Solution manual accounting 25th edition warren chapter 23

CHAPTER 23
PERFORMANCE EVALUATION USING VARIANCES
FROM STANDARD COSTS
DISCUSSION QUESTIONS
1.

Standards are performance goals. Manufacturing companies normally use standard cost for
each of the three following product costs:
a. Direct materials
b. Direct labor
c. Factory overhead
Standard cost systems enable management to determine the following:
a. How much a product should cost (standard cost)
b. How much it does cost (actual cost)

2.

Reporting by the “principle of exceptions” is the reporting of only variances (or
“exceptions”) between standard and actual costs to the individual responsible for cost
control. This reporting allows management to focus on correcting cost variances.

3.

The two variances in direct materials cost are:
a. Direct materials price
b. Direct materials quantity

4.

The offsetting variances might have been caused by the purchase of low-priced, inferior
materials. The low price of the materials would generate a favorable materials price variance,

while the inferior quality of the materials would cause abnormal spoilage and waste, thus
generating an unfavorable materials quantity variance.

5.

a.

The two variances in direct labor costs are:
(1) Direct labor rate
(2) Direct labor time

b.

The direct labor cost variance is usually under the control of the production supervisor.

6.

No. Even though the assembly workers are covered by union contracts, direct labor cost variances
still might result. For example, direct labor rate variances could be caused by scheduling overtime
to meet production demands or by assigning higher-paid workers to jobs normally performed by
lower-paid workers. Likewise, direct labor time variances could result during the training of new
workers or from a shortage of skilled employees.

7.

Standards can be very appropriate in repetitive service operations. Fast-food restaurants can
use standards for evaluating the productivity of the counter and food preparation employees.
In addition, standards could be used to plan staffing patterns around various times of the day
(e.g., increasing staff during the lunch hour).

23-1
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CHAPTER 23

Performance Evaluation Using Variances from Standard Costs

DISCUSSION QUESTIONS (Continued)
8.

9.
10.

a.

The variable factory overhead controllable variance results from incurring a total amount
of variable factory overhead cost greater or less than the amount budgeted for the level of
operations achieved. The fixed factory overhead volume variance results from operating at
a level above or below 100% of normal capacity.

b.

The factory overhead cost variance report presents the standard factory overhead cost
variance data (that is, the volume and the controllable variance).

Net unfavorable direct materials price variance.
Nonfinancial performance measures provide managers additional measures beyond the dollar
impact of decisions. Nonfinancial considerations may help the organization include external
customer perspectives about quality and service in performance measurements. These bring

added perspectives in evaluating performance.


PRACTICE EXERCISES
PE 23–1A
a.

Direct materials price
variance (favorable)

b.

Direct materials quantity

–$10,800
$13,600

[($33.25 – $34.00) × 14,400 gal.]
[(14,400 gal. – 14,000 gal.) × $34.00]

variance (unfavorable)
c.

Direct materials cost
variance (unfavorable)

$2,800

(–$10,800 + $13,600) or
[($33.25 × 14,400 gal.) – ($34.00 × 14,000 gal.)]

= $478,800 – $476,000

$2,250

[($3.00 – $2.50) × 4,500 lbs.]

PE 23–1B
a.

Direct materials price
variance (unfavorable)

b.

Direct materials quantity

–$1,250

[(4,500 lbs. – 5,000 lbs.) × $2.50]

variance (favorable)
c.

Direct materials cost
variance (unfavorable)

$1,000

($2,250 – $1,250) or
[($3.00 × 4,500 lbs.) – ($2.50 × 5,000 lbs.)]

= $13,500 – $12,500

PE 23–2A
a.

Direct labor rate
variance (unfavorable)

$8,850

[($30.50 – $30.00) × 17,700 hrs.]

b.

Direct labor time
variance (unfavorable)

$6,000

[(17,700 hrs. – 17,500 hrs.) × $30.00]

c.

Direct labor cost
variance (unfavorable)

$14,850

($8,850 + $6,000) or
[($30.50 × 17,700 hrs.) – ($30.00 × 17,500 hrs.)]

= $539,850 – $525,000

PE 23–2B
a.

Direct labor rate
variance (favorable)

–$1,400

[($16.50 – $17.00) × 2,800 hrs.]

b.

Direct labor time
variance (favorable)

–$3,400

[(2,800 hrs. – 3,000 hrs.) × $17.00]

c.

Direct labor cost
variance (favorable)

–$4,800

(–$1,400 – $3,400) or
[($16.50 × 2,800 hrs.) – ($17.00 × 3,000 hrs.)]

= $46,200 – $51,000


PE 23–3A
Variable Factory Overhead
Controllable Variance

= $63,400 – [$3.50 × (3,500 units × 5 hrs.)]

Variable Factory Overhead = $63,400 – $61,250
Controllable Variance
Variable Factory Overhead = $2,150 Unfavorable
Controllable Variance

PE 23–3B
Variable Factory Overhead
= $4,000 – [$1.40 × (1,000 units × 3.0 hrs.)]
Controllable Variance
Variable Factory Overhead
Controllable Variance
Variable Factory Overhead
Controllable Variance

PE 23–4A
–$900 favorable

PE 23–4B
$300 unfavorable

= $4,000 – $4,200

= –$200 Favorable

$1.80 × [17,000 hrs. – (3,500 units × 5 hrs.)]

$0.60 × [3,500 hrs. – (1,000 units × 3 hrs.)]


PE 23–5A
Work in Process (14,000* gal. × $34.00)
Direct Materials Quantity Variance**
Materials (14,400 gal. × $34.00)

476,000
13,600
489,600

* 3,500 units × 4 standard gal. per unit
** [(14,400 gal. – 14,000 gal.) × $34.00]

PE 23–5B
Work in Process (5,000* lbs. × $2.50)
Direct Materials Quantity Variance**
Materials (4,500 lbs. × $2.50)

12,500
1,250
11,250

* 1,000 units × 5 standard lbs. per unit

** [(4,500 lbs. – 5,000 lbs.) × $2.50]

PE 23–6A
GIOVANNI COMPANY
Income Statement Through Gross Profit
For the Year Ended December 31, 2014
Sales (3,500 units × $400)
Cost of goods sold—at standard*

$1,400,000
1,093,750

Gross profit—at standard

$ 306,250
Favorable

Less variances from standard cost:
Direct materials price (PE23–1A)
Direct materials quantity (PE23–1A)
Direct labor rate (PE23–2A)
Direct labor time (PE23–2A)
Factory overhead controllable (PE23–3A)
Factory overhead volume (PE23–4A)

Unfavorable

$10,800
$13,600
8,850

6,000
2,150
900

Gross profit
* Direct materials (3,500 units × 4 gal. × $34.00)……………………………………………………
Direct labor (3,500 units × 5 hrs. × $30.00)………………………………………………………
Factory overhead [3,500 units × 5 hrs. × ($3.50 + $1.80)]………………………………………
Cost of goods sold at standard………………………………………………………………………

(18,900)
$ 287,350
$ 476,000
525,000
92,750
$1,093,750


PE 23–6B
DVORAK COMPANY
Income Statement Through Gross Profit
For the Year Ended December 31, 2014
Sales (1,000 units × $90)
Cost of goods sold—at standard*

$90,000
69,500

Gross profit—at standard

$20,500
Favorable

Less variances from standard cost:
Direct materials price (PE23–1B)
Direct materials quantity (PE23–1B)
Direct labor rate (PE23–2B)
Direct labor time (PE23–2B)
Factory overhead controllable (PE23–3B)
Factory overhead volume (PE23–4B)

Unfavorable

$2,250
$1,250
1,400
3,400
200
300

Gross profit
* Direct materials (1,000 units × 5 lbs. × $2.50)……………………………………………………
Direct labor (1,000 units × 3 hrs. × $17.00)………………………………………………………
Factory overhead [1,000 units × 3 hrs. × ($1.40 + $0.60)]………………………………………
Cost of goods sold at standard……………………………………………………………………

3,700
$24,200
$12,500
51,000

6,000
$69,500

PE 23–7A
Number of employee errors…………………………………………………………… Input
Number of times paper supply runs out…………………………………………… Input
Copy machine downtime (broken)…………………………………………………… Input
Number of pages copied per hour…………………………………………………… Output
Number of customer complaints………………………………………………………Output
Percent jobs done on time…………………………..………………………………… Output

PE 23–7B
Number of times ingredients are missing……………………………………………Input
Number of customer complaints………………………………………………………Output
Number of hours kitchen equipment is down for repairs…………………………Input
Number of server order mistakes………………………………………………………Input
Percent of meals prepared on time……………………………………………………Output
Number of unexpected cook absences………………………………………………Input


EXERCISES
Ex. 23–1
Ingredient

Cocoa
Sugar
Milk

Quantity

650 lbs.
200 lbs.
150 gal.

×

Price

×

$0.90 per lb.
$1.50 per lb.
$2.10 per gal.

×

×

Total cost

Total

$ 585
300
315
$1,200

Standard direct materials cost per bar of chocolate:
= $0.25 per bar
$1,200 per batch

4,800 bars

Ex. 23–2
a.

b.

Direct labor………………………………………… $18.00 × 2.0 hrs.
Direct materials…………………………………… $15.00 × 20 bd. ft.
Variable factory overhead………………………
$2.75 × 2.0 hrs.
Fixed factory overhead…………………………… $1.25 × 2.0 hrs.
Total cost per unit………………………………

$ 36.00
300.00
5.50
2.50
$344.00

A standard cost system provides Wood Designs’ management a cost control tool
using the principle of management by exception. Using this principle, costs that
deviate significantly from standards can be investigated and corrected. The
standard cost system also can be used to motivate employees to work efficiently
with their time, use of materials, and other factory overhead resources.


Ex. 23–3
TIME IN A BOTTLE COMPANY
Manufacturing Cost Budget

For the Month Ended May 31, 2014

a.

Standard Cost at
Planned Volume
(600,000 Bottles)

Manufacturing costs:
Direct labor
Direct materials
Factory overhead

$10,800
49,500
3,000
$63,300

Total
$1.80 × (600,000 ÷ 100) = $10,800
$8.25 × (600,000 ÷ 100) = $49,500
$0.50 × (600,000 ÷ 100) = $3,000
Note: The cost standards are expressed as “per 100 bottles.”
TIME IN A BOTTLE COMPANY

b.

Manufacturing Costs—Budget Performance Report
For the Month Ended May 31, 2014
Standard Cost at

Cost Variance—

Manufacturing costs:
Direct labor
Direct materials
Factory overhead
Total manufacturing cost

Actual

Actual Volume

(Favorable)

Costs

(610,000 Bottles)

Unfavorable

$ 9,890
48,450
3,460
$61,800

$10,980
50,325
3,050
$64,355

$(1,090)
(1,875)
410
$(2,555)

$1.80 × (610,000 ÷ 100) = $10,980
$8.25 × (610,000 ÷ 100) = $50,325
$0.50 × (610,000 ÷ 100) = $3,050
c.

Time in a Bottle Company’s actual costs were $2,555 less than budgeted. Favorable
direct labor and direct material cost variances more than offset a small
unfavorable factory overhead cost variance.

Note to Instructors: The budget prepared in part (a) at the beginning of the month
should not be used in the budget performance report because actual volumes
were greater than planned (610,000 vs. 600,000).


Ex. 23–4
a.

Price variance:
Direct Materials = (Actual Price – Standard Price) × Actual Quantity
Price Variance
Direct Materials = ($2.60 per lb. – $2.50 per lb.) × 53,500 lbs.

Price Variance

Direct Materials = $5,350 Unfavorable

Price Variance

Quantity variance:
Direct Materials = (Actual Quantity – Standard Quantity) × Standard Price
Quantity Variance
Direct Materials = (53,500 lbs. – 55,120 lbs.) × $2.50 per lb.
Quantity Variance

Direct Materials = –$4,050 Favorable
Quantity Variance

Total direct materials cost variance:
Direct Materials

Cost Variance

=

Direct Materials Price Variance +

Direct Materials Quantity Variance

Direct Materials = $5,350 – $4,050

Cost Variance
Direct Materials = $1,300 Unfavorable

Cost Variance

b.

The direct materials price variance should normally be reported to the
Purchasing Department, which may or may not be able to control this variance.
If materials of the same quality were purchased from another supplier at a price
higher than the standard price, the variance was controllable. However, if the
variance resulted from a market-wide price increase, the variance was not
subject to control.
The direct materials quantity variance should be reported to the proper level of
operating management. For example, if lower amounts of direct materials had
been used because of production efficiencies, the variance would be reported
to the production supervisor. However, if the favorable use of raw materials had
been caused by the purchase of higher-quality raw materials, the variance
should be reported to the Purchasing Department.
The total materials cost variance should be reported to senior plant management,
such as the plant manager or materials manager.


Ex. 23–5
Price variance:
Direct Materials = (Actual Price – Standard Price) × Actual Quantity

Price Variance

Direct Materials = ($6.50 per unit* – $6.90 per unit) × 450
Price Variance

Direct Materials = –$180 Favorable

Price Variance

* $2,925 ÷ 450 units = $6.50 per unit
Quantity variance:
Direct Materials
Quantity Variance

= (Actual Quantity – Standard Quantity) × Standard Price

Direct Materials
Quantity Variance

= (450 units – 430 units) × $6.90 per unit

Direct Materials
Quantity Variance

= $138 Unfavorable

Total direct materials cost variance:
Direct Materials

Cost Variance

=

Direct Materials =

Direct Materials Price Variance +

Direct Materials Quantity Variance
–$180 + $138

Cost Variance
Direct Materials = –$42 Favorable

Cost Variance


Ex. 23–6
Product finished…………………………………………………………
Standard finished product for direct materials used
(3,000 lbs. ÷ 2 lbs.)……………………………………………………
Deficiency of finished product for materials used……………

1,400 units
1,500
(100) units

Standard cost for direct materials:
Quantity variance divided by deficiency of product
for materials used ($1,000 ÷ 100 units)………………………
Alternate solution:
Price variance, unfavorable………………………………………
Materials used………………………………………………………
Price variance per lb., unfavorable………………………………
Unit price of direct materials……………………………………
Less price variance (unfavorable) per lb. (from above)………
Standard price per lb.………………………………………………
× Pounds per unit of product……………………………………
Standard direct materials cost per unit of product…………

$10.00 per unit
$1,500
÷

3,000 lbs.
$ 0.50
$ 5.50
(0.50)
$ 5.00
2
$10.00

Proof:
Direct Materials Price Variance

Direct Materials Quantity Variance

= (Actual Price – Standard Price) × Actual Quantity
= ($5.50 – $5.00) × 3,000
= $1,500 Unfavorable
= (Actual Quantity – Standard Quantity)
× Standard Price
= (3,000 lbs. – 2,800 lbs.) × $5.00
= $1,000 Unfavorable


Ex. 23–7

Standard

a.
Standard
Quantity

×

Whole tomatoes……… 3,360 lbs.
Vinegar………………… 220 gal.
Corn syrup……………
20 gal.
Salt……………………
80 lbs.

Standard
Price
$ 0.50
3.00
12.00
3.00

per
per
per
per

=

lb.
gal.
gal.

lb.

$1,680
660
240
240

÷ Pounds per batch……………………………………………

b.

Actual
Quantity for
Batch K-54
3,556
230
18
75

lbs.
gal.
gal.
lbs.

–

Standard
Quantity per
Batch
=

3,360
220
20
80

lbs.
gal.
gal.
lbs.

Quantity
Difference
196
10
(2)
(5)

lbs.
gal.
gal.
lbs.

Cost per
Batch

×

$2,820
1,880 lbs.
$ 1.50 per lb.

Standard
Price
$ 0.50
3.00
12.00
3.00

per lb.
per gal.
per gal.
per lb.

Materials
Quantity
= Variance
$98 U
30 U
–24 F
–15 F
$89 U


Ex. 23–8
a.

Rate variance:
(Actual Rate per Hour – Standard Rate per Hour)
Direct Labor = × Actual Hours

Rate Variance

Direct Labor = ($20.00 – $20.40) × 4,050 hours

Rate Variance
Direct Labor = –$1,620 Favorable
Rate Variance

Time variance:
(Actual Direct Labor Hours – Standard Direct Labor Hours)
Direct Labor =
× Standard Rate per Hour
Time Variance
Direct Labor = (4,050 hrs. – 4,000 hrs.) × $20.40 per hour
Time Variance

Direct Labor = $1,020 Unfavorable
Time Variance

Total direct labor cost variance:
Direct Labor =

Direct Labor Rate Variance + Direct Labor Time Variance

Cost Variance
Direct Labor = –$1,620 Favorable + $1,020 Unfavorable

Cost Variance
Direct Labor = –$600 Favorable
Cost Variance

b.

The employees may have been less experienced workers who were paid less than
more experienced workers or poorly trained, thereby resulting in a lower labor rate
than planned. The lower level of experience or training may have resulted in less
efficient performance. Thus, the actual time required was more than standard.
Fortunately, the lost efficiency is more than offset by the lower labor rate.


Ex. 23–9
a.

Rate variance:
(Actual Rate per Hour – Standard Rate per Hour)
Direct Labor = × Actual Hours
Rate Variance

Direct Labor = ($15.60 – $16.00) × 850 hrs.
Rate Variance
Direct Labor = –$340 Favorable

Rate Variance

Time variance:
(Actual Direct Labor Hours – Standard Direct Labor Hours)
Direct Labor = × Standard Rate per Hour

Time Variance

Direct Labor

=
(850 hrs. – 800 hrs.*) × $16.00 per hour

Time Variance

Direct Labor = $800 Unfavorable

Time Variance

* 2.00 hrs. × 400 units
Total direct labor cost variance:
Direct Labor
Cost Variance

=

Direct Labor Rate Variance + Direct Labor Time Variance

Direct Labor = –$340 Favorable + $800 Unfavorable
Cost Variance
Direct Labor =

Cost Variance

$460 Unfavorable


b.

Debit to Work in Process: $12,800
Standard hours at actual production…………………………………………
× Standard rate……………………………………………………………………
Standard direct labor cost………………………………………………………

800
$ 16.00
$12,800


Ex. 23–10
a.

(1) Cutting Department
Rate variance:
Direct Labor
Rate Variance

Direct Labor

= (Actual Rate per Hour – Standard Rate per Hour)
× Actual Hours

=

Rate Variance

($10.90 – $11.00) × 6,380 hours

Direct Labor = –$638 Favorable
Rate Variance

Time variance:
Direct Labor =
Time Variance

(Actual Direct Labor Hours – Standard Direct Labor Hours)
× Standard Rate per Hour

Direct Labor = (6,380 hrs. – 6,250 hrs.*) × $11.00 per hour
Time Variance
Direct Labor =

$1,430 Unfavorable

Time Variance

* 0.25 hr. × 25,000 units
Total direct labor cost variance:
Direct Labor = Direct Labor Rate Variance + Direct Labor Time Variance
Cost Variance

Direct Labor = –$638 Favorable + $1,430 Unfavorable
Cost Variance

Direct Labor = $792 Unfavorable
Cost Variance

Ex. 23–10 (Concluded)
(2) Sewing Department
Rate variance:
Direct Labor
= (Actual Rate per Hour – Standard Rate per Hour)
Rate Variance
× Actual Hours
Direct Labor

=

Rate Variance

($11.12 – $11.00) × 9,875 hours

Direct Labor = $1,185 Unfavorable
Rate Variance

Time variance:
Direct Labor =

Time Variance

(Actual Direct Labor Hours – Standard Direct Labor Hours)

× Standard Rate per Hour

Direct Labor = (9,875 hrs. – 10,000 hrs.*) × $11.00 per hour
Time Variance
Direct Labor =

–$1,375 Favorable

Time Variance

* 0.40 hr. × 25,000 units
Total direct labor cost variance:
Direct Labor
Cost Variance

=

Direct Labor Rate Variance + Direct Labor Time Variance

Direct Labor = $1,185 Unfavorable – $1,375 Favorable
Cost Variance

Direct Labor = –$190 Favorable
Cost Variance

b.

The two departments have opposite results. The Cutting Department has a
favorable rate and an unfavorable time variance, resulting in a total unfavorable
cost variance of $792. In contrast, the Sewing Department has an unfavorable rate
variance, but has a favorable time variance, resulting in a total favorable cost
variance of $190. The causes of this disparity are worthy of investigation. There
are many possible causes including tight or loose standards, inferior or superior
operating methods, and inappropriate or appropriate use of overtime. Combining
both departments, the overall operation shows an unfavorable cost variance of $602

($792 – $190), as a result of the weak performance in the Cutting Department.


Ex. 23–11
a. Actual weekly expenditure: 4 people × $15.00 per hour × 40 hrs. per week = $2,400
b. Standard time used for the volume of admissions:
Unscheduled

Number of admissions………
× Standard time……………
Total……………………………

Scheduled

140
30 min.

350
15 min.

4,200 min.

5,250 min.

Total

9,450 min. or
(157.5 hrs. × 60 min.)

c. Actual productive minutes available

(4 employees × 40 hrs. × 60 min.).............................

9,600 minutes

Less standard minutes used at actual volume............

9,450 minutes

Time difference from standard......................................
1
× Standard rate per minute ...........................................
Direct labor time variance—unfavorable.....................

150 minutes
$ 0.25
$37.50

or
[(4 × 40 hours) – 157.5 hours] × $15 per hour = $37.50
or
2
$2,400 [from (a)] – $2,362.50 = $37.50
1

Standard direct labor rate:
$15 ÷ 60 min. = $0.25 per min.

2

Standard labor cost at actual volume:

Productive time (9,450 ÷ 60) × $15 = $2,362.50

The Admissions Department was less efficient than standard by 150 minutes,
or 2.5 hours. This is equal to $37.50 at the standard rate of $15 per hour.


Ex. 23–12
a.

Standard Sorts per Minute ×

Standard Minutes per Hour

120 sorts per min. × 60 min. per hr.

=

=

Standard Sorts per Hour
(per employee)

7,200 standard sorts per hr.

Pieces of Mail ÷ = Number of Hours Planned
Standard Sorts per Hour

41,472,000 letters ÷ 7,200 sorts per hr. = 5,760 hrs. planned
Number of Hours Planned ÷
Hours per Temporary Employee per Month

5,760 hrs. ÷ 160 hrs.

b.

= Number of Hires

=

36 temporary hires for December

Actual pieces sorted = 41,220,000
Actual Pieces of Mail Sorted ÷ = Standard Number of Hours
for Actual Production
Standard Sorts per Hour

41,220,000 ÷ 7,200 standard sorts per hr.

=

5,725 standard hrs. for actual
production

Actual hours staffed………………………………………………………………
Standard hours for actual production………………………………………
Excess of actual over standard hours………………………………………
× Standard hourly rate……………………………………………………………
Direct labor time variance—unfavorable………………………………………

5,760

5,725
$

35
15

$ 525


Ex. 23–13
Step 1: Determine the standard direct materials and direct labor per unit.
Standard direct materials quantity per unit:
Direct materials lbs. budgeted for June:
= 28,800 lbs.
$36,000
$1.25 per lb.

Standard pounds per unit:
= 1.5 standard lbs. per unit
28,800 lbs.
19,200 units

Standard direct labor time per unit:
Direct labor hrs. budgeted for June:
= 1,920 direct labor hrs.
$26,880
$14.00 per hr.

Standard direct labor hrs. per unit:
= 0.10 standard direct labor hr. per unit

1,920 hrs.
19,200 units

Step 2: Using the standard quantity and time rates in step 1, determine the
standard costs for the actual June production.
Standard direct materials at actual volume:
18,000 units × 1.5 lbs. per unit × $1.25……………………………………………
Standard direct labor at actual volume:
18,000 units × 0.10 direct labor hr. per unit × $14.00…………………………
Total…………………………………………………………………………………………

$33,750
25,200
$58,950

Step 3: Determine the direct materials quantity and direct labor time variances,
assuming no direct materials price or direct labor rate variances.
Actual direct materials used in production…………………………………………
Standard direct materials (step 2)……………………………………………………
Direct materials quantity variance—unfavorable*…………………………………

$34,500
33,750
$

750

* (27,600 lbs. – 27,000 lbs.) × $1.25 = 750 U
$34,500 ÷ $1.25 = 27,600 lbs.
$33,750 ÷ $1.25 = 27,000 lbs.

Actual direct labor………………………………………………………………………
Standard direct labor (step 2)…………………………………………………………
Direct labor time variance—favorable**……………………………………………

$24,500
25,200
$

(700)


** 18,000 units × 0.10 hr. = 1,800 standard hrs.
$24,500 ÷ $14.00 = 1,750 actual hrs.
(1,750 hrs. – 1,800 hrs.) × $14.00 = –$700 F


Ex. 23–14
LENO MANUFACTURING COMPANY
Factory Overhead Cost Budget—Press Department
For the Month Ended November 30, 2014
Direct labor hours
Variable overhead cost:
Indirect factory labor
Power and light
Indirect materials
Total variable factory overhead
Fixed factory overhead cost:
Supervisory salaries
Depreciation of plant and equipment

Insurance and property taxes
Total fixed factory overhead
Total factory overhead
1
2
3

18,000 × ($180,000 ÷ 20,000)
18,000 × ($12,000 ÷ 20,000)
18,000 × ($64,000 ÷ 20,000)

18,000

20,000

22,000

$162,000 1
2
10,800
57,600 3
$230,400

$180,000
12,000
64,000
$256,000

$198,000
13,200

70,400
$281,600

$ 80,000
50,000
32,000
$162,000
$392,400

$ 80,000
50,000
32,000
$162,000
$418,000

$ 80,000
50,000
32,000
$162,000
$443,600


Ex. 23–15
WIKI WIKI COMPANY
Monthly Factory Overhead Cost Budget—Fabrication Department

a.

Direct labor hours
Variable factory overhead cost

Fixed factory overhead cost
Total factory overhead
b.

9,000

10,000

11,000

$ 40,500
60,000
$100,500

$ 45,000
60,000
$105,000

$ 49,500
60,000
$109,500

Overhead applied at actual production:
Actual hours……………………………………………………………………………
× Overhead application rate*………………………………………………………
Factory overhead applied…………………………………………………………
* Total factory overhead rate to be applied to production:
Variable factory overhead………………………………………………… $ 4.50
Fixed factory overhead**…………………………………………………

6.00

Total…………………………………………………………………………… $10.50

**

Fixed factory overhead rate:

$60,000
10,000 hrs.

= $6.00 per hr.

Note: The fixed factory overhead rate is determined at normal production.

9,000
$ 10.50
$94,500


Ex. 23–16
Variable factory overhead controllable variance:
Actual variable factory overhead cost incurred……………… $262,000
Budgeted variable factory overhead for 14,000 hrs.
266,000
[14,000 × ($25.00 – $6.00)]……………………………………
Variance—favorable…………………………………………

$(4,000)

Fixed factory overhead volume variance:
Productive capacity at 100%……………………………………
Standard for amount produced…………………………………
Productive capacity not used…………………………………
× Standard fixed factory overhead rate………………………
Variance—unfavorable………………………………………
Total factory overhead cost variance—unfavorable*……………
* Actual Overhead – Applied Overhead = Total Overhead Variance:
($262,000 + $90,000) – $350,000 = $2,000

15,000 hrs.
14,000 hrs.
1,000 hrs.
$6.00
6,000
$ 2,000


Ex. 23–16 (Concluded)
Alternative Computation of Overhead Variances
Factory Overhead

Actual costs
Balance (underapplied)

352,000

Applied costs

350,000

2,000

Actual

Budgeted Factory

Factory

Overhead for Amount

Factory

Overhead

Produced

Overhead

$352,000

Applied

Fixed cost…………………………………………

$266,000
90,000

Total…………………………………………………

$356,000

Variable cost [14,000 × ($25.00 – $6.00)]………

–$4,000 F

$6,000 U

Controllable

Volume

Variance

Variance
$2,000 U
Total Factory Overhead
Cost Variance

$350,000