CHAPTER 11

Flexible Budgeting and the Management of Overhead and Support

Activity Costs

SOLUTIONS TO EXERCISES
EXERCISE 11-22 (20 MINUTES)

1. Variable-overhead spending = actual variable overhead – (AH  SVR)

variance
= $320,000 – (50,000  $6.10)
= $15,000 U

2. Variable-overhead efficiency = SVR(AH – SH)

variance
= $6.10(50,000 – 40,000*)
= $61,000 U

* SH = 40,000 hrs. = 20,000 units  2 hrs. per unit

3. Fixed-overhead budget variance = actual fixed overhead – budgeted fixed

overhead
= $99,000 – $100,000
= $1,000 F

4. Fixed-overhead volume = budgeted fixed overhead – applied fixed

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Managerial Accounting, 9/e Global Edition 11-1
 variance overhead
= $100,000 – $80,000 †
= $20,000 (positive sign**)

 p r e d t e r m in e d f i x e d   s t a n d a r d a l o w e d 
†
Applied fixed overhead =

  
 ov er he ad r a te   h ou r s 
 $100,000 
  (20,000  2)
=  25,000 2 
= $80,000

**Consistent with the discussion in the text, we choose not to interpret the volume
variance as either favorable or unfavorable. Some accountants would designate a
positive volume variance as "unfavorable" and a negative volume variance as
"favorable."

EXERCISE 11-23 (40 MINUTES)

1. Variable overhead variances:

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11-2 Solutions Manual
 VARIABLE-OVERHEAD SPENDING AND EFFICIENCY VARIANCES
(1) (2) (3) (4) †
VARIABLE OVERHEAD
ACTUAL VARIABLE FLEXIBLE BUDGET: APPLIED TO
OVERHEAD VARIABLE OVERHEAD WORK-IN-PROCESS
Standard Standard
Actual Actual Actual Standard Allowed Standard Allowed Standard
Hours x Rate Hours x Rate x Rate x Rate
Hours Hours
(AH) (AVR) (AH) (SVR) (SH) (SVR) (SH) (SVR)
50,000 x $6.40 50,000 x $6.10 40,000 x $6.10 40,000 x $6.10
hours per hours per hours per hours per
hour* hour hour hour
$320,000 $305,000 $244,000 $244,000

$15,000 Unfavorable $61,000 Unfavorable

Variable-overhead Variable-overhead No difference
spending variance efficiency variance

actual variable overhead cost $320,000

*Actual variable-overhead rate (AVR)  actual hours

50,000
 $6.40per hour

†
Column (4) is not used to compute the variances. It is included to point out that the flexible-budget amount
for  variable overhead, $244,000, is the amount that will be applied to Work-in-Process Inventory for product
 
costing purposes.

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Managerial Accounting, 9/e Global Edition 11-3
2. Fixed-overhead variances:

FIXED-OVERHEAD BUDGET AND VOLUME VARIANCES

(1) (2) (3)

ACTUAL BUDGETED FIXED OVERHEAD
FIXED FIXED APPLIED TO
OVERHEAD OVERHEAD WORK IN PROCESS

Standard
Standard Fixed-
Allowed  Overhead
Hours Rate
40,000 $2.00 per

hours hour*

$99,000 $100,000    $80,000

$1,000 Favorable $20,000 (Positive) †

Fixed-overhead Fixed-overhead
budget variance volume variance

$100,000
*Fixed overhead rate = $2.00 per hour = (25,000)(2hrs per unit)

†
Consistent with the discussion in the text, we choose not to interpret the volume
variance as either favorable or unfavorable. Some accountants would designate a
positive volume variance as "unfavorable" and a negative volume variance as
"favorable."

EXERCISE 11-26 (20 MINUTES)

1. a. Variable-overhead spending variance = actual variable overhead – (AH 

SVR)
= $405,000 – (40,500  $9.00)
= $40,500 U

b. Variable-overhead efficiency variance = SVR(AH – SH)

= $9.00(40,500 – 36,000*)
= $40,500 U

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11-4 Solutions Manual
 * SH = 36,000 hrs. = 9,000 cases  4 hours per case

c. Fixed-overhead budget = actual fixed OH – budgeted fixed OH

variance
= $126,000 – $120,000
= $6,000 U

d. Fixed-overhead volume = budgeted fixed OH – applied fixed OH

variance
= $120,000 – $108,000 †
= $12,000 (positive)**

 p r e d t e r m in e d f i x e d   s t a n d a r d a l o w e d 
†
Applied fixed overhead =

  
o verheadrate   hours 
 $120,000 
   (9,000 4)
=  10,000 4 
= $108,000

**Consistent with the discussion in the text, we choose not to interpret the volume
variance as either favorable or unfavorable. Some accountants would designate a
positive volume variance as "unfavorable" and a negative volume variance as
"favorable."

2. In the electronic version of the solutions manual, press the CTRL key and click on
the following link: Build a Spreadsheet 11-26.xls

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Managerial Accounting, 9/e Global Edition 11-5
EXERCISE 11-28 (15 MINUTES)

1. Formula flexible budget:

Total budgeted monthly

electricity cost = ($3 *  number of patient days) + $1,000

*$3 per patient day = 30 kwh per patient day  $.10 per kwh

2. Columnar flexible budget:

Patient Days
30,000   40,000   50,000  
Variable electricity cost..........................$ 90,000 $ 120,000 $ 150,000
Fixed electricity cost..............................    1,000    1,000    1,000
Total electricity cost...............................$ 91,000 $ 121,000 $ 151,000

EXERCISE 11-32 (15 MINUTES)

Variable-overhead spending = actual variable overhead – (AH  SVR)

variance
= $2,340,000 – (275,000  $8.00)
= $140,000 U

Variable-overhead efficiency = SVR (AH – SH)

variance
= $8.00 (275,000 – 280,000*)
= $40,000 F

* SH = 56,000 units  5 hours per unit

Fixed-overhead budget = actual fixed overhead – budgeted fixed overhead

variance
= $3,750,000 – $3,300,000**
= $450,000 U

**Budgeted fixed overhead = 300,000 hours  $11 per hour

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11-6 Solutions Manual
Fixed-overhead volume = budgeted fixed overhead – applied fixed overhead
variance
= $3,300,000 – $3,080,000***
= $220,000 (positive) †

***Applied fixed overhead = $11 per hour  5 hours per unit  56,000 units
†
Consistent with the discussion in the text, we choose not to interpret the volume
variance as either favorable or unfavorable. Some accountants would designate a
positive volume variance as “unfavorable” and a negative volume variance as
“favorable.”

SOLUTIONS TO PROBLEMS
PROBLEM 11-41 (25 MINUTES)

1. Let X = budgeted fixed overhead

X ÷ 20,000 machine hours = $4.00 per hour
X = $80,000

2. Variable-overhead spending variance:

Actual hours x actual rate
23,100 hours x $55,440
$2.40*…………………...
Actual hours x standard rate
23,100 hours x 57,750
$2.50…………………….
Variable-overhead spending $ 2,310
variance…... Favorable

* $55,440 ÷ 23,100 hours

3. Fixed-overhead volume variance:

Budgeted fixed $80,000
overhead………………………………..
Standard hours allowed x standard rate
5,350 hours* x 21,400
$4.00…………………………………..
Fixed-overhead volume $58,600
variance……………………….

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Managerial Accounting, 9/e Global Edition 11-7
 * 10,700 units x .5 hours per unit

The fixed-overhead volume variance is positive;

some managerial accountants would interpret it
as an unfavorable variance.

4. Maxwell spent more than anticipated. Actual fixed overhead amounted to

$100,460 ($155,900 - $55,440) when the budget was set at $80,000. The fixed-
overhead budget variance is $20,460 unfavorable ($100,460 - $80,000).

5. Variable overhead is underapplied by $42,065:

Actual overhead: Actual hours x actual rate
23,100 hours x $55,440
$2.40…………………………………………..
Applied overhead: Standard hours allowed x standard
rate
5,350 hours x 13,375
$2.50…………………………………………….
Underapplied variable $42,065
overhead………………………………...

6. Without having complete information, it is difficult to be 100% certain. However,

by an analysis of data related to the volume variance, a lengthy strike appears to
be a strong possibility. Maxwell had planned to work 20,000 machine hours
during the period, giving the company the capability of producing 40,000 finished
units (20,000 hours x 2 units per hour). Actual production amounted to only
10,700 units, leaving the firm far shy of its manufacturing goal. A strike is a
plausible explanation.

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11-8 Solutions Manual