Chapter 15, Problem 34E

1.

To determine

Calculate the (a) flexible-budget variance, and (b) the fixed overhead production volume variance for the month.

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

A cost variance is the difference between the cost actually incurred and the amount of costs money earmarked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

Overhead costs, sometimes referred to as overhead or operating expenses, are those costs that are associated with running a business that cannot be connected to constructing or manufacturing a product or a service. They are the expenses the business incurs in staying in business, irrespective of its level of achievement.

The total overhead cost variance for the period is equal to the difference between actual overhead cost incurred and the standard overhead cost applied to the production.

The overhead total flexible-budget variance is equal to the difference between the overhead total actual factory overhead cost over a period and the output-based flexible budget overhead overall.

Fixed variance in the overhead production volume is the difference between the budgeted fixed overhead over the period and the standard fixed overhead applicable to production.

Fixed Overhead cost per month:	Budget	Actual
Engineering Support (Salaries)	$\$15,000$	$\$15,500$
Factory Insurance	$\$5,000$	$\$5,500$
Property taxes (factory)	$\$12,000$	$\$12,000$
Equipment Depreciation (factory)	$\$13,800$	$\$13,800$
Supervisory Salaries (factory)	$\$14,800$	$\$14,800$
Set-up labor	$\$2,400$	$\$2,200$
Materials-handling labor	$\$2,500$	$\$2,400$
Total	$65,500	$66,200
Variable Overhead cost per MH:
Electricity	$8.00	$8.50
Indirect Material A	$1.00	$1.00
Indirect Material B	$4.00	$4.00
Indirect Labor Maintenance	$6.00	$6.00
Manufacturing Supplies	$2.00	$2.10
Totals	$21.00	$21.60

Denominator Activity Level (Machine Hours)                                                  6,550

Standard allowed MH for units produced is 5,500

Actual MH worked during the month is 5,600

Calculate actual variable overhead cost incurred:

$\begin{array}{c}\text{Actual variable overhead cost incurred}=\text{No}\text{. of machine hours worked}\\ \text{ during the month}\times \text{Actual variable overhead }\\ \text{cost per machine hour}\\ =\text{5,600 hours }\times \text{\$21}\text{.60/machine hour}\\ =\text{\$120,960}\end{array}$

Calculate total overhead variance for the month; flexible-budget variance; and the fixed overhead production volume variance for the month:

Standard overhead application rates per machine hour:
Fixed Overhead:
Budgeted fixed Overhead	$\$65,500$
Denominator Level	$\$6,550$	$\$10.00$
Variable Overhead		$\$21.00$
Total Overhead		$\$31.00$
Total overhead variance for the month:
Actual Overhead Cost
Variable		$\$120,960$
Fixed		$\$66,200$	$\$187,160$
Standard Overhead Applied:
Standard allowed MH		5,500
Overhead rate/MH		$31.00	$\$170,500$
Total overhead variance for the month			$\$16,660\text{ U}$
Two-way breakdown of total overhead variance:
Flexible-Budget (Controllable Variance):
Actual overhead cost incurred			$\$187,160$
FB for overhead based on output
Budgeted Fixed OVH		$\$65,500$
Budgeted Variable OVH
Variable OVH:	$\$21.00$
Std. Allowed MH	$\$5,500$	$\$115,500$	$\$181,000$
Flexible-budget (Controllable) variance			$\$6,160\text{ U}$
Fixed Overhead Production Volume Variance
Denominator Activity Level	$\$6,550$
Std. Allowed MH for month	$\$5,500$	$\$1,050$
Standard fixed OVH rate per MH		$\$10.00$	$\$10,500\text{ U}$

2.

To determine

Provide summary journal entries to record actual overhead costs and standard overhead cost applied to production during the month.

Explanation of Solution

Overhead costs, sometimes referred to as overhead or operating expenses, are those costs that are associated with running a business that cannot be connected to constructing or manufacturing a product or a service. They are the expenses the business incurs in staying in business, irrespective of its level of achievement.

The required journal entries are as follows:

Date	Accounting Explanation	Amount ($)	Amount ($)
	Factory Overhead	$\$120,960$
	Utilities Payable (electric)		$\$47,600$
	Indirect Materials Inventory: A		$\$5,600$
	Indirect Materials Inventory: B		$\$22,400$
	Accrued Maintenance Labor		$\$33,600$
	Manufacturing Supplies Inventory		$\$11,760$
	(To record actual variable overhead costs)
	Factory Overhead	$\$66,200$
	Salaries Payable-Engineering Support		$\$15,500$
	Insurance Payable (or Prepaid Insurance)		$\$5,500$
	Property Taxes Payable		$\$12,000$
	Equipment Depreciation (Factory)		$\$13,800$
	Salaries Payable-Supervisory Labor		$\$14,800$
	Wages Payable-Set-up Labor		$\$2,200$
	Wages Payable-Materials-handling Labor		$\$2,400$
	(To record actual fixed overhead costs))
	WIP Inventory	$\$115,500$
	Factory Overhead		$\$115,500$
	(To apply standard variable overhead costs to production)
	WIP Inventory	$\$55,000$
	Factory Overhead		$\$55,000$
	(To apply standard fixed overhead costs to production)

3.

To determine

Provide the journal entry to record the two overhead cost variances for the month.

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

A cost variance is the difference between the cost actually incurred and the amount of costs money earmarked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

Fixed variance in the overhead production volume is the difference between the budgeted fixed overhead over the period and the standard fixed overhead applicable to production.

The required journal entry is as follows:

Date	Accounting Explanation	Amount ($)	Amount ($)
	Controllable Overhead Variance	$\$6,160$
	Fixed overhead production volume variance	$\$10,500$
	Factory Overhead		$\$16,660$
	(To record overhead variances and close the factory overhead account)

4.

To determine

Provide the required journal entry to close the variances to the Cost of Goods Sold (CGS) account

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

A cost variance is the difference between the cost actually incurred and the amount of costs money earmarked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

The required journal entry is as follows:

Date	Accounting Explanation	Amount ($)	Amount ($)
	CGS	$\$16,660$
	Controllable Overhead Variance		$\$6,160$
	Fixed overhead production volume variance		$\$10,500$
	(To record closing of total overhead variance to CGS)