Different management levels in Caudill, Inc., require varying degrees of manager

Question

Different management levels in Caudill, Inc., require varying degrees of managerial accounting information. Because of the need to comply with the managers' requests, four different variances for manufacturing overhead are computed each month. The information for the September overhead expenditures is as follows:

    Budgeted output units                                                      3,200 units

    Budgeted fixed manufacturing overhead               $20,000

    Budgeted variable manufacturing overhead                   $5 per direct labor hour

    Budgeted direct manufacturing labor hours                      2 hours per unit

    Fixed manufacturing costs incurred                        $26,000

    Direct manufacturing labor hours used                      7,200

    Variable manufacturing costs incurred                  $35,600

    Actual units manufactured                                             3,400

Required:

a.     Compute a 4-variance analysis for the plant controller.

b.     Compute a 3-variance analysis for the plant manager.

c.     Compute a 2-variance analysis for the corporate controller.

d.   Compute the flexible-budget variance for the manufacturing vice president.

Explanation / Answer

a. 4-variance analysis :

Variable overhead spending variance = $35,600 – (7,200 x $5) = $400 favorable

Variable overhead efficiency variance = $5 x (7,200 – 6,800 * ) = $2,000 unfavorable

* 3,400 units x 2 hours = 6,800 hours

Fixed overhead spending variance = $26,000 – $20,000 = $6,000 unfavorable

Fixed overhead production-volume variance = $20,000 – (3,400 x 2 x $3.125 * ) = $1,250 favorable

* $20,000/(3,200 units x 2 hours) = $3.125

b. 3-variance analysis:

Spending variance = $400 favorable + $6,000 unfavorable = $5,600 unfavorable

Efficiency variance = $2,000 unfavorable

Production-volume variance = $1,250 favorable

c. 2-variance analysis: Flexible-budget variance = $400 F + $2,000 U + $6,000 U = $7,600 unfavorable

Production-volume variance = $1,250 favorable

d. 1-variance analysis :

Actual Flexible budget Variance U Fixed overhead $26000 $21250 i.e ($3.125 x 3400 x 2) $4750 U Variable overhead 35600 34000 i.e (3400 x2 x5) 1600 U Flexible budget variance $6350

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