Question

CoCo sells cookies while traveling around the city to customers. CoCo is reviewing last month’s overheads. Variable overhead costs for items such as bakers’ wages were budgeted at $15 per hour. Fixed overheads for the month were budgeted at $50,000. The budgeted number of sales was 5,000. They use average travel time as the base for allocating overheads. They budgeted that one sale should on average take 45 minutes. Actual results for the past month were $35,000 variable overhead, $32,000 fixed overhead, 2,450 hours of travel time, and 3,200 sales.

1. Calculate spending and efficiency variances for CoCo’s variable and fixed overhead for last month and evaluate the results.

2. Describe the difference between a direct materials efficiency variance and a variable manufacturing overhead efficiency variance.

3. Why is the flexible-budget variance the same amount as the spending variance for fixed manufacturing overheads?

4. Why might managers find a Level 3 analysis more informative than a Level 2 analysis? Use the case of CoCo as an illustrative example.

Answer 1

	VOH	FOH	No.of sales	Av. Travel time	Total hrs.	FOH Rate/hr.
Budgeted	$ 15/hr.	50000	5000	45 min./sale	3750	13.33
Flexible budget	36000	50000	3200	45	2400	20.83
Actual	$35,000	32000	3200	45.9375	2450	13.06

1…

VOH Spending Variance=(Std. VOH rate/hr.-Actual VOH Rate/hr.)*Actual hrs.

(15-(35000/2450))*2450

1750

F

VOH Efficiency Variance=(Std. hrs.for actual -Actual hrs.)*Std. Rate/hr.

(2400-2450)*15=

-750

UF

Fixed OH Spending Variance=Budgeted FOH-Actual FOH

50000-32000=

18000

F

Fixed OH Efficiency Variance=(Std. hrs. allowed *FOH rate)-(Actual Hrs.*FOH Rate)

(3750*13.33)-(2450*13.33)=

17329

UF    (FOH spread over lesser no.of hours than budgeted)

2.Direct materials efficiency variance=(Actual Quantity used - Standard Quantity allowed for actual production)*Std.Price/Quantity

It is studying the variance ,positive/negative , in total material costs due efficiency /inefficiency in usage of materials as compared to the standard quantity allowed.

VOH Efficiency Variance=(Std. hrs.for actual prodn./sales -Actual hrs.)*Std. Rate/hr.

It is studying the variance ,positive/negative , in total VOH costs due efficiency /inefficiency in usage of hours(ie.time) as compared to the standard hours allowed.

3. Flexible-budget variance is the same amount as the spending variance for fixed manufacturing overheads-- because the fixed Ohs remain the same in both the static and flexible budgets .

Fixed Ohs are period/capacity costs & do not vary for reasonably -differing levels of capacities-----unlike variable costs that vary with every unit/hr.

4. Level 2 analysis

is converting the static budget into a flexible budget according to hours worked or quantity used &

then comparing the flexed budget to the actual results achieved

to study the positive /negative variances, so as to take

corrective actions.

Whereas,

Level 3 analysis

is delving much in-depth ,like

segregating the reasons for variances of individual items of product costs , like

Materials

Labor &

Overheads &

analysing the reasons for variances due to chenge in price/quantity /hrs. used , in actual practice.

Hence,

the managers find a Level 3 analysis more informative than a Level 2 analysis

From the above, Level 2 variance

shows a favourable variance of $ 1000 (36000-35000) for VOH

Whereas,

a Level 3 variance analysis

gives additional insight into the variance that

$ 1750 is reduced as compared to the flexible budget ,due to reduction in spending or cost &

$ 750 is unfavourable to the company ,due to putting in more work-hrs. than that budgeted for the activity .

Thus, the manager can focus his attention on correcting the deficiencies , that too ,within a more short span of time, in a level-3 analysis than in a level-2 one.