Overhead variances, service sector. Easy Meals Now (EMN) ...

[Chloeellawright]

Overhead variances, service sector.
 
  Easy Meals Now (EMN) operates a meal home-delivery service. It has agreements with 20 restaurants to pick up and deliver meals to customers who phone or fax orders to EMN. EMN allocates variable and fixed overhead costs on the basis of delivery time. EMN's owner, Steve Roberts, obtains the following information for May 2014 overhead costs:
 
  Required:
  1. Compute spending and efficiency variances for EMN's variable overhead in May 2014.
  2. Compute the spending variance and production-volume variance for EMN's fixed overhead in May 2014.
  3. Comment on EMN's overhead variances and suggest how Steve Roberts might manage EMN's variable overhead differently from its fixed overhead costs.

Question 2

Prepaid Insurance is a(n)
 a. asset.
  b. liability.
  c. revenue.
  d. expense.

[Brenm]

Answer to Question 1

1.
Easy Meals Now
(May 2014) Actual
Results Flexible
Budget Static
Budget
Output units (number of deliveries) 8,600 8,600 12,000
Hours per delivery 0.66a 0.70 0.70
Hours of delivery time 5,660 6,020b 8,400c
Variable overhead costs per delivery hour 2.00d 1.75 1.75
Variable overhead (VOH) costs 11,320
10,535e 14,700f
Fixed overhead costs 39,600 33,600 33,600
Fixed overhead cost per hour 4.67g

a 5,660 hours 8,600 deliveries = 0.66 hours per delivery
b hrs. per delivery actual number of deliveries = 0.70 8,600 = 6,020 hours
c hrs. per delivery expected number of deliveries = 0.70 12,000 = 8,400 hours
d 11,320 VOH costs 5,660 delivery hours = 2.00 per delivery hour
e 8,600 deliveries 0.70 hours per delivery 1.75 VOH cost per delivery hour = 14,700
f 12,000 deliveries 0.70 hours per delivery 1.75 VOH cost per delivery hour = 14,700
f Static budget delivery hours = 12,000 units 0.70 hours/unit = 8,400 hours;
g Fixed overhead rate = Fixed overhead costs Static budget delivery hours = 33,600 8,400 hours = 4 per hour

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

5,660 hrs 1.75 per hr. 6,020 hrs 1.75 per hr.

11,320 9,905 10,535

1,415 U 630 F
Spending variance Efficiency variance

2.
FIXED OVERHEAD

Actual Costs Incurred Flexible Budget:
Same Budgeted
Lump Sum
(as in Static Budget) Regardless of Output Level Allocated:
Budgeted Input Qty. Allowed for
Actual Output
Budgeted Rate

6,020 hrs. 4/hr.

39,600 33,600 24,080

6,000 U 9,520 U
Spending variance Production-volume variance

3. The spending variances for variable and fixed overhead are both unfavorable. This means that EMN had increases over budget in either or both the cost of individual items (such as telephone calls and gasoline) in the overhead cost pools, or the usage of these individual items per unit of the allocation base (delivery time). The favorable efficiency variance for variable overhead costs results from more efficient use of the cost allocation baseeach delivery takes 0.66 hours versus a budgeted 0.70 hours.
EMN can best manage its fixed overhead costs by long-term planning of capacity rather than day-to-day decisions. This involves planning to undertake only value-added fixed-overhead activities and then determining the appropriate level for those activities. Most fixed overhead costs are committed well before they are incurred. In contrast, for variable overhead, a mix of long-run planning and daily monitoring of the use of individual items is required to manage costs efficiently. EMN should plan to undertake only value-added variable-overhead activities (a long-run focus) and then manage the cost drivers of those activities in the most efficient way (a short-run focus).
There is no production-volume variance for variable overhead costs. The unfavorable production-volume variance for fixed overhead costs arises because EMN has unused fixed overhead resources that it may seek to reduce in the long run.

Answer to Question 2

A

[Chloeellawright]

Excellent

[LegendaryAnswers]

TYSM