Problem for Self-Study

Nina Garcia is the newly appointed president of Aerospace Products Division (APD), which manufactures solar arrays for satellites. Garcia is concerned about manufacturing overhead costs at APD. APD allocates variable and fixed overhead costs to solar arrays on the basis of laser-cutting-hours. The budget information for May 2020 is as follows:

A table shows May 2020 budget information for Aerospace Products Division.
The table depicts May 2020 budget information for Aerospace Products Division. The details of the table are as follows:
  1. Budgeted variable overhead rate: 200 dollars per hour
  2. Budgeted fixed overhead rate: 240 dollars per hour
  3. Budgeted laser-cutting time per solar array: 1.5 hours
  4. Budgeted production and sales for May 2020: 5,000 solar arrays
  5. Budgeted fixed overhead costs for May 2020: 1,800,000 dollars

Actual results for May 2020 are as follows:

A table shows May 2020 actual results for Aerospace Products Division.
The table depicts May 2020 actual results for Aerospace Products Division. The details of the table are as follows:
  1. Solar arrays produced and sold: 4,800 units
  2. Laser-cutting-hours used: 8,400 hours
  3. Variable overhead costs: 1,478,400 dollars
  4. Fixed overhead costs: 1,832,200 dollars

Required

  1. Compute the spending variance and the efficiency variance for variable overhead.
  2. Compute the spending variance and the production-volume variance for fixed overhead.
  3. Give two explanations for each of the variances calculated in requirements 1 and 2.

Solution

  1. 1 and 2. See Exhibit 8-8.
  2. 3.
    1. a. Variable overhead spending variance, $201,600 F. Possible reasons for this variance are (1) actual prices of individual items included in variable overhead (such as cutting fluids) are lower than budgeted prices; (2) the percentage increase in the actual quantity usage of individual items in the variable overhead cost pool is less than the percentage increase in laser-cutting-hours compared to the flexible budget.
    2. b. Variable overhead efficiency variance, $240,000 U. Possible reasons for this variance are (1) inadequate maintenance of laser machines, causing them to take more laser-cutting time per solar array; (2) undermotivated, inexperienced, or underskilled workers operating the laser-cutting machines, resulting in more laser-cutting time per solar array.
    3. c. Fixed overhead spending variance, $32,200 U. Possible reasons for this variance are (1) actual prices of individual items in the fixed-cost pool (for example, cost of leasing machines) are unexpectedly higher than the prices budgeted; (2) APD had to lease more machines or hire more supervisors than had been budgeted.
    4. d. Production-volume variance, $72,000 U. Actual production of solar arrays is 4,800 units, compared with 5,000 units budgeted. Possible reasons for this variance are (1) demand factors, such as a decline in an aerospace program that led to a decline in demand for satellites; (2) supply factors such as a production stoppage due to labor problems or machine breakdowns.

Exhibit 8-8

Columnar Presentation of Integrated Variance Analysis: Laser Products for May 2020a

A table shows the Laser Products’ columnar presentation of integrated variance analysis for May 2020.

Source: Republished with permission of Strategic Finance by Paul Sherman. Copyright 2003 by Institute of Management Accountants. Permission conveyed through Copyright Clearance Center, Inc.

The table has two parts panel A and panel B. Table shows four columns, depicting various costs and variances. The details of the panels are as follows:

Panel A: Variable manufacturing overhead

  • 1. Actual costs incurred (the actual input quantity times actual rate): dollar 1,478,400 (which is 8,400 hours times dollar 176 per hour)

  • 2. Actual input quantity times budgeted rate: dollar 1,680,000 (which is 8,400 hours times dollar 200 per hour)

  • 3. Flexible budget (Budgeted input quantity allowed for actual output times budgeted rate): dollar 1,440,000 (1.5 hours per unit times 4,800 units times dollar 200 per hour)

  • 4. Allocated (Budgeted input quantity allowed for actual output times budgeted rate): dollar 1,440,000 (1.5 hours per unit times 4,800 units times dollar 200 per hour)

  • Spending variance: dollar 201,600 is the difference of above (1) and (2) has a favorable effect on operating system; Efficiency variance: dollar 240,000 is the difference of above (2) and (3) has an unfavorable effect on operating system; Never a variance: dollar 0 is the difference of above (3) and (4).

  • Flexible budget variance: dollar 38,400 is the difference of (1) and (3) and has an unfavorable effect on operating system; Never a variance: dollar 0 is the difference of above (3) and (4).

  • Underallocated variable overhead (Total variable overhead variance): dollar 38,400 is the difference between (1) and (4) and has unfavorable effect on operating system.

Panel B: Fixed manufacturing overhead

  • 1. Actual costs incurred: dollar 1,832,200

  • 2. Same budgeted lump sum as in static budget regardless of output level: dollar 1,800,000

  • 3. Flexible budget (Same budgeted lump sum as in static budget regardless of output level): dollar 1,800,000

  • 4. Allocated (it is the budgeted input quantity allowed for actual output times budgeted rate): 1,800,000 (1.5 hours per unit times 4,800 units times dollar 240 per hour)

  • Spending variance: dollar 32,200 is the difference of above (1) and (2) and has an unfavorable effect on operating system; Never a variance: dollar 0 it is the difference of above (2) and (3); Production volume variance: dollar 72,000 is the difference of above (3) and (4) and has an unfavorable effect on operating system.

  • Flexible budget variance: dollar 32,200 is the difference of above (1) and (3) and has an unfavorable effect on operating system; Production volume variance: dollar 72,000 is the difference of above (3) and (4) and has an unfavorable effect on operating system.

  • Underallocated fixed overhead (Total fixed overhead variance): dollar 104,200 is the difference of above (1) and (4) and has unfavorable effect on operating system.