Author Question: Liabilities represent amounts owed to creditors. Indicate whether the statement is true or ... (Read 185 times)

abarnes · **on:** Jul 6, 2018

Liabilities represent amounts owed to creditors.
Indicate whether the statement is true or false

Question 2

(30 minutes) Overhead variances, service sector.

Cavio is a cloud service provider that offers computing resources to handle enterprise-wide applications. For March 2014, Cavio estimates that it will provide 18,000 RAM hours of services to clients. The budgeted variable overhead rate is 6 per RAM hour.
At the end of March, there is a 500 favorable spending variance for variable overhead and a 1,575 unfavorable spending variance for fixed overhead. For the services actually provided during the month, 14,850 RAM hours are budgeted and 15,000 RAM hours are actually used. Total actual overhead costs are 119,875.

Required:
1. Compute efficiency and flexible-budget variances for Cavio's variable overhead in March 2014. Will variable overhead be over- or underallocated? By how much?
2. Compute production-volume and flexible-budget variances for Cavio's fixed overhead in March 2014. Will fixed overhead be over- or underallocated? By how much?

anoriega3 · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

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Answer to Question 2

1. In the columnar presentation of variable overhead variance analysis, all numbers shown in bold are calculated from the given information, in the order (a)(e).

VARIABLE MANUFACTURING OVERHEAD

Flexible Budget:
Budgeted Input Qty.
Actual Costs Incurred Actual Input Qty.
Budgeted Rate
Allowed for Budgeted
Actual Output Rate

(b) (a) (c)
15,000
6.00 14,850
6.00
RAM hrs. per RAM hr. RAM hrs. per RAM hr.
89,500 90,000 89,100

500 F 900 U (d)
Spending variance Efficiency variance

400 U (e)
Flexible-budget variance

a. 15,000 RAM hours 6 per RAM hour = 90,000

b. Actual VMOH = 90,000 500F (VOH spending variance) = 89,500

c. 14,850 RAM hours 6 per RAM hour = 89,100

d. VOH efficiency variance = 90,000 89,100 = 900 U

e. VOH flexible budget variance = 900U 500F = 400 U

Allocated variable overhead will be the same as the flexible budget variable overhead of 89,100. The actual variable overhead cost is 89,500. Therefore, variable overhead is underallocated by 400.

2. In the columnar presentation of fixed overhead variance analysis, all numbers shown in bold are calculated from the given information, in the order (a)(e).

FIXED MANUFACTURING OVERHEAD
Flexible Budget: Allocated:
Actual Costs Static Budget Lump Sum
Regardless of Output Budgeted Input Qty. Allowed for Budgeted
Incurred Level Actual Output Rate

(a) (b)
14,850
1.60 (c)
RAM hrs. per RAM hr.
30,375 28,800 23,760

1,575 U 5,040 U (d)
Spending variance Production-volume variance

1,575 U (e)
Flexible-budget variance

a. Actual FOH costs = 119,875 total overhead costs 89,500 VOH costs = 30,375

b. Static budget FOH lump sum = 30,375 1,575 spending variance = 28,800

c. FOH allocation rate = 28,800 FOH static-budget lump sum 18,000 static-budget RAM-hours

= 1.60 per RAM hour

Allocated FOH = 14,850 RAM hours 1.60 per RAM hour = 23,760

d. PVV = 28,800 23,760 = 5,040 U

e. FOH flexible budget variance = FOH spending variance = 1,575 U

Allocated fixed overhead is 23,760. The actual fixed overhead cost is 30,375. Therefore, fixed overhead is underallocated by 6,615.