hours clerical
PROBLEM 11-44 (CONTINUED) Explanatory notes for case B:
aTo find the standard variable overhead rate:
Variable-overhead efficiency variance
= SVR(AH – SH)
$400 F = SVR(1,500 – 1,600) SVR = $4
bStandard fixed-overhead rate
= total standard overhead rate – SVR
= $13 – $4 = $9
cFlexible budget for variable overhead
= SH × SVR
= 1,600 × $4 = $6,400
dFlexible budget for fixed overhead
= applied fixed overhead + volume variance
= (1,600 × $9) + $3,600
= $18,000
eActual variable overhead
= applied variable overhead + spending variance + efficiency variance
= (1,600 × $4) + $2,000 U – $400 F
= $8,000
fActual fixed overhead
= budgeted fixed overhead + fixed-overhead budget variance
= $18,000 + $1,080 U
= $19,080
PROBLEM 11-44 (CONTINUED)
gUnderapplied variable overhead
= spending variance + efficiency variance
= $2,000 U* + $400 F*
= $1,600 underapplied
*Note that the signs cancel when adding variances of different signs.
hUnderapplied fixed overhead
= fixed-overhead budget variance + volume variance
= $1,080 U + $3,600 (positive)
= $4,680 underapplied
iBudgeted direct-labor hours = budgetedfixed-overheadfixedoverheadrate
=
$9
$18,000
= 2,000
Budgeted production = standardhoursperunit hours labor -direct budgeted
= 2,0002 =1,000units
jActual production = standardhoursperunit hours allowed standard
= 2 800units 1,600
=
kApplied variable overhead
= SH × SVR = 1,600 × $4
= $6,400
PROBLEM 11-44 (CONTINUED)
lApplied fixed overhead
= SH × standard fixed-overhead rate
= 1,600 × $9
= $14,400
PROBLEM 11-45 (55 MINUTES) 1.
Activity Level (Air Miles)
32,000 35,000 38,000
Variable expenses:
Fuel... $ 16,000 $ 17,500 $ 19,000 Aircraft maintenance... 24,000 26,250 28,500 Flight crew salaries... 12,800 14,000 15,200 Selling and administrative... 25,600 28,000 30,400 Total variable expenses... $ 78,400 $ 85,750 $ 93,100 Fixed expenses:
Depreciation on aircraft... $ 2,900 $ 2,900 $ 2,900 Landing fees... 900 900 900 Supervisory salaries... 9,000 9,000 9,000 Selling and administrative... 11,000 11,000 11,000 Total fixed expenses... $ 23,800 $ 23,800 $ 23,800 Total expenses... $102,200 $109,550 $116,900 2. First, there is a large unfavorable variance in passenger revenue, reflecting the fact
that the company's actual activity level was considerably below the planned level.
Second, there are unfavorable variances in fixed expenses. Finally, the favorable cost variances shown are misleading, as explained in requirement (3).
PROBLEM 11-45 (CONTINUED)
3. Memorandum
Date: Today
To: Red Leif, Manager of Aircraft Operations From: I. M. Student
Subject: Variance Report
The variance report is misleading because the expenses in the budget, which was prepared for an activity level of 35,000 air miles, are compared with actual expenses incurred at the actual activity level, which is considerably lower (32,000 air miles).
Management should expect variable expenses to be lower at the lower activity level.
The variance report should compare actual expenses with flexible budgeted expenses, given the actual activity level.
4. Aircraft maintenance... .75 23,500 24,000 500 F Flight crew salaries... .40 13,100 12,800 300 U Selling and administrative... .80 24,900 25,600 700 F Total variable expenses... $ 2.45 $ 78,500 $ 78,400 $ 100 U
Fixed expenses: Per
Month
Depreciation on aircraft... $ 2,900 $ 2,900 $ 2,900 $ -0- Landing fees... 900 1,000 900 100 U Supervisory salaries... 9,000 8,600 9,000 400 F Selling and administrative... 11,000 12,400 11,000 1,400 U Total fixed expenses... $23,800 $ 24,900 $ 23,800 $1,100 U Total expenses... $103,400 $102,200 $1,200 U
PROBLEM 11-45 (CONTINUED)
5. Jacqueline Frost has acted properly in every way. She noticed a major conceptual error in the way Red Leif had prepared his performance report. She pointed this out to him, and she also provided him with a correct analysis of September's performance.
Leif, however, insists on taking his original (and faulty) report to the company's owner. It sounds as though Leif resents the expertise that Frost has brought to the firm, and he is willing to mislead the owner.
If Leif carries through with his stated intention to present his original report to the owner, Frost has an ethical obligation to make the owner aware that it is a faulty analysis. Frost should show the owner her memo to Leif as well as the revised expense variance report.
Several ethical standards for managerial accountants apply in this situation. (See Chapter 1 for a listing of these standards.) Among the relevant standards are the following:
Competence
• Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.
Integrity
• Communicate unfavorable as well as favorable information and professional judgments or opinions.
Objectivity
• Communicate information fairly and objectivity.
• Disclose fully all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, comments, and recommendations presented.
PROBLEM 11-46 (20 MINUTES)
The purchase of the FMS could have caused the following variances:
(a) Favorable direct-material quantity variance, due to a decrease in material waste.
(b) Unfavorable direct-labor rate variance, due to the need for a more highly skilled labor force.
(c) Favorable direct-labor efficiency variance, due to increased automation and lower labor-time requirements.
(d) Unfavorable variable-overhead spending variance, due to additional production equipment requiring such support costs as electricity and maintenance.
(e) Favorable variable-overhead efficiency variance, due to the decreased usage of direct labor. (See point (c) in this list.)
(f) Unfavorable fixed-overhead budget variance, due to increased depreciation on the new production equipment.
(g) Fixed overhead volume variance:
The sign of the variance is negative, which means that applied fixed overhead exceeded the budgeted amount. It is likely that introduction of the new equipment enabled the company to operate at a higher level of production than was anticipated, due to the increased automation.
PROBLEM 11-47 (40 MINUTES)
1. a. Three weaknesses in WoodCrafts Inc.'s monthly Bookcase Production Performance Report are as follows:
• The report is based on a static budget. WoodCrafts should use a flexible budget that compares the same level of activity, calculating variances between the actual results and the flexible budget. Also, WoodCrafts might consider implementing an activity-based costing system.
• Costs over which the supervisors have no control, such as fixed production costs and allocated overhead costs, are included in the report.
• The report uses a single plant-wide rate to allocate fixed production costs.
Square footage may not drive the fixed production costs, and there may be a more appropriate base such as number of units produced. It may be more appropriate to use different cost drivers for each of the different product lines.
b. Due to Sara McKinley's remarks Steve Clark is likely to:
• Feel tense and apprehensive. The timing of McKinley's remarks, immediately before the meeting, without an opportunity for discussion and feedback, will leave Clark feeling tense and probably inattentive throughout the meeting.
• Be frustrated and confused by the conflicting signals of the report and what is occurring in his department and in the market. This confusion about the department's results and, consequently, the uncertainty of his job will lead to stress which may negatively affect his performance.
2. a. To improve the monthly performance report, WoodCrafts Inc. should:
• Use a flexible budget.
• Hold supervisors responsible for only those costs over which they have control by using a contribution approach.
• Include footnotes to make the report more understandable.
PROBLEM 11-47 (CONTINUED)
A revised monthly performance report based on a flexible budget is as follows:
WOODCRAFTS INC.