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Over- or under-applied overhead variances

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A) Explain the various factors and considerations used in determining if a variance is over- or under-applied.
Why is this type of analysis important to managers?
What are some causes of variances?
How should they be addressed?
Who should be held responsible for these variances

B) Price and efficiency variances. Peterson Foods manufactures pumpkin scones. For January 2007, it budgeted to purchase and use 15,000 pounds of pumpkin at $0.89 a pound. Actual purchases and usage for January 2007 were 16,000 pounds at $0.82 a pound. It budgets for 60,000 pumpkin scones. Actual output was 60,800 pumpkin scones.

1. Compute the flexible-budget variance.
2. Compute the price and efficiency variances.
3. Comment on the results in requirements 1 and 2.

How can determining the causes of these variances help
the company improve?

C) Flexible-budget preparation and analysis.
Bank Management Printers, Inc., produces luxury checkbooks
with three checks and stubs per page. Each checkbook is designed for an individual customer and is ordered through the customer's bank. The company's operating budget for September 2007 included these data:
Number of checkbooks 15,000
Selling price per book $20
Variable cost per book $8
Fixed costs for the month $145,000
The actual results for September 2007 were:
Number of checkbooks produced and sold 12,000
Average selling price per book $21
Variable cost per book $7
Fixed costs for the month $150,000
The executive vice president of the company observed that the operating income for September was much less than anticipated, despite a higher-than-budgeted selling price and a lower-than-budgeted variable cost per unit. As the company's management accountant, you have been asked to provide explanations for the disappointing September results. Bank Management develops its flexible budget on the basis of budgeted per-output-unit revenue and per-output-unit variable costs without detailed analysis of budgeted inputs.

1. Prepare a level 1 analysis of the September performance.
2. Prepare a level 2 analysis of the September performance.
3. Why might Bank Management find the level 2 analysis more informative than the level 1 analysis?
Explain your answer.

D) Need 2 or 3 names of a publicly traded company that you believe works with cost information.

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Solution Summary

This in-depth solution of 1428 words explains the various factors used in over/under applied overhead variances as well as what analysis is important to managers. It also looks at the causes of variances and their effects with real-life examples.

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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