Cost Accounting (14th Edition)

PROBLEM FOR SELF-STUDY 287
nonfinancial performance measures probably would be reported daily or hourly on the
production floor. The overhead variances we discussed in this chapter capture the
financial effects of items such as the three factors listed, which in many cases first
appear as nonfinancial performance measures. An especially interesting example along
these lines comes from Japan, where some companies have introduced budgeted-toactual
variance analysis and internal trading systems among group units as a means to
rein in their CO 2
emissions. The goal is to raise employee awareness of emissions
reduction in preparation for the anticipated future costs of greenhouse-gas reduction
plans being drawn up by the new Japanese government.
Finally, both financial and nonfinancial performance measures are used to evaluate
the performance of managers. Exclusive reliance on either is always too simplistic because
each gives a different perspective on performance. Nonfinancial measures (such as those
described previously) provide feedback on individual aspects of a manager’s performance,
whereas financial measures evaluate the overall effect of and the tradeoffs among different
nonfinancial performance measures. We provide further discussion of these issues in
Chapters 13, 19, and 23.
Decision
Point
How are overhead
variances useful in
nonmanufacturing
settings?
Problem for Self-Study
Nina Garcia is the newly appointed president of Laser Products. She is examining the May
2012 results for the Aerospace Products Division. This division manufactures wing parts for
satellites. Garcia’s current concern is with manufacturing overhead costs at the Aerospace
Products Division. Both variable and fixed overhead costs are allocated to the wing parts on
the basis of laser-cutting-hours. The following budget information is available:
Budgeted variable overhead rate
$200 per hour
Budgeted fixed overhead rate
$240 per hour
Budgeted laser-cutting time per wing part
1.5 hours
Budgeted production and sales for May 2012 5,000 wing parts
Budgeted fixed overhead costs for May 2012 $1,800,000
Actual results for May 2012 are as follows:
Wing parts produced and sold
4,800 units
Laser-cutting-hours used
8,400 hours
Variable overhead costs $1,478,400
Fixed overhead costs $1,832,200
1. Compute the spending variance and the efficiency variance for variable overhead.
2. Compute the spending variance and the production-volume variance for fixed overhead.
3. Give two explanations for each of the variances calculated in requirements 1 and 2.
Required
Solution
1 and 2. See Exhibit 8-7.
3. a. Variable overhead spending variance, $201,600 F. One possible reason for this
variance is that the actual prices of individual items included in variable overhead
(such as cutting fluids) are lower than budgeted prices. A second possible reason is
that the percentage increase in the actual quantity usage of individual items in the
variable overhead cost pool is less than the percentage increase in laser-cuttinghours
compared to the flexible budget.
b. Variable overhead efficiency variance, $240,000 U. One possible reason for this
variance is inadequate maintenance of laser machines, causing them to take more
laser-cutting time per wing part. A second possible reason is use of undermotivated,
inexperienced, or underskilled workers with the laser-cutting machines, resulting in
more laser-cutting time per wing part.