Chapter 10, Problem 76P

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.

Required:

1. 1. Using a flexible budget, prepare a performance report comparing expected costs for the actual production with actual costs.
2. 2. Determine the following: (a) Fixed overhead spending and volume variances and (b) Variable overhead spending and efficiency variances.

To determine

Construct the performance report by comparing the expected costs for the actual production with actual costs with the help of flexible budget.

Explanation of Solution

Flexible Budgets:

Flexible budgets are prepared for various levels of activities or outputs. This enables the entity to know the result for the selected level of activity.

Performance report of the variances:

		Budgeted variance
Overhead cost item	Actual cost (A) ($)	Actual Costs (B) ($)	Spending variance $\left(A-B\right)$ ($)
Direct material	775,000	750,0001	25,000 (U)
Direct labor	590,000	600,0002	10,000 (F)
Variable overhead	310,000	300,0003	10,000 (U)
Fixed overhead	180,000	165,0004	15,000 (U)
Total	1,855,000	1,815,000	40,000 (U)

Table (1)

Working Note:

1. Calculation of actual cost of direct material:

$\begin{array}{c}\text{Actual Costs}=\text{Actual Units Produced}\times \text{Standard Cost}\\ =55,000\text{ Units}\times \$15\\ =\text{\$750,000}\end{array}$

2. Calculation of actual cost of direct labor:

$\begin{array}{c}\text{Actual Costs}=\text{Actual Units Produced}\times \text{Standard Cost}\\ =55,000\text{ Units}\times \$12\\ =\text{\$660,000}\end{array}$

3. Calculation of actual cost of variable overhead:

$\begin{array}{c}\text{Actual Costs}=\text{Actual Units Produced}\times \text{Standard Cost}\\ =55,000\text{ Units}\times \$6\\ =\text{\$330,000}\end{array}$

4. Calculation of actual cost of fixed overhead:

$\begin{array}{c}\text{Actual Costs}=\text{Actual Units Produced}\times \text{Standard Cost}\\ =55,000\text{ Units}\times \$3\\ =\text{\$165,000}\end{array}$

To determine

Calculate the value of fixed overhead spending and volume variance. Also, calculate the value of variable overhead spending and efficiency variance.

Explanation of Solution

(a).

Use the following formula to calculate fixed overhead spending variance:

$\text{Fixed Overhead Spending Variance}=\text{Actual Fixed Overhead}-\text{Budgeted Fixed Overhead}$

Substitute $180,000 for actual fixed overhead and $165,000 for budgeted fixed overhead in the above formula.

$\begin{array}{c}\text{Fixed Overhead Spending Variance}=\$180,000-\text{\$165,000}\\ =\text{\$15,000}\left(\text{U}\right)\end{array}$

Therefore, the fixed overhead spending variance is $15,000 (U).

Use the following formula to calculate volume variance:

$\text{Volume Variance}=\left[\begin{array}{l}\text{Budgeted Fixed Overhead }\\ -\left({\text{Fixed Overhead Rate}}^2\times {\text{Standard Hours}}^1\right)\end{array}\right]$

Substitute $165,000 for budgeted fixed overhead, $2.50 for fixed overhead rate and $60,000 for standard hours in the above formula.

$\begin{array}{c}\text{Volume Variance}=\text{\$165,000}-\left(\$2.50\times 60,000\right)\\ =\$15,000\left(\text{U}\right)\end{array}$

Therefore, the volume variance is $15,000 (U).

(b).

Use the following formula to calculate variable overhead spending variance:

$\text{Overhead Spending Variance}=\left[\begin{array}{c}\text{Actual Overhead}\\ -\left(\text{Actual Hours}\times {\text{Standard Variable Overhead}}^3\right)\end{array}\right]$

Substitute $310,000 for actual overhead, $5.00 for standard variable overhead and 63,000 hours for actual hours in the above formula.

$\begin{array}{c}\text{Overhead Spending Variance}=\$310,000-\left(\text{63,000 hours}\times \$5.00\right)\\ =\$5,000\left(\text{F}\right)\end{array}$

Therefore, the variable overhead spending variance is $5,000 (F).

Use the following formula to calculate variable efficiency variance:

$\text{Efficiency Variance}=\left[\begin{array}{l}\left(\text{Actual Hours}-\text{Standard Hours}\right)\\ \times \text{Standard Variable Overhead Rate}\end{array}\right]$

Substitute 63,000 hours for actual hours, 60,000 hours for standard hours and $5.00 for applied variable overhead in the above formula.

$\begin{array}{c}\text{Efficiency Variance}=\left(\text{63,000 hours}-60,00\text{0 hours}\right)\times \$5.00\\ =\$15,000\left(\text{U}\right)\end{array}$

Therefore, the efficiency variance is $15,000 (U).

Working Note:

1. Calculation of standard hours:

$\begin{array}{c}\text{Standard Hours}=\frac{\text{Actual Hours}}{\text{100}+\text{Extra Hours worked}}\times \text{100}\\ \text{=}\frac{63,00\text{0 hours}}{100+5\%}\times 100\\ =60,00\text{0 hours}\end{array}$

2. Calculation of fixed overhead rate:

First, hours allowed computed so as calculating the fixed overhead rate:

$\begin{array}{c}\text{Hours Allowed}=\frac{\text{Standard Hours}}{\text{Units Produced}}\\ =\frac{60,00\text{0 hours}}{50,00\text{0 units}}\\ =1.2\text{0 hours per unit}\end{array}$

$\begin{array}{c}\text{Standard Fixed Overhead Rate}=\frac{\text{Fixed Overhead Rate}}{\text{Hours Allowed}}\\ =\frac{\text{\$3}\text{.00}}{\text{1}\text{.20 hour per unit}}\\ =\$2.5\text{0 per hour}\end{array}$

3. Calculation of variable overhead rate

$\begin{array}{c}\text{Variable Overhead Rate}=\frac{\text{Units Produced}\times \text{Variable Overhead Rate}}{\text{Standard Hours}}\\ =\frac{50,00\text{0 units}\times 6}{60,00\text{0 hours}}\\ =\$5.0\text{0 per hour}\end{array}$