Cost Accounting (14th Edition)

284 CHAPTER 8 FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL
Possible reasons for larger actual materials-handling labor-hours per batch are
as follows:
Inefficient layout of the Elegance production line
Materials-handling labor having to wait at work centers before picking up or delivering
materials
Unmotivated, inexperienced, and underskilled employees
Very tight standards for materials-handling time
Identifying the reasons for the efficiency variance helps Lyco’s managers develop a plan
for improving materials-handling labor efficiency and to take corrective action that will
be incorporated into future budgets.
We now consider fixed setup overhead costs.
Flexible Budget and Variance Analysis for Fixed Setup
Overhead Costs
Exhibit 8-6 presents the variances for fixed setup overhead costs in columnar form.
Lyco’s fixed setup overhead flexible-budget variance is calculated as follows:
Fixed-setup
overhead Actual costs
= - Flexible-budget
flexible-budget incurred costs
variance
= $220,000 - $216,000
= $4,000 U
Note that the flexible-budget amount for fixed setup overhead costs equals the staticbudget
amount of $216,000. That’s because there is no “flexing” of fixed costs.
Moreover, because fixed overhead costs have no efficiency variance, the fixed setup overhead
spending variance is the same as the fixed overhead flexible-budget variance. The
spending variance could be unfavorable because of higher leasing costs of new setup
equipment or higher salaries paid to engineers and supervisors. Lyco may have incurred
these costs to alleviate some of the difficulties it was having in setting up machines.
Exhibit 8-6
Columnar Presentation of Fixed Setup Overhead Variance Analysis: Lyco
Brass Works for 2012 a
Flexible Budget:
Same Budgeted
Allocated:
Lump Sum
Budgeted Input Quantity
(as in Static Budget)
Allowed for
Actual Costs Regardless of Actual Output
Incurred Output Level Budgeted Rate
(1) (2) (3)
(1,008 b batches 6 hours/batch $30/hour)
(6,048 hours $30/hour)
$220,000 $216,000 $181,440
Level 3 $4,000 U $34,560 U
Spending variance
Production-volume variance
Level 2
$4,000 U
Flexible-budget variance
a F = favorable effect on operating income; U = unfavorable effect on operating income.
b 1,008 batches = 151,200 units ÷ 150 units per batch.