Solution manual cost accounting by carter 14e ch17

CHAPTER 17
DISCUSSION QUESTIONS

Q17-1. Responsibility accounting is a program
encompassing all operating management for
which the accounting, cost, or budget divisions
provide technical assistance in the form of
daily, weekly, or monthly control reports. The
objective of responsibility accounting is to provide management with a useful cost control
tool. To be effective as a control mechanism,
the responsibility accounting system records
and reports costs incurred as a result of each
activity to the individual in the company who is
responsible for controlling the activity.
Q17-2. The emphasis of responsibility accounting is
on internal cost control rather than on determining product cost. This requires a shift in
emphasis from determining the cost of
resources used in manufacturing a product to
determining the amount of control individual
managers have over cost. Responsibility
accounting determines the cost incurred by
an activity or group of activities, rather than
the cost incurred to produce a product.
Q17-3. Controllable costs are those that are incurred
as the result of, or for the benefit of, a business activity. Presumably, such a cost will
increase or decrease as a result of the level of
efficiency with which the activity that generates the cost is conducted or managed. To be
effective, responsibility accounting must hold
a manager responsible for only those costs
that he or she can control.
Q17-4. The organization must be arranged so that

there are no overlapping lines of responsibility (i.e., no more than one individual should be
responsible for each activity). In addition,
each individual in the organization must have
a clear understanding of his or her responsibilities, and must have sufficient authority to
take the actions necessary to meet those
responsibilities.
Q17-5. The cost of any expenditure classification is
composed of two elements: the unit price and
the quantity of the items used. One individual
may have control of price while another
individual has control of quantity. Even in
cases where price does not change, the quan-

tity used may not be fully controllable by the
individual who oversees the activity that consumes the item. The quality of the item may
affect the quantity used and the quality may be
determined by the purchaser, or the efficiency
with which the item is used may be affected by
decisions made at the executive management
level (e.g., personnel changes and machinery
acquisitions). Since the accountant cannot
always determine absolute control, costs
should be assigned on the basis of relative
control, and variances should be viewed as
questions rather than as answers.
Q17-6. Opinion is divided on this subject. Some
believe that for the most effective overhead
control, department heads should be charged
only for those costs that they incur. If they are
charged with uncontrollable costs, they could

spend significant amounts of time trying to
control cost that they have no ability to control, or they may become frustrated and give
up trying to control any costs. On the other
hand, some believe that department heads
should appreciate the fact that many auxiliary
costs must be incurred to support their activities; therefore, they should be charged with a
fair share of such costs, clearly labeled as
uncontrollable.
Q17-7. Total costs of service department overhead
are included in overhead rates in order to
charge jobs and products with all overhead
incurred in their production. Actual service
department costs are controlled if they are
accumulated in service department accounts
where they can be assigned to service
department managers. If service department
costs are charged directly to producing
departments, such costs become an indirect,
noncontrollable item of the departments
receiving the charges.
Q17-8. Service department costs should be charged
to user departments by predetermined billing
rates rather than by allocating actual cost at
the end of the period. The use of predetermined rates makes it possible to determine
service department efficiency through the

17-1


17-2

computation of spending and idle capacity
variances. In addition, user department efficiency can be evaluated more effectively by
eliminating noncontrollable costs from service
department charges. This is particularly
important where user departments have
some control over the amount of the services
used. In such cases, users should be held
accountable for their use of services, but the
rates for pricing those services should be
known by the users in advance.
Q17-9. (a) No. The charge is an arbitrary allocation
of cost. It cannot be influenced directly by
actions of the division management.
(b) Yes and no. The amount of computer
service used is within the control of the
division management. However, the cost
per unit of service varies with the efficiency of the computer facility and the
amount of use by other divisions.
Consequently, the charge is only partly
controllable by division management.
(c) Yes. The charge for goods purchased
from another division is controllable by
the division management, provided that
the quantity of goods purchased is controllable by the division management and
that the price is an externally established
market price.
Q17-10.(a) The higher electric power costs may be
the result of any one or combination of
the following:

(1) increases in the prices paid for
fuel, labor, maintenance, etc.,
(2) inefficient operating practices or
machine failures within the power
department,
(3) the acquisition of expensive new
capacity, and/or
(4) increased production of electricity
required to meet user demand.
(b) To the extent that any inefficiencies exist in
the power department, the current allocation scheme will pass them on to the
user departments. With the kind of allocation used by Emmons Company, it is not
possible to determine what caused the
cost increase. A better system of handling
this department’s cost would be to charge
user departments for actual usage on the
basis of a predetermined variable rate, and
for available usage on the basis of the
power department’s ability to provide service at maximum capacity. Budgeted fixed

Chapter 17

cost should be allocated on the basis of
ability to provide service, because the
Electric Power Department cannot control
actual usage. This approach would make
it possible to compute spending variances for the Electric Power Department,
which are useful in evaluating the department’s operating efficiency.
Q17-11.(a). Higher total cost incurred by the
Maintenance Department (i.e., increases

in the prices and/or quantities of the
various items of cost in the Maintenance
Department), fewer total hours of
maintenance service provided to all user
departments during the period, or a
combination of both could result in a
higher actual maintenance cost per hour.
However, such increases in costs should
remain in the Maintenance Department
and not be charged to the users.
(b) An improved method for distributing
Maintenance Department cost would be
to establish a predetermined rate to be
charged for each hour of maintenance
service provided to users. The rate would
be established annually by dividing the
budgeted hours of service to be performed during the period into budgeted
Maintenance Department cost for the
same period. Using this predetermined
rate, each user department’s maintenance
cost would depend on the number of hours
of service it received. By using the predetermined rate, the actual cost could be
compared with total charges made to users
and the difference decomposed into
spending and idle capacity variances for
the Maintenance Department. These variances are useful in evaluating the efficiency of Maintenance Department activity.
A further refinement would be to
require the Maintenance Department to
submit estimates of cost to users before
providing services. This would not only

give the department receiving the service
some idea of the cost of the work, but
would also restrain the Maintenance
Department from spending too much time
on a job.
Q17-12.The flexible budget (a) provides the monthly
budget allowance regardless of the fluctuating
monthly volume of production; (b) permits not
having to estimate the operating activity of a
month in advance of the period for which the


Chapter 17

budget is prepared; and (c) recognizes the
fixed and variable nature of costs, which leads
to easy adjustments when evaluating actual
performance.
Q17-13.A spending variance is the difference between
actual cost and the budget allowance (i.e., the
budgeted amount adjusted for the actual level
of activity experienced). It is caused by differences between the prices and the quantities of
the various items of cost budgeted and actually
incurred. To the extent that a manager has control over either price or quantity, or both, the
manager has control over the amount of the
spending variance. However, if the manager
does not have control over both prices and
quantities, the manager has only limited control over the amount of the spending variance.
Nevertheless, since a manager may have
some control over spending variances, they

are used to evaluate efficiency in responsibility
reporting.
Q17-14.To aid management in evaluating and controlling cost, a spending variance for each item or
classification of cost should be reported to
responsible management each period.
Itemized variances tell responsible management which item was inefficiently used. This
detailed information pinpoints where the
search to identify causes should begin.
Q17-15.An idle capacity variance is the amount of overor underapplied budgeted fixed factory overhead. In responsibility reporting, it is used as a
measure of capacity utilization. To the extent
that management can control capacity utilization, the idle capacity variance can be controlled. However, the amount of capacity
utilized is often a function of forces outside the
control of individual department supervisors.
Q17-16.The two primary purposes of responsibility
reports are:
(a) To motivate individuals to achieve a high
level of performance by reporting efficiencies and inefficiencies to responsible
managers and their superiors.
(b) To provide information that will help
responsible managers identify inefficiencies so that they can more efficiently control costs.
Q17-17.Dysfunctional behaviors that can result from
the practice of evaluating managerial performance rather than evaluating activities follow:
(a) Managers tend to take actions that are
self serving rather than beneficial to the
company as a whole

17-3

(b) Managers concentrate on meeting the
budget rather than on obtaining the best

level of performance that can be
achieved. The use of budgets tends to
thwart continuous improvement.
(c) Since budgets are based on current operations, managers tend to focus their
attention on short-run targets and ignore
the long-term needs of the business.
(d) Managers who are unable to subvert the
system sufficiently to get acceptable evaluations, but who are otherwise competent
and efficient, become frustrated, do not get
promoted, and often leave the company.
Q17-18.Responsibility accounting and reporting
should not be abandoned despite the fact that
its use in evaluating the performance of managers results in dysfunctional behavior. To
overcome the problem of dysfunctional
behavior, responsibility reports should be
used to evaluate the performance of business
activities, not managers. Managers should be
evaluated on the basis of multiple activities of
which cost control is only one. Managers
should be encouraged to experiment with new
approaches, to improve product quality, to
enlist the cooperation of their department
workers in improving output, to cooperate
with other departments, and to work for the
long-term success of the company. Using
responsibility reports as an aid in evaluating
the efficiency of business activities, instead of
managers, takes pressure off managers to
defend their actions as they relate to cost, and
makes it possible for them to pursue other

desirable business activities.
Q17-19.Some problems that limit the usefulness of
control data reported to managers in a responsibility accounting and reporting system are:
(a) Most responsibility accounting and
reporting systems improperly base allowable budgets on volume-based measures
of activity that have little to do with cost
incurrence (e.g., labor hours, machine
hours, etc.). If nonvolume measures (e.g.,
machine setups, retooling, moving or
storing parts or product, etc.) are major
cost drivers, activity based costing should
be used as the basis for budgeting and
preparing variance reports.
(b) Control data available in a responsibility
reporting system are too aggregated to
be useful. This criticism stems from an
attempt to use responsibility reports for


17-4

Chapter 17

operating control. Even itemized variance
reports may not be sufficient to solve this
problem.
(c) Control data available to managers are
financial and not easily interpreted by
operating level managers, who are not
trained in accounting and finance. The

accounting staff should provide assistance, when practical, in training operating personnel in the use of financial
reports. In addition, nonfinancial measures that can be easily understood by
operating managers should be reported
along with financial data, when practical.
(d) Control data available to managers are
not timely enough to be useful. This criticism stems from an attempt to use financial based responsibility reports for
day-to-day operating control. More frequent reporting will not likely solve this
problem, because it still takes days or
weeks to collect the necessary data and
prepare financial reports. A better solution

is to use statistical process control and
other operating control systems for day-today operating control, and to use periodic
financial reports to evaluate the financial
effectiveness of the business systems and
the process control systems used in monitoring activity.
Q17-20.Despite the fact that nonfinancial measures of
operating performance are more easily interpreted and can be made available on a more
timely basis than financial data, financial
reports generated by a responsibility accounting system still have value because they provide information about the impact of business
systems on income. To be effective, management must not only believe that reducing
inventory, spoilage, or rework will improve
profitability, but also it must monitor the
impact that such efforts have on income. The
tie between changes in business systems and
the effect of those changes on income is provided by financial reports.


Chapter 17

17-5

EXERCISES
E17-1
(1)

Maintenance Department cost should be charged to all departments on the basis
of a predetermined charging rate and could be computed as follows:
Fixed cost......................................................................
Variable cost (15,000 × $8.50)......................................
Total Maintenance Department cost...........................
$135,000
15,000 hours

$ 7,500
127,500
$135,000

= $9 per maintenance hour

The actual Maintenance Department cost for November, $132,000 would be charged
directly to that department. The $9 charging rate is used to charge other departments
for Maintenance Department service received. The November charges would be
$126,000 (14,000 actual maintenance hours × $9 charging rate).
The same approach would be followed for General Factory cost, except that transfers
and charges for such costs would be made to producing departments only. The rate
would be determined as follows:
Fixed cost......................................................................
Variable cost (1,000 × $20)...........................................
Total General Factory cost .........................................

$30,000
20,000
$50,000

$50,000
= $50 per employee
1,000 employees
The actual cost charged to the General Factory in November would be $51,000, and
General Factory cost charged to producing departments would be $49,000 (980 actual
employees × $50 charging rate).


17-6

Chapter 17

E17-1 (Concluded)
(2)
Maintenance Dept.
General
Actual cost .........................
$132,000
Budget allowance:
Variable cost:
14,000 hours × $8.50..... $119,000
980 employees × $20 ....
$19,600
Fixed cost ......................
7,500

126,500
30,000
Spending variance ..............
$ 5,500 unfav.
Budget allowance................
$126,500
Cost charged out:
14,000 hours × $9..........
126,000
980 employees × $50 ....
Idle capacity variance .........
$
500 unfav.
Total variance ...............
$ 6,000 unfav.

Factory
$51,000

49,600
$ 1,400 unfav.
$49,600

49,000
$ 600 unfav.
$ 2,000 unfav.

E17-2
(1)

(2)

Billing rates: Carpenter Shop:

$20,000
2,000 hrs.

= $10 per hour

Electricians:

$30,000
2,500 hrs.

= $12 per hour

Charged to producing departments:

Carpenter Shop* ................................
Electricians**......................................
Total ................................................

Department
1
2
3
$ 4,000 $ 8,000 $ 4,500
12,000
10,200
6,600

$16,000 $18,200 $11,100

*400 × $10 = $4,000; 800 × $10 = $8,000; 450 × $10 = $4,500
** 1,000 × $12 = $12,000; 850 × $12 = $10,200; 550 × $12 = $6,600.

Total
$16,500
28,800
$45,300


Chapter 17

17-7

E17-2 (Concluded)
(3)

Variances in each service department:

Carpenter Shop .........
Electricians ................

Actual cost ..................
Budget allowance:
Variable cost (1,650
hrs. × $3.00) ........
Fixed cost.....................
Spending variance ......
Budget allowance........

Cost charged to
producing departments (req. 2)...........
Idle capacity variance

Monthly
Budget
$20,000
30,000

Fixed Cost
Percentage
70%
80

Carpenter Shop
$19,800

$ 4,950
14,000

18,950
$ 850 unfav.
$18,950

16,500
$ 2,450 unfav.

Fixed
Cost
$14,000

24,000

Actual cost..................
Budget allowance:
Variable cost (2,400
hrs. × $2.40) .......
Fixed cost ...............
Spending variance .....
Budget allowance.......
Cost charged to
producing departments (req. 2)......
Idle capacity variance

Variable
Rate
Per Hour
$3.00
2.40

Variable
Cost
$6,000
6,000

Electricians
$28,900

$ 5,760
24,000

29,760
$ (860) fav.
$29,760

28,800
$ 960 unfav.

E17-3
(1)

Billing rate for Maintenance Department:
Fixed rate: $12,800 total fixed cost ÷ 3,200 normal
maintenance hours ..........................................
$ 4.00 per hour
Variable rate: Variable rate per maintenance hour
for labor ................................... $8.70
Variable rate per maintenance hour
for other costs:
Supervision .............. $.50
Tools and supplies ... .75
Miscellaneous ........... .05
1.30 10.00
Total ...........................................................................
$14.00 per hour
Billing rate for Payroll Department:
Fixed rate: $12,000 budgeted fixed cost ÷ 1,200
average number of employees...............
Variable rate .........................................................................
Total ......................................................................................

$10 per employee
2
$12 per employee

The billing rate for the Maintenance Department was based on the number of
maintenance hours worked, because it was the only variable given on which a
measure of operating results could be computed. For the Payroll Department,
the billing rate was based on the number of employees, because it was an adequate measure of operating results for that department.


17-8

Chapter 17

E17-3 (Concluded)
(2)

Maintenance Department:
Actual cost......................................................
Budget allowance based on actual hours:
Variable cost (3,355 hours × $10) .............
Fixed cost ..................................................
Spending variance .........................................

$47,200
$33,550
12,800

Budget allowance based on actual hours ...
Cost charged out (3,355 hours × $14)..........

Idle capacity variance ....................................

46,350
$850 unfav.
$46,350
46,970
$ (620) fav.

Payroll Department:
Actual cost......................................................
Budget allowance based on actual number
of employees:
Variable cost (1,165 employees × $2)...
Fixed cost ..............................................
Spending variance ........................................

$13,875

$ 2,330
12,000

Budget allowance based on actual number
of employees ..............................................
Cost charged out (1,165 employees × $12) .
Idle capacity variance ....................................

14,330
$ (455) fav.
$14,330
13,980

$ 350 unfav.

E17-4
(1)

Producing
Departments

Fixed cost* ..................................
Variable cost (rate × hours)** .....
Total ..........................................
*Dept.
A
B
X
Y

Hours
10,000
20,000
12,000
8,000
50,000

A
$1,200
1,600
$2,800

%

Fixed cost
20%
$1,200
40
2,400
24
1,440
16
960
100%

Service
Departments

B
$2,400
2,600
$5,000
**A
B
X
Y

X
$1,440
1,400
$2,840
=
=
=

=

Y
$ 960
1,200
$2,160

Total
$ 6,000
6,800
$12,800

8,000 hrs.
13,000
7,000
6,000
34,000 hrs.

$6,000
$6,800
34,000 hrs.

= $.20 variable rate


Chapter 17

17-9

E17-4 (Concluded)

(2)

The two general principles for the allocation of service department costs applicable under the circumstances are (a) distribution on the basis of service or benefit received for the variable cost; and (b) distribution on the basis of readiness
to serve or capacity that must be maintained for the fixed cost.
This solution distributes all variable costs incurred. A predetermined variable cost rate should be calculated, so that the efficiency of the power plant
could be judged. The present $.20 rate is based on the actual monthly consumption and cost.

E17-5
(1)
Benefiting
Standby
Department
Capacity
Cutting .............................................
35,000
Grinding ...........................................
26,000
Polishing ..........................................
30,000
Stores................................................
9,000
Total................................................... 100,000
Variable rate =
=
=

% of
Total
35%
26

30
9
100%

Variable Cost ÷ Expected Annual Capacity
$30,000 ÷ 300,000 KWH
$.10 per KWH

Quarterly
Fixed Cost
Billing
$2,450
1,820
2,100
630
$7,000


17-10

Chapter 17

E17-5 (Concluded)
Benefiting Department
Cutting
First Quarter Billing:
Variable rate .............. $
.10
Actual consumption.. 29,500
Variable cost ............. $ 2,950

Fixed cost..................
2,450
Total........................... $ 5,400

Grinding

Polishing

Stores

Total

$

.10
20,000
$ 2,000
1,820
$ 3,820

$

.10
29,000
$ 2,900
2,100
$ 5,000

$

.10
6,500
$ 650
630
$ 1,280

.10
85,000
$ 8,500
7,000
$ 15,500

$

.10
24,750
$ 2,475
1,820
$ 4,295

$

.10
23,500
$ 2,350
2,100
$ 4,450

.10
8,250

$ 825
630
$ 1,455

$

.10
90,000
$ 9,000
7,000
$ 16,000

$

.10
21,250
$ 2,125
1,820
$ 3,945

$

.10
25,500
$ 2,550
2,100
$ 4,650

$

.10
6,500
$ 650
630
$ 1,280

$

.10
86,000
$ 8,600
7,000
$ 15,600

$

.10
23,000
$ 2,300
1,820
$ 4,120
$16,180

$

.10
27,750
$ 2,775
2,100
$ 4,875

$18,975

$

.10
6,000
$ 600
630
$ 1,230
$ 5,245

$

First
Quarter
Actual cost.................... $15,450
Less budget allowance:
Variable rate .............. $
.10
Actual KWH provided 85,000
Variable cost ............. $ 8,500
Fixed cost..................
7,000
Budget allowance..... $15,500
Spending variance ....... $ (50)

Second
Quarter
$16,200

Third
Quarter
$15,900

Fourth
Annual
Quarter
Total
$15,400 $ 62,950

$

.10
90,000
$ 9,000
7,000
$16,000
$ 200

$

.10
86,000
$ 8,600
7,000
$15,600
$ 300

$

.10
85,000
$ 8,500
7,000
$15,500
$ (100)

.10
346,000
$ 34,600
28,000
$ 62,600
$
350

fav.

unfav.

unfav.

fav.

unfav.

Second Quarter Billing:
Variable rate ..............
Actual consumption..
Variable cost .............
Fixed cost..................

Total ...........................

$

.10
33,500
$ 3,350
2,450
$ 5,800

Third Quarter Billing:
Variable rate .............. $
.10
Actual consumption.. 32,750
Variable cost ............. $ 3,275
Fixed cost..................
2,450
Total ........................... $ 5,725
Fourth Quarter Billing:
Variable rate ..............
$.10
Actual consumption.. 28,250
Variable cost ............. $ 2,825
Fixed cost..................
2,450
Total ........................... $ 5,275
Total............................... $22,200

$

.10
85,000
$ 8,500
7,000
$ 15,500
$ 62,600

(2)

$


Chapter 17

E17-6

17-11

UNIVERSITY MOTOR POOL
Budget Report for March

Gasoline ........................................................
Oil, minor repairs, parts, and supplies.......
Outside repairs .............................................
Insurance .....................................................
Salaries and benefits ...................................
Depreciation..................................................
Total............................................................

Monthly

Budget
$ 5,513
378
236
525
2,500
2,310
$11,462

March
Actual
$ 5,323
380
50
525
2,500
2,310
$11,088

Number of automobiles ...............................
Total miles .....................................................
Cost per mile ................................................

21
63,000
$.1819

21
63,000
$.1760

(Over)
Under
$190
(2)
186
—
—
—
$374
—
—
$.0059

Supporting calculations for monthly budget amounts:
Gasoline:
Oil, minor repairs, parts,
and supplies:

63,000 miles
16 miles per gal.

× $1.40 per gallon = $5,512.50

63,000 × $.006 per mile = $378

Outside repairs:

$135 per auto × 21 autos
12 months

Insurance:

Annual cost for one auto: $6,000 ÷ 20 autos = $300
Annual cost for 21 autos: 21 × $300 = $6,300
Monthly cost: $6,300 ÷ 12 = $525

Salaries and benefits:

No change
$30,000 annual cost
12 months

Depreciation:

= $236.25

= $2,500 per month

Annual depreciation per auto:
$26,400 ÷ 20 autos = $1,320
Annual depreciation for 21 autos:
$1,320 per auto × 21 = $27,720
Monthly depreciation: $27,720 ÷ 12 = $2,310


17-12

Chapter 17

E17-7
CLAYTON COMPANY
Assembly Department
Flexible Budget—90% Level
Direct materials (90% × $20,000) .......................................................
Direct labor (90% × $11,250) ...............................................................
Supervision .........................................................................................
Indirect materials ($250 + (90% × ($1,750 – $250))) ..........................
Property tax .........................................................................................
Maintenance ($600 + (90% × ($1,600 – $600))) ..................................
Power ($200 + (90% × ($300 – $200))) ................................................
Insurance .............................................................................................
Depreciation .........................................................................................
Total ............................................................................................

$18,000
10,125
500
1,600
300
1,500
290
175
1,600
$34,090


Chapter 17

E17-8

17-13

ONE MONTH FLEXIBLE BUDGET FOR FINISHING DEPARTMENT

Operating level
Based on labor hours .......................
Percentage of capacity .....................

800
80%

900
90%

Variable cost:
Indirect labor ..................................... $ 1,200.00 $ 1,350.00 $
Factory supplies ................................ 1,880.00
2,115.00
Power ................................................
600.00
675.00
Rework operations ............................
400.00
450.00
Payroll taxes ...................................... 1,040.00
1,170.00
Repair and maintenance ...................
320.00
360.00

General factory ..................................
160.00
180.00
Total variable cost ................ $ 5,600.00 $ 6,300.00 $

1,000
100%

1,100
110%

1,500.00
2,350.00
750.00
500.00
1,300.00
400.00
200.00
7,000.00

$ 1,650.00
2,585.00
825.00
550.00
1,430.00
440.00
220.00
$ 7,700.00

Fixed Cost:

Indirect labor...................................... $ 4,000.00 $ 4,000.00 $ 4,000.00
Supervision ....................................... 2,500.00
2,500.00
2,500.00
Factory supplies ................................
900.00
900.00
900.00
Power .................................................
500.00
500.00
500.00
Rework operations ............................
200.00
200.00
200.00
Payroll taxes ......................................
800.00
800.00
800.00
Repair and maintenance ...................
600.00
600.00
600.00
Property insurance............................
700.00
700.00
700.00
Property taxes....................................
300.00

300.00
300.00
Vacation pay....................................... 2,200.00
2,200.00
2,200.00
Employee pension costs ................. 1,200.00
1,200.00
1,200.00
Employee health plan........................ 1,800.00
1,800.00
1,800.00
Machinery depreciation ................... 1,000.00
1,000.00
1,000.00
Water and heat...................................
600.00
600.00
600.00
Building occupancy .......................... 1,000.00
1,000.00
1,000.00
General factory .................................. 1,500.00
1,500.00
1,500.00
Total fixed cost...................... $19,800.00 $19,800.00 $19,800.00
Total cost ........................................... $25,400.00 $26,100.00 $26,800.00

$ 4,000.00
2,500.00
900.00

500.00
200.00
800.00
600.00
700.00
300.00
2,200.00
1,200.00
1,800.00
1,000.00
600.00
1,000.00
1,500.00
$19,800.00
$27,500.00


17-14

Chapter 17

E17-9

Capacity hours .....................................
Variable costs:
Supplies .........................................
Repairs and maintenance ............
Indirect labor ..................................
Power and light ..............................
Heat ................................................

Subtotal ....................................
Fixed costs:
Building expense ...........................
Depreciation—machinery..............
Property tax and insurance ..........
Subtotal ....................................
Total costs .............................................

Spending
Actual Variance
Cost Unfav.(Fav.)
8,800

Original Budget
Budget Allowance
8,000
8,800
$ 2,000
800
4,000
1,200
400
$ 8,400

$ 2,200
880
4,400
1,320
440
$ 9,240

$ 2,300
900
4,300
1,400
500
$ 9,400

$800
2,400
400
$ 3,600
$12,000

$800
2,400
400
$ 3,600
$12,840

$840
2,400
420
$ 3,660
$13,060

Applied factory overhead ....................
Idle capacity variance ...........................

13,200

$(360) fav.

Actual factory overhead ......................
Applied factory overhead .....................
Overapplied factory overhead ............

$13,060
13,200
$ (140)

Spending variance ................................
Idle capacity variance ...........................
Overapplied factory overhead ............

$
$

220 unfav.
(360) fav.
(140)

$100
20
(100)
80
60

40
0
20

$220
unfav.


Chapter 17

17-15

E17-10

Direct labor hours ..........................
Variable costs:
Indirect labor ..........................
Payroll taxes ............................
Factory supplies .....................
Electric utility ..........................
Gas utility ................................
Water utility .............................
Machinery repairs ..................
Maintenance ...........................
Overtime premium .................
Subtotal .............................
Fixed costs:
Supervision ...........................
Indirect labor ...........................
Vacation pay ............................
Payroll taxes ............................
Employee insurance ...............
Factory supplies .....................
Electric utility ..........................

Gas utility ................................
Water utility .............................
Maintenance ............................
Machinery depreciation ........
Building rent............................
Property taxes.........................
Property insurance .................
Subtotal ...............................
Total costs .....................................

Original Budget
Budget Allowance
10,000
9,600

Spending
Actual Variance
Cost Unfav.(Fav.)
9,600

$ 70,000
61,500
27,000
12,000
6,000
1,500
10,000
21,000
9,000
$218,000

$ 67,200
59,040
25,920
11,520
5,760
1,440
9,600
20,160
8,640
$209,280

$ 70,000
60,000
28,000
12,000
6,100
1,500
10,000
15,000
9,000
$211,600

$2,800
960
2,080
480
340
60
400

(5,160)
360

$ 48,000
36,000
40,000
8,000
12,000
19,000
15,000
9,000
5,000
23,000
50,000
15,000
12,000
15,000
$307,000
$525,000

$ 48,000
36,000
40,000
8,000
12,000
19,000
15,000
9,000
5,000
23,000

50,000
15,000
12,000
15,000
$307,000
$516,280

$ 48,000
36,000
40,500
8,000
12,250
19,000
15,000
9,000
5,000
23,000
50,000
15,000
13,000
15,250
$309,000
$520,600

0
0
500
0
250
0

0
0
0
0
0
0
1,000
250

Applied factory overhead ..................................
Idle capacity variance .........................................

504,000
$ 12,280 unfav.

Actual factory overhead......................................
Applied factory overhead ..................................
Underapplied factory overhead ........................

$520,600
504,000
$ 16,600

Spending variance...............................................
Idle capacity variance ........................................
Underapplied factory overhead..........................

$4,320 unfav.
12,280 unfav.
$ 16,600

$4,320
unfav.


17-16

Chapter 17

PROBLEMS
P17-1
(1)
Factory overhead applied for each producing department:
Dept. A: 20,480 hrs. ×
$4.20 = $86,016
Dept. B: 29,850 hrs. ×
3.10 = 92,535
Dept. C: 20,100 hrs. ×
3.75 = 75,375
(2)

Over- or underapplied factory overhead for each producing department:
Producing Departments

Expenses
Actual department factory
overhead ...........................
Proration of service departments:
Utilities (on actual kwh) ....
Repairs and maintenance

(on actual dlh) ...............
Total actual department factory
overhead ...........................
Applied factory overhead .............
(Over-) or underapplied factory
overhead ...........................
* 39,300 × $.35
** 20,480 × $.90
(3)

=
=

A

B

C

$56,020

$52,850

$42,580

13,755*

16,170

12,530

18,432**

26,865

18,090

$88,207
86,016

$95,885
92,535

$73,200
75,375

$ 2,191 unfav.

$ 3,350 unfav.

$ (2,175)fav.

$13,755
18,432

Total variance for each service department:

Actual cost before allocation of Utilities
Department cost ...............
Utilities Department cost allocation

(18,950 kwh × $.35) ...................
Services allocated (sold) to other departments:
(70,430 hrs. × $.90) .....................
(140,250 kwh × $.35) ..................
(Over) or underallocated service department
costs............................................

Repairs and
Maintenance

Utilities

$56,320

$50,040

6,633
$62,953
63,387
49,088
$(434) fav.

$952 unfav.


Chapter 17

17-17

P17-2

(1)

Maintenance Department:

Total estimated cost
Total estimated maintenance hours

= $10,500
3,500

= $3 per maintenance hour

Utilities Department:
Total estimated cost
Total estimated kwh

=

$8,400
70,000

= $.12 per kwh

(2)

Producing
Planers

Variable overhead.........................................
Fixed overhead ............................................

Direct departmental overhead ....................
Distribution—service depts.:
Maintenance:
(2,500 × $3) .....................................
(1,000 × $3) .....................................

$15,000
18,000
$33,000

Service

Radial
Drills

Maintenance

Utilities

$ 9,000
15,000
$24,000

$ 4,500
6,000
$10,500

$3,600
4,800
$8,400

3,000

(10,500)

7,500

Utilities:
(45,000 × $.12) ................................
(25,000 × $.12) ...............................

5,400

Total factory overhead .................................

$45,900

$30,000

Direct labor hours .......................................
Overhead rate per dlh .................................

12,000
$ 3.825

$

3,000
7,500
4

(8,400)


17-18

Chapter 17

P17-2 (Continued)
(3)
Spending variance:
Actual factory overhead
Add distribution—
service departments*
Total departmental factory
overhead
Budget allowance based
on actual hours:
Variable:**
Planers (1,020 ×
$2.325) .............. $2,371.50
Radial Drills
(680 × $2) ........
Fixed ........................ 1,500.00
Spending variance...........

Planers

Radial Drills

$3,120.00

$2,300

1,440.00

480

$4,560.00

$2,780

3,871.50
$ 688.50 unfav.

$1,360
1,250

2,610
$ 170 unfav.

*Distribution of service department costs to producing departments:
Planers
Maintenance:
Planers (320 hrs. × $3) .......................
Radial Drills (80 hrs. × $3) .................
Utilities:
Planers (4,000 hrs. × $.12) .................
Radial Drills (2,000 hrs. × $.12) ..........

Radial
Drills

$960
$ 240
480
$1,440

240
$ 480

**Variable overhead rate:
Planers: $3.825 – ($18,000 ÷ 12,000) = $2.325
Radial Drills: $4 – ($15,000 ÷ 7,500) = $2
Planers
Idle capacity variance:
Budget allowance based on actual hours................ $3,871.50
Less applied factory overhead:
Planers (1,020 hrs. × $3.825) ......................... 3,901.50
Radial Drills (680 hrs. × $4) ...........................
Idle capacity variance................................................. $ (30.00) fav.

Radial
Drills
$2,610

2,720
$ (110) fav.

Chapter 17

17-19

P17-2 (Continued)
(4)
Maintenance
Actual service department cost .........................
$1,170
Distributed to producing departments:
Maintenance (400 hrs. × $3) ..........................
1,200
Utilities (6,000 kwh × $.12)..............................
Overdistributed ...................................................
$(30)
Spending variance:
Actual service department cost ................
Budget allowance
based on actual hours:
Variable .....................
Fixed .........................
Spending variance.......

$514.281
500.00

Idle capacity variance:
Budget allowance based
on actual hours........
Less applied overhead:

Maintenance (400 hrs. × $3)
Utilities (6,000 kwh × $.12)
Idle capacity variance
Net variance .....................
1 Estimated

variable expense
Estimated hours

variable expense
Estimated kwh

$.0514 × 6,000 kwh = $308.40

720
$ (10)

$1,170.00

$710.00

$308.402
1,014.28
400.00
$ 155.72 unfav.

708.40
$ 1.60 unfav.

$1,014.28

$708.40

1,200.00
$ (185.72) fav.
$ (30.00) fav.

720.00
$ (11.60) fav.
$ (10.00) fav.

=

$4,500
3,500

= $1.2857 per maintenance hour

=

$3,600
70,000

= $.0514 per kwh

$1.2857 × 400 hours = $514.28
2 Estimated

Utilities
$710

17-20

Chapter 17

17-2 (Concluded)
(5)
Reconciliation of total variances:
Actual factory overhead .......................
Less: Applied to work in process—
Planers ..................................
Applied to work in process—
Radial Drills............................
Net total variance ..................................
Variances:
Spending variance—Planers............
Spending variance—Radial Drills....
Idle capacity variance—Planers ......
Idle capacity variance—
Radial Drills.................................
Spending variance—Maintenance ...
Spending variance—Utilities............
Idle capacity variance—Maintenance
Idle capacity variance—Utilities ......

$7,300.00
$3,901.50
2,720.00

Unfavorable
$ 688.50
170.00

Favorable

$

30.00
110.00

155.72
1.60

$1,015.82
Net total variance

6,621.50
$ 678.50 unfav.

$678.50 unfav.

185.72
11.60
$ 337.32


Chapter 17

17-21

P17-3
(1)

Budget allowance for each producing department in January:
(a) Based on scheduled production hours:

Variable factory overhead:
(5,000 units × $.451 per unit) or
(1,250 hours × $1.80 per hour) ....
(5,000 units × $.382 per unit) or
(1,000 hours × $1.90 per hour) ....
Fixed factory overhead:
($17,520 ÷ 12 months).......................
($34,230 ÷ 12 months).......................
Share of service department cost:
Maintenance (1,250 hours × $.503 per hour)
Maintenance (1,000 hours × $.50 per hour)
Janitorial ($1,980 ÷ 12 months)........
Janitorial ($2,970 ÷ 12 months)........
Total budget allowance.........................

Machining

Assembly

$2,250
$1,900.00
1,460
2,852.50

625
500.00
165
$4,500

247.50
$5,500.00

1Machining:

$27,000 ÷ 60,000 units = $.45 per unit; $27,000 ÷ 15,000 hours =
$1.80 per hour
2Assembly: $22,800 ÷ 60,000 units = $.38 per unit; $22,800 ÷ 12,000 hours =
$1.90 per hour
3Maintenance: $13,500 ÷ 27,000 hours = $.50 per direct labor hour
(b)

Budget allowance based on actual production hours:

Variable factory overhead:
(1,340 hours × $1.80 per hour) ........
(1,030 hours × $1.90 per hour) .........
Fixed factory overhead:
($17,520 ÷ 12 months).......................
($34,230 ÷ 12 months) ......................
Share of service department cost:
Maintenance (1,340 hours × $.50 per hour)
Maintenance (1,030 hours × $.50 per hour).
Janitorial ($1,980 ÷ 12 months)........
Janitorial ($2,970 ÷ 12 months)........

Total budget allowance ........................

Machining
$2,412

Assembly
$1,957.00

1,460
2,852.50
670
515.00
165
$4,707

247.50
$5,572.00


17-22

Chapter 17

17-3 (Continued)
The budget allowances calculated in (a) and in (b) include the service department shares by two different methods: the share of the Maintenance Department
cost is based on the charging rate of $.50 and the actual hours worked, which is
in harmony with the general procedure advocated. The share of the Janitorial
Department cost is based on 1/12 of the apportioned cost. This approach is used
because it is believed that janitorial services have no relationship to the number
of hours worked in the production departments. In fact, the illustration could be

made more realistic by basing the apportionment of Janitorial Department cost
on the basis of the relative amount of floor space occupied by the producing
departments. As long as no change in the space has been reported, the share
would remain as established in the budget figures.
It should be noted further that the maintenance cost could be charged to the
producing departments on the basis of maintenance hours and not direct labor
hours. An additional refinement would apportion fixed cost on the basis of a predetermined maintenance schedule, and the variable cost on the basis of maintenance hours actually used.
(2)

Spending and idle capacity variances for each producing department, based on
actual production hours:
Machining

Actual departmental factory
overhead .........................................
Add share of budgeted service
department costs:
Maintenance Department ................
Janitorial Department .......................
Total actual factory overhead ..............
Budget allowance based on actual
production hours...............................
Spending variance ................................
Budget allowance based on actual
production hours...............................
Applied factory overhead:
(1,340 hours × $3.60 per hour) .........
(1,030 hours × $5.50 per hour) .........
Idle capacity variance ...........................

Assembly

$4,200

$5,240.00

670
165
$5,035

515.00
247.50
$6,002.50

4,707
$ 328 unfav.

5,572.00
$ 430.50 unfav.

$4,707

$5,572.00

4,824
$ (117) fav.

5,665.00
$ (93.00)fav.

Chapter 17

17-23

P17-3 (Concluded)
(3)
Spending variance for each service department:

Actual cost (month of January) ...........
Budget allowance* ...............................
Spending variance ................................

Maintenance
$1,350.00
1,147.93
$ 202.07 unfav.

*Variable factory overhead:
($5,100 ÷ 27,000 budgeted hours
= $.189 per hour) (2,370 actual
hours × $.189 per hour) ...............
($2,700 ÷ 12 months) ........................
Fixed factory overhead:
($8,400 ÷ 12 months).........................
($7,200 ÷ 12 months) ........................

$ 447.93
$ 225
700.00

600

Budget allowance..................................
P17-4
Capacity .....................................................
Direct labor hours.....................................
Variable costs: .........................................
Indirect labor......................................
Payroll taxes and fringe benefits .....
Power and light ..................................
Inspection...........................................
Other semivariable costs..................
Total variable costs ..........................
Fixed costs:
Depreciation ......................................
Insurance ...........................................
Maintenance cost ..............................
Property tax........................................
Supervisory staff ..............................
Power and light .................................
Inspection...........................................
Other semivariable costs..................
Total fixed costs ...............................
Total factory overhead ............................

Janitorial
$1,040
825
$ 215 unfav.

$1,147.93

$ 825

80%
40,000
$ 4,000
18,000
57,240
1,200
4,800
6,000
$ 91,240

90%
45,000
$ 4,500
20,250
64,395
1,350
5,400
6,750
$102,645

100%
50,000
$ 5,000
22,500
71,5501
1,5002

6,0003
7,5004
$114,050

$

$

$

9,000
1,500
24,000
1,500
36,000
200
4,200
1,400
$ 77,800
$169,040

9,000
1,500
24,000
1,500
36,000
200
4,200
1,400
$ 77,800

$180,445

9,000
1,500
24,000
1,500
36,000
200
4,200
1,400
$ 77,800
$191,850


17-24

Chapter 17

17-4 (Concluded)
1Payroll

taxes and fringe benefits:
Direct labor cost
= 50,000 hrs. × $7.50 = $375,000
Indirect labor cost = 50,000 hrs. × $ .45 =
22,500
$397,500 × .18 = $71,550

2 Power

and light:

High ............................................................
Low .............................................................
Difference....................................................

Hours
50,000
40,000
10,000

$300
= $.03 per direct labor hour
10,000 hrs.
Total cost ....................................................
Variable cost (50,000 hrs. × $.03)..............
Fixed cost ...................................................

Cost
$ 1,700
1,400
$ 300

$ 1,700
1,500
$ 200

3 Inspection:

High .............................................................

Low .............................................................
Difference....................................................

Hours
50,000
40,000
10,000

$1,200
= $.12 per direct labor hour
10,000 hrs.
Total cost ....................................................
Variable cost (50,000 hrs. × $.12)..............
Fixed cost ...................................................
4 Other

Cost
$10,200
9,000
$ 1,200

$10,200
6,000
$ 4,200

semivariable expenses:

High ............................................................
Low .............................................................
Difference....................................................

$1,500
= $.15 per direct labor hour
10,000 hrs.
Total cost ....................................................
Variable cost (50,000 hrs. × $.15)..............
Fixed cost ...................................................

Hours
50,000
40,000
10,000

Cost
$ 8,900
7,400
$ 1,500

$ 8,900
7,500
$ 1,400


Chapter 17

17-25

P17-5
(1)

ONE MONTH FLEXIBLE BUDGET FOR FABRICATION DEPARTMENT

Operating level
Based on machine hours ................
Percentage of capacity ...................
Variable cost:
Indirect labor ....................................
Factory supplies ..............................
Power ..............................................
Rework operations...........................
Payroll taxes ....................................
Repair and maintenance .................
General factory ...............................
Total variable cost ...............
Fixed cost:
Indirect labor ..................................
Supervision .....................................
Factory supplies ..............................
Power ..............................................
Payroll taxes .....................................
Repair and maintenance ................
Property insurance ..........................
Property taxes..................................
Vacation pay .....................................
Employee pension costs.................
Employee health plan......................
Machinery depreciation .................
Water and heat .................................
Building occupancy.........................
General factory ................................
Total fixed cost ...................

Total cost .........................................

1,600
80%

1,800
90%

$ 3,440.00 $ 3,870.00 $
1,200.00
1,350.00
800.00
900.00
480.00
540.00
560.00
630.00
400.00
450.00
320.00
360.00
$ 7,200.00 $ 8,100.00 $

2,000
100%

2,200
110%

4,300.00

1,500.00
1,000.00
600.00
700.00
500.00
400.00
9,000.00

$ 4,730.00
1,650.00
1,100.00
660.00
770.00
550.00
440.00
$ 9,900.00

$ 2,000.00 $ 2,000.00 $ 2,000.00
2,000.00
2,000.00
2,000.00
600.00
600.00
600.00
450.00
450.00
450.00
1,000.00
1,000.00
1,000.00

1,400.00
1,400.00
1,400.00
750.00
750.00
750.00
500.00
500.00
500.00
1,700.00
1,700.00
1,700.00
1,000.00
1,000.00
1,000.00
800.00
800.00
800.00
3,500.00
3,500.00
3,500.00
400.00
400.00
400.00
900.00
900.00
900.00
1,000.00
1,000.00
1,000.00

$18,000.00 $18,000.00 $18,000.00
$25,200.00 $26,100.00 $27,000.00

$ 2,000.00
2,000.00
600.00
450.00
1,000.00
1,400.00
750.00
500.00
1,700.00
1,000.00
800.00
3,500.00
400.00
900.00
1,000.00
$18,000.00
$27,900.00