Chapter (7),(8)

Static budget variance (Level 1)

Static budget variance = actual results – static budget items

For example:
☺ Static budget variance for sales = Actual sales – Static budget sales
(budgeted No of unites expected to be sold x budgeted S/P)
☺ Static budget variance for V/C = Actual V/C – Static budget V/C (budgeted
No of unites expected to be sold x budgeted V/C)
☺ Static budget variance for F/C = Actual F/C- Static budget F/C
☺ Static budget variance for O/I= Actual O/I - Static budget O/I
Flexible budget variance (Level 2)

Flexible budget variance = Actual results –Flexible budget items

For example:

☺ Flexible budget variance for sales = Actual sales - Flexible budget sales
(Actual No of unites sold x budgeted S/P)
☺ Flexible budget variance for V/C = Actual V/C – Flexible budget V/C (Actual
No of unites sold x budgeted V/C)
☺ Flexible budget variance for F/C= Actual F/C- Flexible budget as the same
Static budget F/C
☺ Flexible budget variance for O/I= Actual O/I - Flexible budget O/I
Sales volume variance (Level 2)

Sales volume variance = Flexible budget items - static budget items

For example:

☺ Sales volume variance for sales = Flexible budget sales - Static budget sales
☺ Sales volume variance for V/C = Flexible budget V/C - Static budget V/C
☺ Flexible budget variance for O/I= Actual O/I - Flexible budget O/I
☺ Sales volume variance for O/I= Flexible budget O/I - Static budget 0/I

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 Flexible budget Variance analysis for direct costs (level3)

1- Direct material

 Price variance = (actual price of material – budgeted price of material) x Actual

quantity of material

 Efficiency variance = (Actual quantity of material used- Budgeted quantity of

material allowed for actual output) x Budgeted price

☺ Flexible budget variance for Direct material= Price variance + Efficiency

variance

☺ Or Flexible budget variance = Actual cost for direct material – flexible budget
cost (Budgeted quantity of material allowed for actual output x Budgeted

price)

2- Direct labor

 Price variance = (actual price per hour – budgeted price per hour) x Actual No.
of hours used

 Efficiency variance = (Actual No. of hours used - Budgeted No. of hours

allowed for actual output) x Budgeted price per hour

☺ Flexible budget variance for Direct labor = Price variance + Efficiency

variance

☺ Or Flexible budget variance = Actual cost for direct Labor – flexible budget
cost (Budgeted No. of hours allowed for actual output x Budgeted price per

hour)

2
 Flexible budget Variance analysis for overhead costs (level3)

a- Variable costs

 Spending Variance= (Actual V.C per allocation base – budgeted V.C per
allocation base) x actual Q of allocation base used for actual output

 Efficiency Variance= (Actual Q of allocation base – budgeted Q of allocation

base allowed for actual output) x budgeted V.C per allocation base

☺ Flexible budget variance for variable cost =Spending variance + Efficiency

variance

☺ Or Flexible budget variance = Actual variable cost– flexible budget cost

(budgeted Q of allocation base allowed for actual output x budgeted V.C per

allocation base)

b- Fixed overhead

 Spending Variance = Actual costs incurred - Flexible-budget amount

 Production volume variance = Budgeted fixed overhead- Fixed overhead allocated
for actual output units produced

Flexible budget variance for variable cost =Spending variance

Over or under allocated = Spending Variance + Production volume variance

Or Actual costs incurred - Fixed overhead allocated for actual output units produced

3
Exercise (1)
Peterson Foods manufactures pumpkin scones. For January 2012, it budgeted to purchase and
use 15,000 pounds of pumpkin at $0.89 a pound. Actual purchases and usage for January
2012 were 16,000 pounds at $0.82 a pound. Peterson budgeted for 60,000 pumpkin scones.
Actual output was 60,800 pumpkin scones.
1. Compute the flexible-budget variance.
2. Compute the price and efficiency variances.

Solution

a) The key information items are:

Actual Budgeted
Output units (scones) 60,800 60,000
Input units (pounds of pumpkin) 16,000 15,000
Cost per input unit $ 0.82 $ 0.89

Peterson budgets to obtain 4 pumpkin scones from each pound of pumpkin.

Direct material

1- Flexible budget variance = Actual cost for direct material – flexible budget cost

(Budgeted quantity of material allowed for actual output x Budgeted price) =

(16,000pound x 0.82) – ((60,800 x 0.25) x 0.89) = $408 F

Or Flexible budget variance for Direct material= Price variance + Efficiency

variance= 1120 F – 712U= $408 F

2- Price variance = (actual price of input – budgeted price of input) x Actual quantity of

input = (0.82-0.89) x 16,000= 1120 F

3- Efficiency variance = (Actual quantity of input used- Budgeted quantity of input

allowed for actual output) x Budgeted price = (16,000- (60,800 x 0.25) x 0.89=$712 U

4
Exercise (2)

The Monroe Corporation manufactures lamps. It has set up the following standards per
finished unit for direct materials and direct manufacturing labor:

Direct materials: 10 lb. at $4.50 per lb. $45.00

Direct manufacturing labor: 0.5 hour at $30 per hour 15.00

The number of finished units budgeted for January 2012 was 10,000; 9,850 units were
actually produced. Actual results in January 2012 were as follows:

Direct materials used 98,055

Direct manufacturing labor: 4,900 hours $154,350
Assume that there was no beginning inventory of either direct materials or finished units.
During the month, materials purchased amounted to 100,000 lb., at a total cost of 465,000.
Input price variances are isolated upon purchase. Input-efficiency variances are isolated at
the time of usage.
Required:
Compute the January 2012 price and efficiency variances of direct materials and direct
manufacturing labor.
Prepare journal entries to record the variances in requirement 1.
Solution

1- Direct material

 Price variance = (actual price of material – budgeted price of material) x Actual

quantity of material = ($4.65*- 4.5) x 100,000= $15,000U

*Actual price = 465,000/100,000IB = $4.65

 Efficiency variance = (Actual quantity of material used- Budgeted quantity of material

allowed for actual output) x Budgeted price= (98,055- (10x 9850)) x 4.5= $2,002 F

2- Direct labor

 Price variance = (actual price per hour* – budgeted price per hour) x Actual No. of

hours used = (31.5- 30) x 4900= $7,350 U

*Actual price per hour= 154,350/4900h= 31.5

 Efficiency variance = (Actual No. of hours used - Budgeted No. of hours allowed for

actual output) x Budgeted price per hour= ( 4900-(9850x0.5)) x30= $750 F

5
Exercise (3)
Esquire Clothing is a manufacturer of designer suits. The cost of each suit is the sum of three variable
costs (direct material costs, direct manufacturing labor costs, and manufacturing overhead costs) and
one fixed-cost category (manufacturing overhead costs). Variable manufacturing overhead cost is
allocated to each suit on the basis of budgeted direct manufacturing labor-hours per suit. For June
2012 each suit is budgeted to take four labor-hours. Budgeted variable manufacturing overhead
cost per labor-hour is $12. The budgeted number of suits to be manufactured in June 2012 is 1,040.
Actual variable manufacturing costs in June 2012 were $52,164 for 1,080 suits started and
completed. There was no beginning or ending inventories of suits. Actual direct manufacturing labor-
hours for June were 4,536.
Esquire Clothing allocates fixed manufacturing overhead to each suit using budgeted direct
manufacturing labor-hours per suit. Data pertaining to fixed manufacturing overhead costs for June
2012 are budgeted, $62,400, and actual, $63,916.

Required

1. Compute the flexible-budget variance, the spending variance, and the efficiency variance
for variable manufacturing overhead.
2. Compute the spending variance for fixed manufacturing overhead and the production-
volume variance for June 2012.

Solution
a- Variable costs

1- Flexible budget variance = Actual variable cost– flexible budget cost (budgeted Q of

allocation base allowed for actual output x budgeted V.C per allocation base) = $52,164 –

(12x 4x 1080) = $324 U

2- Spending Variance= (Actual V.C per allocation base – budgeted V.C per allocation base) x

actual Q of allocation base used for actual output= (11.5*-12) x 4900= 2268F

* Actual V.C per allocation base = $52,164 /4536h= $11.5/h

3- Efficiency Variance= (Actual Q of allocation base – budgeted Q of allocation base

allowed for actual output) x budgeted V.C per allocation base = (4536- (4x 1080)) x

12= 2592U

b- Fixed overhead

 Spending Variance = Flexible budget variance = Actual costs incurred - Flexible-budget

amount= $63,916 - $62,400= $1,516 U

 Production volume variance = Budgeted fixed overhead- Fixed overhead allocated for

actual output units produced= $62,400 – (1080x4x15*) = $2,400 F

*Fixed cost rate = Budgeted fixed overhead cost = 62,400/ 4x1040= 15$/h
Budgeted quantity of allocation base
6
Exercise (4)
The Singapore division of a Canadian telecommunications company uses standard costing for
its machine-paced production of telephone equipment. Data regarding production during June
are as follows:

Variable manufacturing overhead costs incurred $618,840

Variable manufacturing overhead cost rate $8 per standard machine-hour
Fixed manufacturing overhead costs incurred $145,790
Fixed manufacturing overhead costs budgeted $144,000
Denominator level in machine-hours 72,000
Standard machine-hour allowed per unit of output 1.2
Units of output 65,500
Actual machine-hours used 76,400
Ending work-in-process inventory 0
Required

1. Prepare an analysis of all manufacturing overhead variances.

2. Prepare journal entries for manufacturing overhead costs and their variances.
a- Variable costs

1. Flexible budget variance = Actual variable cost– flexible budget cost (budgeted Q of

allocation base allowed for actual output x budgeted V.C per allocation base) = $618,840 –

(8x 1.2x 65,500) = 9,960 F

2. Spending Variance= (Actual V.C per allocation base – budgeted V.C per allocation base) x

actual Q of allocation base used for actual output= (8.1*-8) x 4900= 7,640U

* Actual V.C per allocation base = $618,840/76,400h= $8.1/h

3. Efficiency Variance= (Actual Q of allocation base – budgeted Q of allocation base

allowed for actual output) x budgeted V.C per allocation base = (76,400- (1.2x 65,500))

x 8= 17,600 F

b- Fixed overhead

 Spending Variance = Flexible budget variance = Actual costs incurred - Flexible-budget

amount= $145,790- $144,000= $1,790 U

 Production volume variance = Budgeted fixed overhead- Fixed overhead allocated for

actual output units produced= $144,000– (65,500x1.2x2*) = $13,200 F

*Fixed cost rate = Budgeted fixed overhead cost = 144,000/ 72,000= $ 2 per hour
Budgeted quantity of allocation base

7
journal entries
Details Dr Cr
Variable Manufacturing Overhead Control 618,840
Accounts Payable Control and other accounts 618,840
Work-in-Process Control 628,800
Variable Manufacturing Overhead 628,800
Allocated
Variable Manufacturing Overhead Allocated 628,800
Spending variance 7,640
Variable Manufacturing Overhead 618,840
Control
Efficiency Variance 17,600
Fixed Manufacturing Overhead Control 145,790
Accounts Payable Control and Accumulated 145,790
Depreciation Control
Work-in-Process Control 157,200
Fixed Manufacturing Overhead Allocated 157,200
Fixed Manufacturing Overhead Allocated 157,200
Spending variance 1,790
Fixed Manufacturing Overhead Control 145,790
Production volume variance 13,200

Exercise (5)
Meals on Wheels (MOW) operates a meal home-delivery service. It has agreements
with 20 restaurants to pick up and deliver meals to customers who phone or fax orders
to MOW. MOW allocates variable and fixed overhead costs on the basis of delivery
time. MOW’s owner, Josh Carter, obtains the following information for May 2012
overhead costs:

Meals on Wheels (May 2012) Actual results Static Budget

Output units (number of deliveries) 8,800 10,000
Hours per delivery 0.70
Hours of delivery time 5,720
Variable overhead cost per hour of delivery time $ 1.50
Variable overhead costs $10,296
Fixed overhead costs $38,600 $35,000
Required
1. Compute spending and efficiency variances for MOW’s variable overhead in May 2012.
2. Compute the spending variance and production-volume variance for MOW’s fixed overhead
in May 2012.

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 a. Variable costs

1) Flexible budget variance = Actual variable cost– flexible budget cost (budgeted Q of

allocation base allowed for actual output x budgeted V.C per allocation base) = $10,296–

(1.5x 0.7x 8800) = 1056 U

2) Spending Variance= (Actual V.C per allocation base – budgeted V.C per allocation base) x

actual Q of allocation base used for actual output= (1.8*-1.5) x 4900= 1716 U

*Actual V.C per allocation base = $10,296/5,720h= $1.8/h

3) Efficiency Variance= (Actual Q of allocation base – budgeted Q of allocation base

allowed for actual output) x budgeted V.C per allocation base = (5,720- (0.7x 8800)) x

1.5= 660 F

b. Fixed overhead

 Spending Variance = Flexible budget variance = Actual costs incurred - Flexible-budget

amount= $38,600- $35,000= $3,600 U

 Production volume variance = Budgeted fixed overhead- Fixed overhead allocated for

actual output units produced= $35,000 – (8800x0.7x5*) = $4,200 U

*Fixed cost rate = Budgeted fixed overhead cost = $35,000 / (10,000x 0.7)= $
Budgeted quantity of allocation base
5per hour