Accounting 6310

Chapter 13 – Overhead and Marketing Variances

Predetermined Overhead Rates

• Budgeted overhead = Predetermined OH• Budgeted cost driver Rate

• Budgeted cost driver? What volume should be used?– Expected volume? Based on next year’s projected

volume – Normal volume? Long-run average production– Some other volume?

Flexible Budget for Several Levels900 units 1000

units1100 units

Variable Costs

$5 unit 4,500 5,000 5,500

Fixed costs

10,000 10,000 10,000

Total costs

14,500 15,000 15,500

Predetermined OH Rates

• Variable OH: $4,500/900 = $5

• $5,000/1,000 = $5

• $5,500/1,100 = $5

• It makes no difference which level of output we choose to set variable OH rate. It is $5 for all of the levels.

Predetermined OH Rates

• Fixed OH: $10,000/900 = $11.11

• $10,000/1,000 = $10

• $10,000/1,100 = $9.09• It DOES make a difference which level of output we

choose to set the fixed OH rate. The OH rate varies from $11.11 to $9.09 based on the level of units we choose to set the rate. This chosen level is called the DENOMINATOR LEVEL.

Predetermined OH Rates

• If we choose to use 900 units to set our OH rate, we will have the higher $11.11 OH rate.

• More overhead will be allocated than the other two levels.

• We are more likely to have overallocated OH with a higher rate.

Variable Overhead

• Flexible budget rates = standard rate – Predetermined OH rate

• Flexible budget variances– Spending variance

• Difference in actual cost and predetermined variable overhead rate multiplied by the actual cost driver

– Efficiency variance

• Difference in actual cost driver and STANDARD cost driver multiplied by the predetermined variable overhead rate

• Causes

Variable OH Variances

• Actual Var. OH SR x AH SR x SH

• |__________________| |_____________|

• Spending Variance Efficiency Variance

• |_________________________________|

• Total Variable OH Variance

Fixed Overhead

• Flexible budget rates - based on denominator level

• Fixed spending variance– Difference in actual amount spent and budgeted

amount (FROM THE FLEXIBLE BUDGET)– Controllable variance

Fixed Overhead

• Production-volume variance– Difference in flexible budget and

predetermined fixed overhead rate x standard activity

– Depends on denominator level chosen– This is part of the sales volume variance– Deemed an “uncontrollable” variance

• Causes

Fixed OH Variances

• Actual Fixed Flexible• Overhead Budget SR x SH• |__________________| |_____________|• Spending Variance Production Volume

Variance• |_________________________________|• Total Fixed OH Variance

Variances

• Efficiency variance – we are assuming that variable overhead varies linearly with the cost driver. If this is not the case, this variance will be inaccurate.

• Production volume variance – If the production manager is responsible for this variance, this may cause overproduction. Better to put sales in charge of this variance.

Marketing Variances

• For revenues, the opposite holds true.– FAVORABLE: Actual > Standard– UNFAVORABLE: Actual < Standard

• Marketing Variances– Price variance (Difference in sales prices)– Quantity variance (Difference in sales volumes)

• Mix variance (Results from selling a different proportion of products than planned)

• Sales variance (Difference in volume sold)

Marketing Variances

• Price – – Result of this variance lets management know how

successful their price strategy was– Did they have to lower their price to sell products? Or

were customers willing to pay a price premium?– Person who sets prices is responsible

Marketing Variances

• Quantity – • Mix – details consumer preferences for products,

especially when the products are substitutes– Favorable (unfavorable) if consumers shift to a higher

(lower) priced (CM) product

– Must evaluate why customers chose one product over another

– Marketing probably responsible

Marketing Variances

• Quantity:– Sales (volume) Variance:

• This variance tells us whether we sold more units than planned.

• Favorable variance results if we sold more volume than planned.

• Person responsible for generating demand for overall product is responsible (probably marketing)

Marketing Variances

• AP x AQ SP x AQ SP x SQ

• |__________________| |_____________|

• Price Variance Quantity Variance

• |_________________________________|

• Total Marketing Variance

Marketing Variances

• Quantity Variance:– Mix variance = (Actual mix % - Standard mix

%) x Actual units of all products sold x Standard price

– Sales variance = (Actual units of all products sold – standard units of all products sold) x standard mix % x Standard Price

Sales Volume Variance

• Sales volume variance can be broken down into:– Change in market share due to market share:

• Tells us how much of our change in profits is due to increases or decreases in our hold on the market

• Our managers should be able to control this variance.

– Change in market share due to industry volume:• Tells us how much of our increased (decreased) sales is due to

a bigger (smaller) overall market for our products

• Our managers generally cannot control the overall industry volume.

Homework

• P13-5 – Oneida Metal

• P13-12 – Wine Distributors

• DUE WEDNESDAY, MARCH 18