Nonlinear Cost Behavior The MNO Company has assumed that its total manufacturing overhead cost is most heavily affected by only one variable, direct-labor hours. The company used a linear approximation, as shown in the following graph, as a basis for determining its flexible-budget allowances at various volumes: lop8

The actual cost behavior pattern is the nonlinear function represented by the curve in the graph.
Suppose that manager Charles is responsible for the whole plant, manager Baker for overhead spending variances, and foreman Able for overhead efficiency variances. At the end of the period, actual hours are Of, and standard hours are Oh,. Actual overhead is Ol.
. Suppose that the flexible budget was based on the linear approximation. Use the graph to measure the amount of, the spending variance (call it Al), the efficiency variance (call it gh), and the flexible-budget variance (call it gl).
. Suppose the budget was based on the curve. How would your answers in 1 be different? Be specific.
. Compare your answers in 1 and 2. If the linear approximation in | is used as a basis for flexible budgeting, what are the likely effects on the attitudes of each of the three managers?

Transcribed Image Text:

Total Overhead Costs hs ha Direct Labor Hours