Chapter 11 Flexible Budgets and Overhead Analysis
True/False Questions
1.A key feature of a flexible budget is that actual results can be compared to budgeted costs at the same level of activity.
Ans:True
2.Direct labor-hours would generally be a better measure of activity for a flexible budget than direct labor cost.
Ans:True
3.In a flexible budget, when the activity declines, the variable costs per unit also declines.
Ans:False
4.Fixed costs should not be included in a flexible budget because they do not change when the level of activity changes.
Ans:False
5.To assess how well a production manager has controlled costs, actual costs should be compared to what the costs should have been for the planned level of production.
Ans:False
6.The overhead spending variance is not affected by excessive usage or waste of overhead materials.
Ans:False
7.The variable overhead efficiency variance provides a measure of how efficiently the activity base which underlies the flexible budget is being utilized in production.
Ans:True
8.A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. The company's choice of the denominator level of activity affects the fixed overhead volume variance.
Ans:True LO:5;6
9.The higher the denominator activity level used to compute the predetermined overhead rate, the higher the predetermined overhead rate.
Ans:False LO:5
10.In a standard costing system, if the actual fixed manufacturing overhead cost exceeds the budgeted fixed manufacturing overhead cost for the period, then fixed manufacturing overhead cost would be underapplied for the period.
Ans:False LO:5
11.When fixed manufacturing overhead cost is applied to work in process, it is treated as if it were a variable cost.
Ans:True LO:5
12.A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. The company's choice of the denominator level of activity has no effect on the variable portion of the predetermined overhead rate.
Ans:True LO:5
13.There can be a volume variance for either variable manufacturing overhead or fixed manufacturing overhead.
Ans:False LO:6
14.If the denominator level of activity is less than the standard hours allowed for the output of the period, then the volume variance is unfavorable, indicating an overutilization of available facilities.
Ans:False LO:6
15.A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. A fixed overhead volume variance will necessarily occur in a month in which actual direct labor-hours differ from standard hours allowed.
Ans:False LO:6
Multiple Choice Questions
16.The purpose of a flexible budget is to:
A)allow management some latitude in meeting goals.
B)eliminate fluctuations in production reports by ignoring variable costs.
C)compare actual and budgeted results at virtually any level of activity.
D)reduce the time to prepare the annual budget.
Ans:C Source:CPA;adapted
17.When using a flexible budget, a decrease in activity within the relevant range:
A)decreases variable cost per unit.
B)decreases total costs.
C)increases total fixed costs.
D)increases variable cost per unit.
Ans:B Source:CPA;adapted
18.The activity base that is used for a flexible budget for an overhead cost should be:
A)direct labor-hours.
B)units of output.
C)expressed in dollars, if possible.
D)the cause of the overhead cost.
Ans:D
19.A budget that is based on the actual activity of a period is known as a:
A)continuous budget.
B)flexible budget.
C)static budget.
D)master budget.
Ans:B
20.The fixed manufacturing overhead budget variance equals:
A)Actual fixed manufacturing overhead cost--Applied fixed manufacturing overhead cost.
B)Actual fixed manufacturing overhead cost--Budgeted fixed manufacturing overhead cost.
C)Budgeted fixed manufacturing overhead cost--Applied fixed manufacturing overhead cost.
D)Actual fixed manufacturing overhead cost-- (Actual hours x Standard fixed overhead rate).
Ans:B LO:6
21.Which of the following variances is least significant from a standpoint of cost control?
A)materials price variance.
B)labor efficiency variance.
C)fixed overhead volume variance.
D)variable overhead spending variance.
Ans:C LO:6
22.The manufacturing overhead variance that is a measure of capacity utilization is:
A)the overhead spending variance.
B)the overhead efficiency variance.
C)the overhead budget variance.
D)the overhead volume variance.
Ans:D LO:6
23.If the denominator activity is less than the standard hours allowed for the actual output, one would expect that:
A)the variable overhead efficiency variance would be unfavorable.
B)the fixed overhead volume variance would be favorable.
C)the fixed overhead budget variance would be unfavorable.
D)the variable overhead efficiency variance would be favorable.
Ans:B LO:6
24.The volume variance is nonzero whenever:
A)standard hours allowed for the output of a period differ from the denominator level of activity.
B)actual hours differ from the denominator level of activity.
C)standard hours allowed for the output of a period differ from the actual hours during the period.
D)actual fixed overhead costs incurred during a period differ from budgeted fixed overhead costs as contained in the flexible budget.
Ans:A LO:6
25.A volume variance is computed for:
A)both variable and fixed overhead.
B)variable overhead only.
C)fixed overhead only.
D)direct labor costs as well as overhead costs.
Ans:C LO:6
26.Which of the following standard cost variances would usually be least controllable by a production supervisor?
A)Fixed overhead volume variance.
B)Variable overhead efficiency variance.
C)Direct labor efficiency variance.
D)Materials usage (quantity) variance.
Ans:A LO:6 Source:CPA;adapted
27.The following costs appear in Malgorzata Company's flexible budget at an activity level of 15,000 machine-hours:
Total CostIndirect materials...... / $7,800
Factory rent...... / $18,000
What would be the flexible budget amounts at an activity level of 12,000 machine-hours if indirect materials is a variable cost and factory rent is a fixed cost?
Indirect Materials / Factory RentA) / $7,800 / $14,400
B) / $7,800 / $18,000
C) / $6,240 / $14,400
D) / $6,240 / $18,000
Ans:D
Solution:
Budgeted number of machine hours: 15,000
Cost Formula(per machine-hour) / Activity
(in machine-hours):
12,000
Variable costs:
Indirect materials.... / $0.52* / $6,240
Fixed costs:
Factory rent...... / $18,000
*$7,800 ÷ 15,000 MHs = $0.52 per MH
28.Mongelli Family Inn is a bed and breakfast establishment in a converted 100-year-old mansion. The Inn's guests appreciate its gourmet breakfasts and individually decorated rooms. The Inn's overhead budget for the most recent month appears below:
Activity level...... / 90 guestsVariable overhead costs:
Supplies...... / $234
Laundry...... / 315
Fixed overhead costs:
Utilities...... / 220
Salaries and wages...... / 4,290
Depreciation...... / 2,680
Total overhead cost...... / $7,739
The Inn's variable overhead costs are driven by the number of guests.
What would be the total budgeted overhead cost for a month if the activity level is 99 guests? Assume that the activity levels of 90 guests and 99 guests are within the same relevant range.
A)$7,793.90
B)$61,541.00
C)$8,512.90
D)$7,739.00
Ans:A
Solution:
Budgeted number of guests: 90
Cost Formula (per guest) / Activity(in guests): 99
Overhead Costs
Variable overhead costs:
Supplies ($234 ÷ 90 guests)...... / $2.60 / $257.40
Laundry ($315 ÷ 90 guests)...... / 3.50 / 346.50
Total variable overhead cost...... / $6.10 / 603.90
Fixed overhead costs:
Utilities...... / 220.00
Salaries and wages...... / 4,290.00
Depreciation...... / 2,680.00
Total fixed overhead cost...... / 7,190.00
Total budgeted overhead cost...... / $7,793.90
29.Kerekes Manufacturing Corporation has prepared the following overhead budget for next month.
Activity level...... / 2,500 / machine-hoursVariable overhead costs:
Supplies...... / $12,250
Indirect labor...... / 22,000
Fixed overhead costs:
Supervision...... / 15,500
Utilities...... / 5,500
Depreciation...... / 6,500
Total overhead cost...... / $61,750
The company's variable overhead costs are driven by machine-hours.
What would be the total budgeted overhead cost for next month if the activity level is 2,400 machine-hours rather than 2,500 machine-hours? Assume that the activity levels of 2,500 machine-hours and 2,400 machine-hours are within the same relevant range.
A)$59,830.00
B)$59,280.00
C)$60,380.00
D)$61,750.00
Ans:C
Solution:
Budgeted variable overhead costs / Machine-hours / Per machine-hourSupplies...... / $12,250 / 2,500 / $4.90
Indirect labor...... / $22,000 / 2,500 / $8.80
Budgeted number of machine-hours: 2,500
Cost Formula (per MH) / Activity(in MHs): 2,400
Overhead Costs
Variable overhead costs:
Supplies...... / $4.90 / $11,760
Indirect labor...... / 8.80 / 21,120
Total variable overhead cost...... / $13.70 / 13,880
Fixed overhead costs:
Supervision...... / 15,500
Utilities...... / 5,500
Depreciation...... / 6,500
Total fixed overhead cost...... / 27,500
Total overhead cost...... / $60,380
30.Sharifi Hospital bases its budgets on patient-visits. The hospital's static budget for October appears below:
Budgeted number of patient-visits..... / 8,500Budgeted variable overhead costs:
Supplies (@$4.70 per patient-visit)... / $39,950
Laundry (@$7.80 per patient-visit)... / 66,300
Total variable overhead cost...... / 106,250
Budgeted fixed overhead costs:
Wages and salaries...... / 50,150
Occupancy costs...... / 84,150
Total fixed overhead cost...... / 134,300
Total budgeted overhead cost...... / $240,550
The total overhead cost at an activity level of 9,200 patient-visits per month should be:
A)$260,360
B)$250,070
C)$249,300
D)$240,550
Ans:C
Solution:
Budgeted number of patient-visits: 8,500
Cost Formula (per patient-visit) / Activity(in patient visits):
9,200
Overhead Costs
Variable overhead costs:
Supplies...... / $4.70 / $43,240
Laundry...... / 7.80 / 71,760
Total variable overhead cost...... / $12.50 / 115,000
Fixed overhead costs:
Wages and salaries...... / 50,150
Occupancy costs...... / 84,150
Total fixed overhead cost...... / 134,300
Total overhead cost...... / $249,300
31.Ostler Hotel bases its budgets on guest-days. The hotel's static budget for April appears below:
Budgeted number of guest-days...... / 8,700Budgeted variable overhead costs:
Supplies (@$7.00 per guest-day)..... / $60,900
Laundry (@$3.80 per guest-day)..... / 33,060
Total variable overhead cost...... / 93,960
Budgeted fixed overhead costs:
Wages and salaries...... / 80,910
Occupancy costs...... / 38,280
Total fixed overhead cost...... / 119,190
Total budgeted overhead cost...... / $213,150
The total overhead cost at an activity level of 9,700 guest-days per month should be:
A)$213,150
B)$237,650
C)$223,950
D)$224,920
Ans:C
Solution:
Budgeted number of guest-days: 8,700
Cost Formula (per guest-day) / Activity(in guest-days):
9,700
Overhead Costs
Variable overhead costs:
Supplies...... / $7.00 / $67,900
Laundry...... / 3.80 / 36,860
Total variable overhead cost...... / $10.80 / 104,760
Fixed overhead costs:
Wages and salaries...... / 80,910
Occupancy costs...... / 38,280
Total fixed overhead cost...... / 119,190
Total overhead cost...... / $223,950
32.Riggs Enterprise's flexible budget cost formula for indirect materials, a variable cost, is $0.45 per unit of output. If the company's performance report for last month shows a $90 favorable variance for indirect materials and if 8,700 units of output were produced last month, then the actual costs incurred for indirect materials for the month must have been:
A)$4,005
B)$3,915
C)$3,825
D)$3,735
Ans:C
Solution:
Variable overhead spending variance = AH × (AR − SR) = 90 F
8,700 × (AR − 0.45) = -90
(8,700 × AR) − 3,915 = -90
(8,700 × AR) = 3,825
AR = 3,825 ÷ 8,700 = $0.4396
Actual indirect labor costs = 8,700 × $0.4396 = $3,825
33.Chmielewski Medical Clinic measures its activity in terms of patient-visits. Last month, the budgeted level of activity was 1,560 patient-visits and the actual level of activity was 1,530 patient-visits. The clinic's director budgets for variable overhead costs of $1.10 per patient-visit and fixed overhead costs of $19,900 per month. The actual variable overhead cost last month was $1,400 and the actual fixed overhead cost was $21,720. In the clinic's flexible budget performance report for last month, what would have been the variance for the total overhead cost?
A)$33 F
B)$1,504 U
C)$1,537 U
D)$283 F
Ans:C
Solution:
Budgeted number of patient-visits: 1,560
Actual number of patient-visits: 1,530
Cost Formula (per patient-visit) / Actual Costs Incurred for 1,530 patient-visits / Budget Based on 1,530 patient-visits / VarianceVariable overhead costs.. / $1.10 / $1,400 / $1,683 / $283 F
Fixed overhead costs.... / $21,720 / $19,900 / 1,820 U
$1,537 U
34.Rodriques Tile Installation Corporation measures its activity in terms of square feet of tile installed. Last month, the budgeted level of activity was 1,630 square feet and the actual level of activity was 1,720 square feet. The company's owner budgets for supply costs, a variable overhead cost, at $3.40 per square foot. The actual supply cost last month was $6,750. In the company's flexible budget performance report for last month, what would have been the variance for supply costs?
A)$353 U
B)$306 U
C)$902 U
D)$1,208 U
Ans:C
Solution:
Budgeted number of square feet: 1,720
Actual number of square feet: 1,630
Cost Formula (per square foot) / Actual Costs Incurred for 1,720 square feet / Budget Based on 1,720 square feet / VarianceVariable overhead costs (Supply costs) / $3.40 / $6,750 / $5,848 / $902 U
35.Rodabaugh Natural Dying Corporation measures its activity in terms of skeins of yarn dyed. Last month, the budgeted level of activity was 15,900 skeins and the actual level of activity was 16,100 skeins. The company's owner budgets for dye costs, a variable overhead cost, at $0.87 per skein. The actual dye cost last month was $14,800. In the company's flexible budget performance report for last month, what would have been the variance for dye costs?
A)$967 U
B)$174 U
C)$184 U
D)$793 U
Ans:D
Solution:
Budgeted number of skeins: 15,900
Actual number of skeins: 16,100
Cost Formula (per skein) / Actual Costs Incurred for 16,100 skeins / Budget Based on 16,100 skeins / VarianceVariable overhead costs (Dye costs) / $0.87 / $14,800 / $14,007 / $793 U
36.Andress Footwear Corporation's flexible budget cost formula for supplies, a variable overhead cost, is $2.17 per unit of output. The company's flexible budget performance report for last month showed a $4,531 unfavorable variance for supplies. During that month, 19,700 units were produced. Budgeted activity for the month had been 19,400 units. The actual costs incurred for indirect materials must have been closest to:
A)$2.17
B)$2.63
C)$2.67
D)$2.40
Ans:D
Solution:
Budgeted number of units produced: 19,400
Actual number of units produced: 19,700
Cost Formula (per unit produced) / Actual Costs Incurred for 19,700 units produced / Budget Based on 19,700 units produced / VarianceVariable overhead costs (Supplies) / $2.17 / X / $42,749 / $4,531 U
Actual costs − Budgeted costs = Supplies variance
X − $42,749 = $4,531
X = $47,280
Per unit cost = Total actual costs ÷ Number of units produced
Per unit cost = $47,280 ÷ 19,700 = $2.40
37.Ocker Corporation's flexible budget performance report for last month shows that actual indirect materials cost, a variable overhead cost, was $28,420 and that the variance for indirect materials cost was $3,828 unfavorable. During that month, the company worked 11,600 machine-hours. Budgeted activity for the month had been 11,300 machine-hours. The cost formula per machine-hour for indirect materials cost must have been closest to:
A)$2.85
B)$2.18
C)$2.78
D)$2.12
Ans:D
Solution:
Budgeted number of machine-hours: 11,300
Actual number of machine-hours: 11,600
Cost Formula (per MH) / Actual Costs Incurred for 11,600 machine-hours / Budget Based on 11,600 machine-hours / VarianceVariable overhead costs (Indirect materials) / Y / $28,420 / X / $3,828 U
Actual costs − Budgeted costs = Indirect materials variance
$28,420 − X = $3,828
X = $24,592
Y = Per machine-hour cost =
Per machine-hour cost = Actual cost ÷ Machine-hours =
Per machine-hour cost = $24,592 ÷ 11,600 = $2.12
38.Viger Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month:
Budgeted level of activity...... / 9,700 / MHsActual level of activity...... / 9,900 / MHs
Cost formula for variable manufacturing overhead cost. / $6.30 / per MH
Budgeted fixed manufacturing overhead cost...... / $49,000
Actual total variable manufacturing overhead...... / $60,390
Actual total fixed manufacturing overhead...... / $47,000
What was the variable overhead spending variance for the month?
A)$2,000 favorable
B)$720 favorable
C)$1,260 unfavorable
D)$1,980 favorable
Ans:D
Solution:
Actual rate =
Actual total variable manufacturing overhead ÷ Actual machine-hours
Actual rate = $60,390 ÷ 9,900 = $6.10
Variable overhead spending variance = AH × (AR − SR)
9,900 × ($6.10 − $6.30) = 9,900 × (-$0.20) = $1,980 F
39.Teall Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month:
Budgeted level of activity...... / 8,500 / MHsActual level of activity...... / 8,600 / MHs
Cost formula for variable manufacturing overhead cost. / $5.70 / per MH
Budgeted fixed manufacturing overhead cost...... / $50,000
Actual total variable manufacturing overhead...... / $51,600
Actual total fixed manufacturing overhead...... / $54,000
What was the fixed overhead budget variance for the month?
A)$4,000 unfavorable
B)$4,000 favorable
C)$570 favorable
D)$570 unfavorable
Ans:A
Solution:
Budget variance = Actual fixed overhead cost − Budgeted fixed overhead cost
= $54,000 − $50,000 = $4,000 U
40.Alapai Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month:
Budgeted level of activity...... / 7,000 / MHsActual level of activity...... / 7,200 / MHs
Cost formula for variable manufacturing overhead cost. / $9.40 / per MH
Budgeted fixed manufacturing overhead cost...... / $40,000
Actual total variable manufacturing overhead...... / $66,960
Actual total fixed manufacturing overhead...... / $37,000
What was the total of the variable overhead spending and fixed overhead budget variances for the month?
A)$3,720 favorable
B)$2,280 unfavorable
C)$1,840 favorable
D)$1,880 unfavorable
Ans:A
Solution:
Actual rate =
Actual total variable manufacturing overhead ÷ Actual machine-hours =
$66,960 ÷ 7,200 = $9.30
Variable overhead spending variance = AH × (AR − SR)
= 7,200 × ($9.30 − $9.40)
= 7,200 × (−$0.10) = $720 F
Fixed overhead budget variance
= Actual fixed overhead costs − Budgeted fixed overhead cost
= $37,000 − $40,000 = $3,000 F
Total overhead variance = $720 F + $3,000 F = $3,720 F
41.Bartoletti Fabrication Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company's cost formula for variable manufacturing overhead is $4.60 per MH. The company had budgeted its fixed manufacturing overhead cost at $65,000 for the month. During the month, the actual total variable manufacturing overhead was $22,080 and the actual total fixed manufacturing overhead was $63,000. The actual level of activity for the period was 4,600 MHs. What was the total of the variable overhead spending and fixed overhead budget variances for the month?
A)$1,080 unfavorable