Answer 17-1

CHAPTER 17 Example 17A: Variance Analysis Our variance analysis example and practice exercise use the flexible budget approach. A flexible budget is one that is created using budgeted revenue and/or budgeted cost amounts. A flexible budget is adjusted, or flexed, to the actual level of output achieved (or perhaps expected to be achieved) during the budget period. A flexible budget thus looks toward a range of activity or volume (versus only one level in the static budget). Examples of how the variance analysis works are contained in Figure 17-1 (the elements). in Figure 17-2 (the composition), and in Figures 17-3 and 17-4 (the calculations). Study these examples before undertaking the Practice Exercise. We have restated Exhibit 17-2 in a worksheet format for purposes of this example. The new format appears as follows. (The numbers have not changed.) $920,000 Actual Cost Less: Flexible Budget 990,000 $70,000 Price Variance (favorable) $937,500 Budgeted Cost Less: Flexible Budget Quantity Variance (unfavorable) 990,000 $52,500 $ 17,500 Net Variance (favorable) Assumptions (refer to Exhibit 17-2) Cost per #Therapy Minutes (Activity Level) (3) 330,000 Overhead equals Therapy Minute (5) $2.79 (6) $3.00 divided by Cost Actual (1) $920,000 Budgeted (2) $937,500 (4) 312,500 498 EXAMPLES AND EXERCISES, SUPPLEMENTAL MATERIALS, AND SOLUTIONS tine Practice Exercise 17-1 Exhibit 17-2 presents the Variance Analysis for hospital rehab services for the third quar ter. For our practice exercise we will duplicate this report for the fourth quarter. We are able to reformat the information in Exhibit 17-2 into a worksheet as follows. The fourth be labe For quarter assumptions appear below the worksheet. Actual Cost Less: Flexible Budget Price Variance (favorable) Budgeted Cost Less: Flexible Budget Quantity Variance (unfavorable) Net Variance (unfavorable) Assumptions Overhead # Therapy Minutes (Activity Level) Cost per Cost divided by equals Therapy Minute Actual (1) $950,000 (2) $930,000 (3) 350,000 (5) $2.71 (6) $3.00 Budgeted (4) 310,000 Required 1. Set up a worksheet for the fourth quarter like that shown in Exhibit 17-2 for the third quarter 2 Insert the Fourth Quarter Input Data (per assumptions given above) on the worksheet. 3. Complete the "Actual Cost,""Flexible Budget," and "Budgeted Cost" sections at the top of the worksheet. 4. Compute the Price Variance and the Quantity Variance in the middle of the worksheet 5. Indicate whether the Price and the Quantity Variances are favorable or unfavorable for the fourth quarter. Optional Can you compute how the $950,000 actual overhead costs and the $930,000 budgeted ove head costs were calculated? wer- Assignment Exercise 17-1: Variance Analysis Greenview Hospital operated at 120% of normal capacity in two of its departments during the year. It operated 120 % times 20.000 normal capacity direct labor nursing hours in Chapter 17 499 outine services and it operated 120 % times 20,000 normal capacity equipment hours in he laboratory. The lab allocates overhead by measuring minutes and hours the equipment is used; thus equipment hours. Assumptions: For Routine Services Nursing: 20,000 hours X 120% Budgeted Overhead at 24,000 hours total. Actual Overhead at 24,000 hours = $42,000 fixed plus $7,000 variable = $49,000 total. Applied Overhead for 24,000 hours at $2.35 $56,400. 24,000 direct labor nursing hours. $42,000 fixed plus $6,000 variable = $48,000 For Laboratory: 20,000 hours X 120% = 24,000 equipment hours. Budgeted Overhead at 24,000 hours total Actual Overhead at 24,000 hours $59,600 fixed plus $11,600 variable total Applied Overhead for 24,000 hours at $3.455 = $82,920. $59,600 fixed plus $11,400 variable = $71,000 = $71,200 Required 1. Set up a worksheet for applied overhead costs and volume variance with a column for Routine Services Nursing and a second column for Laboratory 2. Set up a worksheet for actual overhead costs and budget variance with a column for Routine Services Nursing and a second column for Laboratory. 3. Set up a worksheet for volume variance and budget variance totaling with a column for Routine Services Nursing and a second column for Laboratory. 4. Insert input data from the Assumptions. 5. Complete computations for all three worksheets. C net variance