 4,350 machine-hours during the month and the standard hours allowed for the actual output were 4,190 machine-hours. What was the overall variable overhead efficiency variance for the month? A) $130 unfavorable B) $950 favorable C) $1,310 favorable D) $1,440 unfavorable Ans: D Solution: Variable overhead costs Per Supplies $7,980 4,200 $1.90 Indirect labor $29,820 4,200 $7.10 hour
Actual number of machine-hours: 1,200 Cost Formula (per Actual Incurred for 1,200 Budget Based on 1,200 Variance Variable overhead (Supplies) $8.60 $10,290 $10,320 $30 F 75. The variance for power costs in the flexible budget performance report for the month should be: A) $2,060 F B) $2,060 U C) $300 F D) $300 U Ans: D Solution: Budgeted number of machine-hours: 1,000 Actual number of machine-hours: 1,200 Cost Formula (per Actual Costs Incurred for 1,200 Budget Based on 1,200 Variance Variable overhead costs (Power) $8.80 $10,860 $10,560 $300 U 76. The variance for equipment depreciation in the flexible budget performance report for the month should be: A) $1,890 U B) $90 F C) $90 U D) $1,890 F Ans: C Solution: Budgeted number of machine-hours: 1,000 Actual number of machine-hours: 1,200 hours hours hours hours
(per Costs Incurred 42,120 Budget Based on 42,120 Budget Based on 41,580 Indirect labor $5.90 $268,306 $248,508 $245,322 Power 1.00 41,922 42,120 41,580 Total $6.90 $310,228 $290,628 $286,902 Variable overhead costs: Total Variance (1) − (3) Spending Variance (1) − (2) Efficiency Variance (2) − (3) Indirect $22,984 U $19,798 U $3,186 U Power 342 U 198 F 540 U Total $23,326 U $19,600 U $3,726 U 153. Creger Corporation, which makes landing gears, has provided the following data for a recent month: Budgeted production 7,900 gears Standard per gear 9.3 machine-hours Budgeted supplies cost $6.20 per machine-hour Actual production 8,300 gears Actual 76,930 machine-hours Actual supplies cost (total) $479,438 Required: Determine the total variance, the spending variance, and the efficiency variance for the variable overhead item supplies cost that would appear on the company's variable overhead performance report. Show your work! Ans: Budgeted machine-hours (9.3 × 7,900) 73,470 Actual machine-hours 76,930 Standard machine-hours allowed for the actual output (9.3 × 8,300) 77,190 Variable overhead costs: Cost Formula (per (1) Actual Costs Incurred 76,930 (2) Flexible Budget Based on 76,930 (3) Flexible Budget Based on 77,190 Supplies cost $6.20 $479,438 $476,966 $478,578