Chapter 15, Problem 50P

1.a

To determine

Compute the fixed set up related costs.

Explanation of Solution

Compute the fixed set up related costs.

	Budgeted Results	Actual Results
Units produced and sold	10,000	9,000
Batch size (units)	250	200
Number of batches	40	45
Set up hours	4	4.25
Variable OH cost per set up hour	160	191.25
Total set-up related variable overhead costs	20	19
Fixed set up related costs per year	3,200	3,633.75
Fixed set up related costs/set up hour:	20,000	21,000
$20,000/160 hours	$125
$21,000/191.25 hours		$109.804

Table (1)

For the given output for the last year of 9,000 units, the company must have used 36 bathes (9,000 units/250 units per batch). Moreover, at the standard set up hours of 4 per batch, the units produced of 9,000 units produced is equivalent to 144 set-up hours.

Compute the fixed overhead spending variance.

$\begin{array}{c}\begin{array}{l}\text{Fixed overhead }\\ \text{spending variance}\end{array})\text{ =}\left(\begin{array}{l}\text{Actual fixed setup }\\ \text{related costs}\end{array}\right)-\left(\begin{array}{l}\text{Budgeted fixed setup }\\ \text{related costs}\end{array}\right)\\ =\$21,000-\$20,000\\ =\$1,000\text{ U}\end{array}$

1.b

To determine

Compute the production volume variance.

Explanation of Solution

$\begin{array}{c}\begin{array}{l}\text{Production volume}\\ \text{ variance}\end{array})\text{ =}\left(\begin{array}{l}\text{Budgeted fixed setup }\\ \text{related costs}\end{array}\right)-\left(\begin{array}{l}\text{Applied fixed setup }\\ \text{related overhead costs}\end{array}\right)\\ =\$20,000-\left(\begin{array}{l}36\text{ batches }\times \text{4 setups-hours per batch}\\ \times \text{ \$125 per setup hour}\end{array}\right)\\ =\$20,000-\$18,000\\ =\$2,000\text{ U}\end{array}$

2.a

To determine

Compute the variable setup related overhead spending variance.

Explanation of Solution

$\begin{array}{c}\left(\begin{array}{l}\text{Variable setup-related}\\ \text{overhead spending}\\ \text{variance}\end{array}\right)=\left(\begin{array}{l}\text{Actual variable}\\ \text{setup related overhead}\\ \text{costs}\end{array}\right)-\left(\begin{array}{l}\text{Budgeted variable setup}\\ \text{related overhead cost based}\\ \text{on inputs}\end{array}\right)\left(\right)\\ =\text{Actual batch}\times \left(\begin{array}{l}\text{actual setup }\\ \text{hours per batch}\end{array}\right)\times \left(\begin{array}{l}\text{Actual variable setup }\\ \text{related overhead cost }\\ \text{per setup hour}\end{array}\right)-\left(\text{Actual batch}\times \left(\begin{array}{l}\text{actual setup }\\ \text{hours per batch}\end{array}\right)\right)\times \left(\begin{array}{l}\text{Budgeted variable}\\ \text{setup}\end{array}\right)-\left(\begin{array}{l}\text{Related overhead}\\ \text{cost per setup hour}\end{array}\right)\\ =\left(45\text{batches }\times \text{4}\text{.25 setup hours per batch }\times \text{ \$19 per setup hour}\right)-\left(45\text{ batches }\times \text{ 4}\text{.25 setup hours per batch }\times \text{ \$20 per setup hour}\right)\\ =\$3,633.75-\$3,825\\ =\$191.25\text{ F}\end{array}$

2.b

To determine

Compute the variable setup related overhead efficiency variance.

Explanation of Solution

$\begin{array}{c}\left(\begin{array}{l}\text{variable setup }\\ \text{related overhead }\\ \text{efficiency variance}\end{array}\right)\text{ =\$3,825}-\left(36\text{ batches }\times \text{ 4 setup hours per batch}\times \text{\$20 per setup hour}\right)\\ =\$3,825-\$2,880\\ =\$945\text{ U}\end{array}$

A favourable spending variance can be attributed to spending on variable setup related overhead costs which is being $1 per hour less than their budgeted standard.

The unfavourable efficiency variance for variable setup related overhead cost is because of a combination of the following mentioned factors:

• The actual output for the period.
• The setup activity

The net of the unfavourable variable setup-related overhead variance denotes a favourable spending variance was not sufficient to offset the unfavourable efficiency variance.

3.

To determine

Mention the implication of activity based cost with respect to projected costs.

Explanation of Solution

The fixed setup related costs are controlled to the point of operations. They are controlled mainly through the planning process. The capital budgeting process or the use of zero-based budgeting. These types of costs relate to the capacity or the ability to produce.

Moreover, the variable setup related costs differ in response to multiple underlying factors. As a result, the costs are controlled by attempting to identify and eliminate the non-value-added activities and to perform the value-added activities in an efficient manner. Activity based cost systems must provide a greater control of variable setup related overhead costs in comparison to the traditional systems. This is due to the focus of costing of activities under activity based costing.

4.

To determine

Make suitable recommendation to the management of B Manufacturing Company with respect to foreign competitors.

Explanation of Solution

A majority of companies find that a comprehensive control systems that consists of both financial and non-financial performance indicators. Therefore, the it is expected that operating units in B Manufacturing Company may have a timely access to non-financial access to a non-financial performance indicator like a process yield. Such type of information has a merit o being expressed in a manner that is interpretable by some operating personnel in readily available format. These types of data direct worker attention to take actionable steps in case a proves is considered to be out of control. Such measures provide the managers to evaluate trade-offs and moreover, dollar based variance information is useful to determine the variances that must be investigated.