In Class #8.1 Coverage of manufacturing overhead, standard cost system
Solution Exhibit 8-1 shows the computations. Summary details are:
Actual Flexible Budget
Output units 49,200 49,200
Allocation base (machine-hours) 15,960 a
Allocation base per output unit 0.324 0.30
Variable MOH $186,120 $212,544 c
Variable MOH per hour $11.662 $14.40
Fixed MOH $481,200 $468,000
Fixed MOH per hour e –
49,200 × 0.30 = 14,760 $186,120 ÷ 15,960 = $11.662
b15,960 ÷ 49,200 = 0.324 e$481,200 ÷ 15,960 = $30.15
c14,760 × $14.40 = $212,544
An overview of the four-variance analysis is:
Four-Variance Rate Efficiency
Analysis Variance Variance Variance
Manufacturing $43,704 F $17,280 U Never a variance
Manufacturing $13,200 U Never a variance $25,200 U
The control of variable manufacturing overhead requires the identification of the cost drivers for such
items as energy, supplies, and repairs. Control often entails monitoring nonfinancial measures that affect
each cost item, one by one. Examples are kilowatt-hours used, quantities of lubricants used, and repair
parts and hours used. The most convincing way to discover why overhead performance did not agree with
a budget is to investigate possible causes, line item by line item.
The variable overhead rate variance is favourable. This means the actual rate applied to the manufacturing
costs is lower than the budgeted rate. Since variable overhead consists of several different costs, this
could be for a variety of reasons, such as the utility rates being lower than estimated or the indirect
materials costs per unit of denominator activity being less than estimated.
The variable overhead efficiency variance is unfavourable, which implies that the estimated denominator
activity was too low. Since the denominator activity is machine hours, this could be the result of
inefficient use of machines, poorly scheduled production runs, or machines that need maintenance and
thus are not working at the expected level of efficiency. Solution Exhibit 8-1
Budgeted Input Allocated:
Allowed for Budgeted Input
Actual Output Allowed for
× Budgeted Rate Actual Output
(3) × Budgeted Rate
Actual Input (4)
Actual Costs × Budgeted Rate
Variable (15,960 × $14.40) (14,760 × $14.40) (14,760 × $14.40)
Manufacturing $229,824 $212,544 $212,544
$43,704 F $17,280 U
Rate variance Efficiency variance Never a variance
Flexible-budget variance Never a variance
Underallocated variable overhead
(Total variable overhead variance)
Same Budgeted Same Budgeted Allowed for
Actual Costs Actual Output
Incurred × Budgeted Rate
Lump Sum (4)
(1) Lump Sum (as in Static Budget)
(as in Static Budget) Regardless of
Regardless of Output Level
Fixed (14,760 × $30)
Manufacturing $481,200 $468,000 $468,000 $442,800
$13,200 U $25,200 U
Rate variance Never a variance Production-volume variance
Flexible-budget variance Production-volume variance
Underallocated fixed overhead
(Total fixed overhead variance)
Fixed manufacturing overhead $468,000
= = $30 per machine-hour.
budgeted rate 15,600 machine - hours In Class #8.2 Overhead variance, missing information
Compute efficiency and flexible-budget variances for Dvent’s variable overhead in August 2013.
Will variable overhead be overallocated or underallocated? By how much?
In the columnar presentation of variable overhead variance analysis, all numbers shown in bold are
calculated from the given information, in the order (a) - (e).
VARIABLE MANUFACTURING OVERHEAD
Budgeted Input Qty.
Actual Costs Actual Input Qty. Allowed for Budgeted
Incurred Budgeted Rate Actual Output Rate
(b) (a) (c)
15,000 $6.00 14,850 $6.00
mach. hrs. per mach. hr. mach. hrs. per mach. hr.
$89,625 $90,000 $89,100
$375 F $900 U (d)
Rate variance Efficiency variance
$525 U (e)
a. 15,000 machine-hours $6 per machine-hour = $90,000
b. Actual VMOH = $90,000 – $375F (VOH rate variance) = $89,625
c. 14,850 machine-hours $6 per machine-hour = $89,100
d. VOH efficiency variance = $90,000 – $89,100 = $900U
e. VOH flexible budget variance = $900U – $375F = $525U
Allocated variable overhead will be the same as the flexible budget variable overhead of $89,100. The
actual variable overhead cost is $89,625. Therefore, variable overhead is underallocated by $525. Required 2
Compute production-volume and flexible-budget variances for Dvent’s fixed overhead in August
2013. Will fixed overhead be overallocated or underallocated? By how much?
In the columnar presentation of fixed overhead variance analysis, all numbers shown in bold are
calculated from the given information, in the order (a) – (e).
FIXED MANUFACTURING OVERHEAD
Flexible Budget: Allocated:
Static Budget Lump Sum Budgeted Input Qty.
Actual Costs Regardless of Output Allowed for Budgeted
Incurred Level Actual Output Rate
14,850 $1.60* (c)
mach. hrs. mach. hr.