Crystal Glassware Company has the following standards and flexible-budget data. Standard variable-overhead rate $ 8.00 per direct-labor hour Standard quantity of direct labor 3 hours per unit of output Budgeted fixed overhead $ 138,000 Budgeted output 23,000 units Actual results for April are as follows: Actual output 16,000 units Actual variable overhead $ 480,000 Actual fixed overhead $ 133,000 Actual direct labor 55,000 hours Required: Compute the following variances and indicate the effect of each variance. (Indicate the effect of each variance by selecting "Favorable", "Unfavorable", and "None" for no effect (i.e., zero variance). Do not round your intermediate calculations. Input all amounts as positive values. Omit the "$" sign in your response.) Variable-overhead spending variance $ Unfavorable Variable-overhead efficiency variance $ Unfavorable Fixed-overhead budget variance $ Favorable Fixed-overhead volume variance $ Unfavorable Explanation: Variable-overhead spending variance = actual variable overhead – (AH × SVR) = $480,000 – (55,000 × $8.00) = $40,000 U Variable-overhead efficiency variance = SVR(AH – SH) = $8.00(55,000 – 48,000*) = $56,000 U *SH = 48,000 hrs. = 16,000 units × 3 hrs. per unit Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead = $133,000 – $138,000 = $5,000 F Fixed-overhead volume variance = budgeted fixed overhead – applied fixed overhead = $138,000 – $96,000† = $42,000 (positive sign**) †Applied fixed overhead = (predetermined fixed overhead rate) × (standard allowed hours) = formula39.mml × (16,000 × 3) = $96,000 ** Some accountants would designate a positive volume variance as "unfavorable" and a negative volume variance as "favorable", but some accountants may choose not to interpret the volume variance as either favorable or unfavorable.

Crystal Glassware Company has the following standards and flexible-budget data.      

Standard variable-overhead rate	$	8.00	per direct-labor hour
Standard quantity of direct labor		3	hours per unit of output
Budgeted fixed overhead	$	138,000
Budgeted output		23,000	units

  

Actual results for April are as follows:

  

Actual output		16,000	units
Actual variable overhead	$	480,000
Actual fixed overhead	$	133,000
Actual direct labor		55,000	hours

  

Required:

Compute the following variances and indicate the effect of each variance. (Indicate the effect of each variance by selecting "Favorable", "Unfavorable", and "None" for no effect (i.e., zero variance). Do not round your intermediate calculations. Input all amounts as positive values. Omit the "$" sign in your response.)

  

Variable-overhead spending variance	$	Unfavorable
Variable-overhead efficiency variance	$	Unfavorable
Fixed-overhead budget variance	$	Favorable
Fixed-overhead volume variance	$	Unfavorable

Explanation:

Variable-overhead spending variance	=	actual variable overhead – (AH × SVR)
	=	$480,000 – (55,000 × $8.00)
	=	$40,000 U

 

Variable-overhead efficiency variance	=	SVR(AH – SH)
	=	$8.00(55,000 – 48,000*)
	=	$56,000 U

  

*SH = 48,000 hrs. = 16,000 units × 3 hrs. per unit

 

Fixed-overhead budget variance	=	actual fixed overhead – budgeted fixed overhead
	=	$133,000 – $138,000
	=	$5,000 F

  

Fixed-overhead volume variance	=	budgeted fixed overhead – applied fixed overhead
	=	$138,000 – $96,000†
	=	$42,000 (positive sign**)

 

†Applied fixed overhead	=	(predetermined fixed overhead rate) × (standard allowed hours)
	=		× (16,000 × 3)
	=	$96,000

  

**	Some accountants would designate a positive volume variance as "unfavorable" and a negative volume variance as "favorable", but some accountants may choose not to interpret the volume variance as either favorable or unfavorable.

Johnson Electrical produces industrial ventilation fans. The company plans to manufacture 87,000 fans evenly over the next quarter at the following costs: direct material, $1,914,000; direct labor, $435,000; variable manufacturing overhead, $639,450; and fixed manufacturing overhead, $966,000.

Johnson Electrical produces industrial ventilation fans. The company plans to manufacture 87,000 fans evenly over the next quarter at the following costs: direct material, $1,914,000; direct labor, $435,000; variable manufacturing overhead, $639,450; and fixed manufacturing overhead, $966,000. The $966,000 amount includes $84,000 of straight-line depreciation and $126,000 of supervisory salaries.

Shortly after the conclusion of the quarter’s first month, Johnson reported the following costs:

  

Direct material	$	619,700
Direct labor		134,400
Variable manufacturing overhead		217,000
Depreciation		28,000
Supervisory salaries		44,900
Other fixed manufacturing overhead		250,000
Total	$	1,294,000

  

Dave Kellerman and his crews turned out 26,000 fans during the month—a remarkable feat given that the firm’s manufacturing plant was closed for several days because of storm damage and flooding.

Kellerman was especially pleased with the fact that overall financial performance for the period was favorable when compared with the budget. His pleasure, however, was very short-lived, as Johnson’s general manager issued a stern warning that performance must improve, and improve quickly, if Kellerman had any hopes of keeping his job.

  

Required:

2.	Which of the two budgets would be more useful when planning the company’s cash needs over a range of activity?
	Flexible Budget

  

3.

Prepare a performance report that compares budgeted and actual costs for the period just ended (i.e., the report that Kellerman likely used when assessing his performance). (Indicate the effect of each variance by selecting "Favorable", "Unfavorable", and "None" for no effect (i.e., zero variance). Do not round your intermediate calculations. Leave no cells blank, be sure to enter "0" if required. Input all amounts as positive values. Omit the "$" sign in your response.)

  

	Static Budget: 29,000 Units	Actual: 26,000 Units	Variance
Direct material used	$	$	$	Favorable
Direct labor				Favorable
Variable manufacturing overhead				Unfavorable
Depreciation				None
Supervisory salaries				Unfavorable
Other fixed manufacturing overhead				Favorable
Total	$	$	$	Favorable

  

4.

Prepare a performance report that compares budgeted and actual costs for the period just ended (i.e., the report that the general manager likely used when assessing Kellerman’s performance). (Indicate the effect of each variance by selecting "Favorable", "Unfavorable", and "None" for no effect (i.e., zero variance). Do not round your intermediate calculations. Leave no cells blank, be sure to enter "0" if required. Input all amounts as positive values. Omit the "$" sign in your response.)

  

	Flexible Budget: 26,000 Units	Actual: 26,000 Units	Variance
Direct material used	$	$	$	Unfavorable
Direct labor				Unfavorable
Variable manufacturing overhead				Unfavorable
Depreciation				None
Supervisory salaries				Unfavorable
Other fixed manufacturing overhead				Favorable
Total	$	$	$	Unfavorable

  

5-a.	Which of the following two reports is preferred?
	A performance report based on flexible budgeting.

  

5-b.	Which of the following statements is false?
	Kellerman's assessment regarding the favorable overall performance for the period is correct.

Explanation: 2.

Given the focus on a range of activity, a flexible budget would be more useful because it incorporates several different activity levels.

 
3.

Static budget vs. actual experience:

Calculations:

Direct material used:  $1,914,000 ÷ 87,000 units = $22 per unit

Direct labor:  $435,000 ÷ 87,000 units = $5 per unit

Variable manufacturing overhead:  $639,450 ÷ 87,000 units = $7.35 per unit

Depreciation:  $84,000 ÷ 3 months = $28,000 per month

Supervisory salaries:  $126,000 ÷ 3 months = $42,000 per month

Other fixed manufacturing overhead:  ($966,000 – $84,000 – $126,000) ÷ 3 months = $252,000 per month

5.

A performance report based on flexible budgeting is preferred. The report compares budgeted and actual performance at the same volume level, eliminating any variations in activity. In essence, everything is placed on a “level playing field.”

The general manager’s warning is appropriate because of the sizable variances that have arisen. With the static budget, performance appears favorable, especially with respect to variable costs. Bear in mind, though, that volume was below the original monthly expectation of 29,000 units, presumably because of the plant closure. A reduced volume will likely lead to lower variable costs than anticipated (and resulting favorable variances).

When the volume differential is removed, variable cost variances total $78,000U ($47,700U + $4,400U + $25,900U), or 8.73% of budgeted variable costs ($572,000 + $130,000 + $191,100). Variable cost incurrence appears excessive with respect to all components of the total: direct material, direct labor, and variable manufacturing overhead.

Fall City Hospital has an outpatient clinic. Jeffrey Harper, the hospital’s chief administrator, is very concerned about cost control and has asked that performance reports be prepared that compare budgeted and actual amounts for medical assistants, clinic supplies, and lab tests. Past financial studies have shown that the cost of clinic supplies used is driven by the number of medical assistant labor hours worked, whereas lab tests are highly correlated with the number of patients served.

Fall City Hospital has an outpatient clinic. Jeffrey Harper, the hospital’s chief administrator, is very concerned about cost control and has asked that performance reports be prepared that compare budgeted and actual amounts for medical assistants, clinic supplies, and lab tests. Past financial studies have shown that the cost of clinic supplies used is driven by the number of medical assistant labor hours worked, whereas lab tests are highly correlated with the number of patients served.

The following information is available for June:

  

•	Medical assistants Fall City’s standard wage rate is $16 per hour, and each assistant is expected to spend 30 minutes with a patient. Assistants totaled 820 hours in helping the 1,590 patients seen, at an average pay rate of $17.50 per hour.
•	Clinic supplies The cost of clinic supplies used is budgeted at $12 per labor hour, and the actual cost of supplies used was $9,150.
•	Lab tests Each patient is anticipated to have four lab tests, at an average budgeted cost of $67 per test. Actual lab tests for June cost $440,748 and averaged 4.4 per patient.

  

Required:

1.

Prepare a report that shows budgeted and actual costs for the 1,590 patients served during June. Compute the differences (variances) between these amounts and label them as favorable or unfavorable. (Indicate the effect of each variance by selecting "Favorable", "Unfavorable", and "None" for no effect (i.e., zero variance). Input all amounts as positive values. Do not round your intermediate calculations. Omit the "$" sign in your response.)

  

	Budget: 1,590 Patients	Actual: 1,590 Patients	Variance
Medical assistants	$	$	$	Unfavorable
Clinic supplies				Favorable
Lab tests				Unfavorable
Total	$	$	$	Unfavorable

  

2.	On the basis of your answer to requirement (1), state whether the hospital has any significant problems with respect to clinic supplies and lab tests.
	No

  

3-a.

Determine the spending and efficiency variances for lab tests. (Hint: In applying the overhead variance formulas, think of the number of tests as analogous to the number of hours, and think of the cost per test as analogous to the variable overhead rate.) (Indicate the effect of each variance by selecting "Favorable", "Unfavorable", and "None" for no effect (i.e., zero variance). Do not round your intermediate calculations. Input all amounts as positive values. Omit the "$" sign in your response.)

  

Variable-overhead spending variance	$	Favorable
Variable-overhead efficiency variance	$	Unfavorable

  

3-b.	Does it appear that Fall City has any significant problems with the cost of its lab tests?
	Yes

  

4.	Compare the lab test variance computed in requirement (1), a flexible-budget variance with the sum of the variances is requirement (3-a ) and state whether the flexible-budget variance reflects the total of the individual standard-cost variance.
	Yes

Explanation: 1.

Calculations:

Medical assistants:

Budget: 1,590 patients × .5 hours × $16 = $12,720

Actual: 820 hours × $17.5 = $14,350

Clinic supplies:

Budget: 1,590 patients × .5 hours × $12 = $9,540

Actual: $9,150 (given)

Lab tests:

Budget: 1,590 patients × 4 tests × $67 = $426,120

Actual: $440,748 (given)

2.

The variances do not reveal any significant problems. The $390 variance for clinic supplies is only 4.09% of the budgeted amount ($390 ÷ $9,540) and favorable. Similarly, the lab-test variance, while unfavorable, is only 3.43% of the budget ($14,628 ÷ $426,120).

3.

Variances for lab tests:

Spending variance:
Actual tests conducted × actual cost 6,996 tests* × $63**	$	440,748
Actual tests conducted × standard cost 6,996 tests × $67		468,732
Variable-overhead spending variance	$	27,984	F

*  1,590 patients × 4.4 tests

** $440,748 ÷ 6,996 tests

Efficiency variance:
Actual tests conducted × standard cost 6,996 tests × $67	$	468,732
Standard tests allowed × standard cost 6,360 tests* × $67		426,120
Variable-overhead efficiency (quantity) variance	$	42,612	U

* 1,590 patients × 4 tests

Yes, Fall City does appear to have some problems. The two variances computed are fairly sizable in relation to the $426,120 budget. The efficiency variance is of particular concern, given that it is 10.00% of budget ($42,612 ÷ $426,120) and unfavorable. This variance arises because the assistants are conducting an average of 4.4 tests per patient when the standard calls for only 4 tests. The standard may be set too low or perhaps the assistants are somewhat sloppy, having to re-do tests that were done improperly.

The administration should also investigate the causes of the $4 decline in the cost per test, from the standard cost of $67 to the actual cost of $63.

4.

The spending and efficiency variances add up to equal the flexible-budget variance ($27,984F + $42,612U = $14,628U). The flexible-budget variance reflects the total of the individual standard-cost variances.

Your next-door neighbor recently began a new job as assistant controller for Conundrum Corporation. As her first assignment, she prepared a performance report for January. She was scheduled to present the report

Your next-door neighbor recently began a new job as assistant controller for Conundrum Corporation. As her first assignment, she prepared a performance report for January. She was scheduled to present the report to management the next morning, so she brought it home to review. As the two of you chatted in the backyard, she decided to show you the report she had prepared. Unfortunately, your dog thought the report was an object to be fetched. The pup made a flying leap and got a firm grip on the report. After chasing the dog around the block, you managed to wrest the report from its teeth. Needless to say, it was torn to bits. Only certain data are legible on the report. This information follows:

  

CONUNDRUM CORPORATION

Performance Report For the Month of January

Direct Material

Direct Labor

Variable Overhead

Fixed Overhead

Standard allowed cost   given actual output

?

?

(? kilograms at $10per kilogram)

(2 hours at $16 per hour)

Flexible overhead budget

?

$

36,000

Actual cost

$

189,000

?

?

?

(16,000 kilograms at $15.5 per kilogram)

(10,800 hours at ? per hour)

Direct-material price variance

?

Direct-material quantity variance

$

6,000

U

Direct-labor rate variance

$

10,800

U

Direct-labor efficiency variance

4,800

F

Variable-overhead spending variance

$

2,640

U

Variable-overhead efficiency variance

2,000

F

Fixed-overhead budget variance

$

3,250

U

Fixed-overhead volume variance

?

  

In addition to the fragmentary data still legible on the performance report, your neighbor happened to remember the following facts.

  

•	Planned production of Conundrum's sole product was 400 units more than the actual production.
•	All of the direct material purchased in January was used in production.
•	There were no beginning or ending inventories.
•	Variable and fixed overhead are applied on the basis of direct-labor hours. The fixed overhead rate is $3 per hour.

  

Required:

Feeling guilty, you have agreed to help your neighbor reconstruct the following facts, which will be necessary for her presentation. Indicate whether the variance is favorable or unfavorable.(Round "Actual variable-overhead rate" to 2 decimal places. Select "None" for no effect (i.e., zero variance). Input all amounts as positive values. Do not round your intermediate calculations. Omit the "$" sign in your response.)

  

1.	Planned production (in units).
2.	Actual production (in units).
3.	Actual fixed overhead.	$
4.	Total standard allowed direct-labor hours.
5.	Actual direct-labor rate.	$
6.	Standard variable-overhead rate.	$
7.	Actual variable-overhead rate.	$
8.	Standard direct-material quantity per unit.
9.	Direct-material price variance.	$	Unfavorable
10.	Applied fixed overhead.	$
11.	Fixed-overhead volume variance.	$	Unfavorable

Explanation:

1.

Planned production = 6,000 units.

  

The reasoning is as follows:

  

Fixed-overhead rate per direct-labor hour	=	budgeted fixed overhead
		planned direct-labor hours
$3 per hr.	=	$36,000
		X

  

Therefore, planned direct-labor hours (X) equals 12,000 hours.

  

Planned direct-labor hours	=	planned production × standard hours per unit
12,000 hr.	=	X × 2 hr. per unit

  

Therefore, planned production (X) equals 6,000 units.

 
2.

Actual production	=	planned production – 400 units
	=	6,000 units – 400 units
	=	5,600 units

 
3.

Actual fixed overhead = $39,250.

  

Fixed overhead budget variance	=	actual fixed overhead – budgeted fixed overhead
$3,250 U	=	X – $36,000

  

Therefore, actual fixed overhead (X) equals $39,250.

 
4.

Total standard allowed direct-labor hours

= 5,600 units produced × 2 hr. per unit

= 11,200 hr.

 
5.

Actual direct-labor rate = $17 per hour.

  

Direct-labor rate variance	=	AH(AR – SR)
$10,800 U	=	10,800(AR – $16)

  

Therefore, AR = $17.

 
6.

Standard variable-overhead rate = $5 per direct-labor hour.

 

Variable-overhead efficiency variance	=	SVR(AH – SH)
$2,000 F	=	SVR(10,800 – 11,200)

 

Therefore, SVR = $5 per hr.

 
7.

Actual variable-overhead rate = $5.2 per direct-labor hour.

  

Variable-overhead spending variance	=	AH(AVR – SVR)
$2,640 U	=	10,800(AVR – $5)

  

Therefore, AVR = $5.2 per hr.

 
8.

Standard direct-material quantity per unit	=	total standard direct-material quantity allowed
		actual production in units
	=	15,400 kg.*
		5,600 units
	=	3 kg.

  

*Direct-material quantity variance	=	SP(AQ – SQ)
$6,000 U	=	$10(16,000 – SQ)
SQ	=	15,400 kg.

 
9.

Direct-material price variance	=	PQ(AP – SP)
	=	16,000($15.5 – $10)
	=	$88,000 U

 
10.

Applied fixed overhead	=	standard fixed-overhead rate × standard allowed hours
	=	$3 per hr. × 11,200 hr.
	=	$33,600

 
11.

Fixed-overhead volume variance	=	budgeted fixed overhead – applied fixed overhead
	=	$36,000 – $33,600
	=	$2,400 (Positive)*

  

*	Some accountants would designate a positive volume variance as "unfavorable" because planned production exceeded actual production, but some accountants may choose not to interpret the volume variance as either favorable or unfavorable.