Keeran Corporation's flexible budget for two levels of activity appears below:

Keeran Corporation's flexible budget for two levels of activity appears below:

		Cost Formula (per machine-hour)	Activity (in machine-hours)
			6,100	6,200
	Variable overhead costs:
	Lubricants.............................	$3.70	$ 22,570	$ 22,940
	Power....................................	1.50	9,150	9,300
	Total variable overhead cost...	$5.20	31,720	32,240
	Fixed overhead costs:
	Depreciation.........................		173,972	173,972
	Taxes....................................		68,076	68,076
	Total fixed overhead cost........		242,048	242,048
	Total overhead cost.................		$273,768	$274,288

    129. If the denominator level of activity is 6,100 machine-hours, the variable element in the predetermined overhead rate would be:

            A)      $5.20

            B)      $44.24

            C)      $39.68

            D)      $44.88

           

            Ans:  A     LO:  5    

            Solution:

            Variable element = $31,720 ÷ 6,100 MHs = $5.20 per MH

    130. If the denominator level of activity is 6,100 machine-hours, the fixed element in the predetermined overhead rate would be:

            A)      $520.00

            B)      $39.68

            C)      $5.20

            D)      $44.88

           

            Ans:  B     LO:  5    

            Solution:

            Fixed element = $242,048 ÷ 6,100 MHs = $39.68 per MH

    131. If the denominator level of activity is 6,200 machine-hours, the predetermined overhead rate would be:

            A)      $520.00

            B)      $5.20

            C)      $44.24

            D)      $39.04

           

            Ans:  C     LO:  5    

            Solution:

            Predetermined overhead rate = $274,288 ÷ 6,200 MHs = $44.24 per MH

Use the following to answer questions 132-133:

Kasteron Corporation has a standard cost system in which manufacturing overhead is applied to units of product on the basis of standard machine-hours. The company has provided the following data concerning its manufacturing overhead costs for last year:

	Actual machine-hours...................................................	640	hours
	Standard machine-hours allowed for the actual output	650	hours
	Denominator activity....................................................	700	hours
	Actual fixed overhead costs..........................................	$2,000
	Budgeted fixed overhead costs.....................................	$2,100
	Predetermined overhead rate ($1 variable + $3 fixed).	$4	per hour

    132. The fixed overhead budget variance would be:

            A)      $100 F

            B)      $300 F

            C)      $300 U

            D)      $200 F

           

            Ans:  A     LO:  6    

            Solution:

            Budget variance = Actual fixed overhead cost − Budgeted fixed overhead cost

            = $2,000 − $2,100 = $100 F

    133. The volume variance would be:

            A)      $180 F

            B)      $240 F

            C)      $150 U

            D)      $200 U

           

            Ans:  C     LO:  6    

            Solution:

           

Volume variance = Fixed portion of predetermined overhead rate × (Denominator hours − Standard hours allowed) = $3 per hour × (700 hours − 650 hours) = $3 per hours × 50 hours = $150 U

Use the following to answer questions 134-135:

Asper Corporation has provided the following data for February.

	Denominator level of activity...................	7,700	machine-hours
	Budgeted fixed overhead costs..................	$266,420
	Fixed portion of the predetermined overhead rate.........................................	$34.60	per machine-hour
	Actual level of activity..............................	7,900	machine-hours
	Standard machine-hours allowed for the actual output..........................................	8,200	machine-hours
	Actual fixed overhead costs......................	$259,960

    134. The budget variance for February is:

            A)      $6,460 F

            B)      $6,920 U

            C)      $6,460 U

            D)      $6,920 F

           

            Ans:  A     LO:  6    

            Solution:

            Budget variance = Actual fixed overhead cost − Budgeted fixed overhead cost

            = $259,960 − $266,420 = $6,460 F

    135. The volume variance for February is:

            A)      $17,300 U

            B)      $17,300 F

            C)      $6,920 F

            D)      $6,920 U

           

            Ans:  B     LO:  6    

            Solution:

           

Volume variance = Fixed portion of predetermined overhead rate × (Denominator hours − Standard hours allowed)

= $34.60 per MH × (7,700 MHs − 8,200 MHs)

= $34.60 per MH × 500 MHs = $17,300 F

Use the following to answer questions 136-137:

The following data for May has been provided by Mccawley Corporation.

	Denominator level of activity........	2,600	machine-hours
	Budgeted fixed overhead costs......	$53,820
	Actual level of activity..................	2,700	machine-hours
	Standard machine-hours allowed for the actual output...................	2,800	machine-hours
	Actual fixed overhead costs..........	$56,290

    136. The budget variance for May is:

            A)      $2,070 U

            B)      $2,470 F

            C)      $2,070 F

            D)      $2,470 U

           

            Ans:  D     LO:  6    

            Solution:

            Budget variance = Actual fixed overhead cost − Budgeted fixed overhead cost

            = $56,290 − $53,820 = $2,470 U

    137. The volume variance for May is:

            A)      $2,070 U

            B)      $4,140 U

            C)      $4,140 F

            D)      $2,070 F

           

            Ans:  C     LO:  6    

            Solution:

           

Volume variance = Fixed portion of predetermined overhead rate × (Denominator hours − Standard hours allowed)

= ($53,820 ÷ 2,600 MHs) × (2,600 MHs − 2,800 MHs) =

= $20.70 per MH × 200 MHs = $4,140 F

    138. The following overhead data are for a department in a large company.

           

		Actual	Static budget
	Activity level (in units).....	290	280
	Variable costs:
	Indirect materials............	$3,625	$3,780
	Power..............................	$2,648	$2,576
	Fixed costs:
	Supervision.....................	$9,670	$9,700
	Depreciation...................	$4,210	$4,200

            Required:

           

            Prepare a report that would be useful in assessing how well costs were controlled in this department.

            Ans: 

	Cost formula per unit	Actual costs incurred	Flexible budget based on actual activity	Variance
Variable costs:
Indirect materials...	$13.50	$3,625	$3,915	$290 F
Power.....................	9.20	2,648	2,668	20 F
Total variable cost.....	$22.70	6,273	6,583	310 F
Fixed costs:
Supervision............		9,670	9,700	30 F
Depreciation...........		4,210	4,200	10 U
Total fixed cost.........		13,880	13,900	20 F
Total cost...................		$20,153	$20,483	$330 F

            AICPA FN:  Measurement; Reporting     LO:  1; 2    

    139. You have been recently hired by Ritter Enterprises as an assistant manager. As your first task, you have been asked to set up a flexible budgeting system for manufacturing overhead. The major purpose of this system will be to prepare performance reports.

           

            Required:

           

            What three criteria should be used when selecting an activity base for constructing a flexible budget? Why are these criteria important?

            Ans:  The three criteria and the reasons for their importance are:

                     

                      1. There should be a causal relationship between the activity base and the overhead costs in the flexible budget. If variations in the activity base do not cause variations in the costs, then the performance report will have little value.

                     

                      2. The activity base should not be expressed in dollars or other currency. Activity bases stated in dollars are subject to price-level changes that may have little to do with overhead costs. For example, an increase in the wage rate of direct labor would cause a direct labor cost activity base to change even though a proportionate change may not take place in the overhead costs themselves.

                     

                      3. The activity base should be simple and easy to understand. If the activity base is complex or difficult to understand, it will probably cause confusion and misunderstanding rather than serve as a means of positive cost control.

           

            AICPA FN:  Measurement; Reporting    

    140. Elvin Hospital bases its budgets on patient-visits. The hospital's static budget for May appears below:

           

	Budgeted number of patient-visits............	5,100
	Budgeted variable overhead costs:
	Supplies (@ $2.70 per patient-visit)......	$13,770
	Laundry (@ $3.00 per patient-visit).......	15,300
	Total variable overhead cost.....................	29,070
	Budgeted fixed overhead costs:
	Wages and salaries.................................	16,830
	Occupancy costs.....................................	16,830
	Total fixed overhead cost..........................	33,660
	Total budgeted overhead cost....................	$62,730

            Required:

           

            Prepare a flexible budget for an activity level of 5,300 patient-visits per month.

            Ans: 

	Cost Formula (per patient-visit)	Flexible Budget Based on 5,300 Patient-Visits
Variable overhead costs:
Supplies...................................	$2.70	$14,310
Laundry...................................	3.00	15,900
Total variable overhead cost......	$5.70	30,210
Fixed overhead costs:
Wages and salaries..................		16,830
Occupancy costs......................		16,830
Total fixed overhead cost...........		33,660
Total overhead cost....................		$63,870

            AICPA FN:  Measurement; Reporting    

    141. Wytch Corporation bases its budgets on machine-hours. The company's static budget for February appears below:

           

	Budgeted number of machine-hours.........	6,000
	Budgeted variable overhead costs:
	Supplies (@ $6.90 per machine-hour)...	$  41,400
	Power (@ $3.70 per machine-hour).......	22,200
	Total variable overhead cost.....................	63,600
	Budgeted fixed overhead costs:
	Salaries...................................................	51,600
	Equipment depreciation.........................	26,400
	Total fixed overhead cost..........................	78,000
	Total budgeted overhead cost....................	$141,600

            Required:

           

            Prepare a flexible budget in good form for an activity level of 6,400 machine-hours per month.

            Ans: 

	Cost Formula (per machine-hour)	Flexible Budget Based on 6,400 Machine-Hours
Variable overhead costs:
Supplies.................................	$6.90	$44,160
Power....................................	3.70	23,680
Total variable overhead cost....	$10.60	67,840
Fixed overhead costs:
Salaries..................................		51,600
Equipment depreciation........		26,400
Total fixed overhead cost.........		78,000
Total overhead cost..................		$145,840

            AICPA FN:  Measurement; Reporting    

    142. Lobato Hospital bases its budgets on patient-visits. The hospital's static budget for September appears below:

           

	Budgeted number of patient-visits............	9,900
	Budgeted variable overhead costs:
	Supplies (@ $2.20 per patient-visit)......	$21,780
	Laundry (@ $1.10 per patient-visit).......	10,890
	Total variable overhead cost.....................	32,670
	Budgeted fixed overhead costs:
	Salaries...................................................	28,710
	Occupancy costs.....................................	10,890
	Total fixed overhead cost..........................	39,600
	Total budgeted overhead cost....................	$72,270

Actual results for the month were:

	Actual number of patient-visits.................	10,000
	Supplies.....................................................	$22,040
	Laundry.....................................................	$10,640
	Salaries......................................................	$28,480
	Occupancy costs........................................	$11,360

            Required:

           

            Prepare a flexible budget performance report in good form.

            Ans: 

	Cost Formula (per patient-visit)	Actual Costs Incurred for 10,000 Patient-Visits	Flexible Budget Based on 10,000 Patient-Visits	Variances
Variable overhead costs:
Supplies..............................	$2.20	$22,040	$22,000	$40 U
Laundry..............................	1.10	10,640	11,000	360 F
Total variable overhead cost.	$3.30	32,680	33,000	320 F
Fixed overhead costs:
Salaries...............................		28,480	28,710	230 F
Occupancy costs.................		11,360	10,890	470 U
Total fixed overhead cost......		39,840	39,600	240 U
Total overhead cost...............		$72,520	$72,600	$80 F

            AICPA FN:  Measurement; Reporting    

    143. Weakly Corporation bases its budgets on machine-hours. The company's static budget for September appears below:

           

	Budgeted number of machine-hours.........	6,000
	Budgeted variable overhead costs:
	Power (@ $9.30 per machine-hour).......	$ 55,800
	Supplies (@ $5.20 per machine-hour)...	31,200
	Total variable overhead cost.....................	87,000
	Budgeted fixed overhead costs:
	Salaries...................................................	68,400
	Equipment depreciation.........................	46,200
	Total fixed overhead cost..........................	114,600
	Total budgeted overhead cost....................	$201,600

Actual results for the month were:

	Actual number of machine-hours..............	6,400
	Power.........................................................	$59,870
	Supplies.....................................................	$34,960
	Salaries......................................................	$65,100
	Equipment depreciation.............................	$44,610

            Required:

           

            Prepare a flexible budget performance report in good form.

            Ans: 

	Cost Formula (per machine-hour)	Actual Costs Incurred for 6,400 Machine-Hours	Flexible Budget Based on 6,400 Machine-Hours	Variances
Variable overhead costs:
Power..................................	$9.30	$59,870	$59,520	$350 U
Supplies..............................	5.20	34,960	33,280	1,680 U
Total variable overhead cost.	$14.50	94,830	92,800	2,030 U
Fixed overhead costs:
Salaries...............................		65,100	68,400	3,300 F
Equipment depreciation.....		44,610	46,200	1,590 F
Total fixed overhead cost......		109,710	114,600	4,890 F
Total overhead cost...............		$204,540	$207,400	$2,860 F

            AICPA FN:  Measurement; Reporting    

    144. Cashaw Corporation, which produces only a single product, bases its budgets on units produced. The company's static budget for September appears below:

           

	Budgeted number of units produced.........	4,200
	Budgeted variable overhead costs:
	Power (@ $6.50 per unit).......................	$27,300
	Supplies (@ $1.10 per unit)...................	4,620
	Total variable overhead cost.....................	31,920
	Budgeted fixed overhead costs:
	Salaries...................................................	34,020
	Occupancy costs.....................................	4,620
	Total fixed overhead cost..........................	38,640
	Total budgeted overhead cost....................	$70,560

Actual results for the month were:

	Actual number of units produced..............	4,500
	Power.........................................................	$31,840
	Supplies.....................................................	$4,730
	Salaries......................................................	$32,480
	Occupancy costs........................................	$4,800

            Required:

           

            Prepare a flexible budget performance report in good form.

            Ans: 

	Cost Formula (per unit)	Actual Costs Incurred for 4,500 Units	Flexible Budget Based on 4,500 Units	Variances
Variable overhead costs:
Power..................................	$6.50	$31,840	$29,250	$2,590 U
Supplies..............................	1.10	4,730	4,950	220 F
Total variable overhead cost.	$7.60	36,570	34,200	2,370 U
Fixed overhead costs:
Salaries...............................		32,480	34,020	1,540 F
Occupancy costs.................		4,800	4,620	180 U
Total fixed overhead cost......		37,280	38,640	1,360 F
Total overhead cost...............		$73,850	$72,840	$1,010 U

            AICPA FN:  Measurement; Reporting