Managerial Accounting: The Cornerstone of Business Decision-Making
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
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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:

Chapter 10, Problem 76P, Shumaker Company manufactures a line of high-top basketball shoes. At the beginning of the year, the , example  1

During the year, a total of 50,000 units were produced and sold. The following actual costs were incurred:

Chapter 10, Problem 76P, Shumaker Company manufactures a line of high-top basketball shoes. At the beginning of the year, the , example  2

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.

1.

Expert Solution
Check Mark
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

(A-B)

($)

Direct material775,000750,000125,000 (U)
Direct labor590,000600,000210,000 (F)
Variable overhead310,000300,000310,000 (U)
Fixed overhead180,000165,000415,000 (U)
Total1,855,0001,815,00040,000 (U)

Table (1)

Working Note:

1. Calculation of actual cost of direct material:

Actual Costs=Actual Units Produced×Standard Cost=55,000 Units×$15=$750,000

2. Calculation of actual cost of direct labor:

Actual Costs=Actual Units Produced×Standard Cost=55,000 Units×$12=$660,000

3. Calculation of actual cost of variable overhead:

Actual Costs=Actual Units Produced×Standard Cost=55,000 Units×$6=$330,000

4. Calculation of actual cost of fixed overhead:

Actual Costs=Actual Units Produced×Standard Cost=55,000 Units×$3=$165,000

2.

Expert Solution
Check Mark
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:

Fixed Overhead Spending Variance=Actual Fixed OverheadBudgeted Fixed Overhead

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

Fixed Overhead Spending Variance=$180,000$165,000=$15,000(U)

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

Use the following formula to calculate volume variance:

Volume Variance=[Budgeted Fixed Overhead  (Fixed Overhead Rate2×Standard Hours1)]

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

Volume Variance=$165,000($2.50×60,000)=$15,000(U)

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

(b).

Use the following formula to calculate variable overhead spending variance:

Overhead Spending Variance=[Actual Overhead(Actual Hours×Standard Variable Overhead3)]

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

Overhead Spending Variance=$310,000(63,000 hours×$5.00)=$5,000(F)

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

Use the following formula to calculate variable efficiency variance:

Efficiency Variance=[(Actual HoursStandard Hours)×Standard Variable Overhead Rate]

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

Efficiency Variance=(63,000 hours60,000 hours)×$5.00=$15,000(U)

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

Working Note:

1. Calculation of standard hours:

Standard Hours=Actual Hours100+Extra Hours worked×100=63,000 hours100+5%×100=60,000 hours

2. Calculation of fixed overhead rate:

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

Hours Allowed=Standard HoursUnits Produced=60,000 hours50,000 units=1.20 hours per unit

Standard Fixed Overhead Rate=Fixed Overhead RateHours Allowed=$3.001.20 hour per unit=$2.50 per hour

3. Calculation of variable overhead rate

Variable Overhead Rate=Units Produced×Variable Overhead RateStandard Hours=50,000 units×660,000 hours=$5.00 per hour

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Chapter 10 Solutions

Managerial Accounting: The Cornerstone of Business Decision-Making

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