ch8.ppt

CHAPTER 8Flexible Budgets,Overhead Cost Variances,andManagement Control

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.8-*

Learning Objective 1Explain the similarities and differences in planning variable and fixed overhead costs.


Planning of Variable andFixed Overhead CostsOH costs are more difficult to manage than direct costs: the relationship between production volume and OH costs is not easy to determine.Separating OH into variable and fixed OH.


Planning of Variable andFixed Overhead CostsVariable OH: energy, machine maintenance, engineering support, and indirect materials Fixed OH: plant leasing costs, depreciation on plant equipment, and salaries of the plant managers.


Planning of Variable andFixed Overhead CostsVariable OH cost planning: Effective planning of variable overhead costs involves undertaking only those variable overhead activities that add value for customers using the product or service.Examining how each item of variable overhead relates to delivering a superior product or service is part of this process.


Planning of Variable andFixed Overhead CostsFixed OH cost planning: 1. Focusing on eliminating the non-value added costs 2. Choosing the appropriate level of capacity or investment that will benefit the company over an extended time period since fixed costs are predetermined well before the budget period begins.


Standard CostingStandard costing is a costing system that utilized predetermined quantities and cost of inputs into the manufacturing process. Traces direct costs to output by multiplying the standard prices or rate by the standard quantities of inputs allowed for actual outputs producedAllocates overhead costs on the basis of the standard overhead-cost rates time the standard quantities of the allocation bases allowed for the actual outputs produced


Learning Objective 2Developing Budgeted Variable Overhead Allocation Rates.


Developing Budgeted VariableOverhead Allocation RatesStep 1: Choose the period to be used for the budget.Pasadena Co. uses a 12-month budget period.Step 2: Select the cost-allocation base. Pasadena budgets select labor-hours as the cost allocation base. 26,000 labor-hours for a budgeted output of 13,000 suits in year 2004.


Developing Budgeted VariableOverhead Allocation RatesStep 3: Identify the variable overhead costs associated with each cost-allocation base.Pasadenas budgeted variable OH costs for 2004 are $312,000.Step 4: Compute the rate per unit of each cost-allocation base. Budgeted variable cost rate per base$312,000 26,000 hours = $12/hour


Developing Budgeted VariableOverhead Allocation RatesWhat is the budgeted variable overheadcost rate per output unit (dress suit)?2.00 hours allowed per output unit $12budgeted variable overhead cost rate per base = $24 per suit (output unit)


Learning Objective 3Compute the variable overheadefficiency variance andspending variance.


Variable OverheadCost VariancesThe following data are for 2004 whenPasadena produced and sold 10,000 suits:Output units:10,000Labor-hours:Actual results:21,500Flexible-budget amount:20,000


Variable OverheadCost VariancesLabor-hours per output unit:Actual results:21,500 10,000 = 2.15Flexible-budget amount:20,000 10,000 = 2.00Variable manufacturing overhead costs:Actual results:$244,775Flexible-budget amount:$240,000


Variable OverheadCost VariancesVariable manufacturing overheadcost per labor-hour:Actual results:$244,775 21,500 = $11.3849Flexible-budget amount:$240,000 20,000 = $12.00


Variable OverheadCost VariancesVariable manufacturing overheadcost per output unit:Actual results:$244,775 10,000 = $24.4775Flexible-budget amount:$240,000 10,000 = $24.00


Flexible-Budget AnalysisThe variable overhead flexible-budget variancemeasures the difference between the actualvariable overhead costs and the flexible-budgetvariable overhead costs.Actual results: $244,775 Flexible-budget amount $240,000 = $4,775 U

Sheet1

Variable Overhead=Actual Costs-Flexible-budget

flexible-budget varianceincurredamount

Sheet2

Sheet3


Flexible-Budget AnalysisActualCosts Incurred $244,775Budgeted InputsAllowed for ActualOutputs at Budgeted Rate20,000 $12.00= $240,000$4,775 UFlexible-budget variance


The Details: Variable OH VariancesVariable Overhead Efficiency Variance is the difference between actual quantity of the cost-allocation base used and budgeted quantity of the cost-allocation base, times budgeted OH rate.

Sheet1


flexible-budget varianceIncurredamount

Sheet2

Variable{Actual quantity ofBudgeted quantity of}Budgeted variable

Overhead=variable overhead-variable overhead cost-Xoverhead cost

Efficiencycost-allocation baseallocation base allowedper unit of

Varianceused for actual outputfor actual outputcost-allocation base

Sheet3


Flexible-Budget AnalysisActual Quantityof Inputs atBudgeted Rate21,500 $12.00= $258,000Budgeted InputsAllowed for ActualOutputs at Budgeted Rate20,000 $12.00= $240,000$18,000 UVariable overhead efficiency variance


Interpretation of Efficiency VarianceDirect cost efficiency variance: whether more or fewer direct materials or direct labor hours are used per output than budgeted.OH cost efficiency: whether more or fewer cost allocation bases are used than budgeted.The key cause for Pasadenas unfavorableefficiency variance is the higher-than-budgetedlabor-hours used.


Interpretation of Efficiency VariancePossible causes:Less skilled workersProduction schedule inefficiencyPoor machine maintenanceA rush deliveryStandards too tight


The Details: Variable OH VariancesVariable Overhead Spending Variance is the difference between actual and budgeted variable overhead cost rate, multiplied by actual quantity of variable overhead cost-allocation base used

simple



Fixed Overhead=Actual Costs-Flexible-budget


complex



Efficiencycost-allocation baseallocation based allowedper unit of


Variable{Actual variableBudgeted variable}Actual quantity of

Overhead=overhead cost-overhead costXvariable overhead

Spendingper unit ofper unit ofcost-allocation base

Variancecost-allocation basecost-allocation baseused for actual output

Sheet3


Flexible-Budget AnalysisActual Costs Incurred $244,775Actual Quantityof Inputs atBudgeted Rate21,500 $12.00= $258,000$13,225 FVariable overhead spending variance


Variable Overhead VariancesFlexible-budget variance$4,775 UEfficiency variance$18,000 USpending variance$13,225 F


Interpretation Spending VarianceIn the Pasadena Co.s example, the 21,500 actual direct manufacturing labor-hours are 7.5% greater than the flexible-budget amount of 20,000 direct manufacturing labor-hours.(21,500 20,000) 20,000 = 7.5%Actual variable overhead costs of $244,775 are only 2% greater than the flexible-budget amount of $240,000.Actual variable OH cost rate is lower than budgeted.


Interpretation Spending VariancePossible causes:Actual prices of individual inputs are lower than budgeted.The percentage increase in actual quantity usage of individual items is less than percentage increase in labor hours.


Journal Entries for Variable Overhead Costs and VariancesWhat is the journal entry to record variablemanufacturing overhead?Variable ManufacturingOverhead Control 244,775Accounts Payable(and other) 244,775To record actual variable manufacturing overheadcosts incurred


Journal Entries for Variable Overhead Costs and VariancesWhat is the journal entry to allocate variablemanufacturing overhead?Work in Process Control 240,000Variable ManufacturingOverhead Allocated 240,000To record variable manufacturing overhead costallocated: (2.00 10,000 $12)What is the journal entry to isolate variances?


Journal Entries for Variable Overhead Costs and VariancesVariable ManufacturingOverhead Allocated240,000Variable OverheadEfficiency Variance 18,000Variable ManufacturingOverhead Control244,775Variable OverheadSpending Variance 13,225To isolate variances for the accounting period


Learning Objective 4Compute a budgetedfixed overhead cost rate.


Developing Budgeted FixedOverhead Allocation RatesFixed overhead costs are, by definition, a lump sum of costs that remain unchanged in total for a given period despite wide changes in the level of activity. These costs are fixed in the sense that they do not automatically increase or decrease with the level of activity within the relevant range.Fixed costs are expressed on a per-unit basis to facilitate assigning a unit cost to the product or service.


Developing Budgeted FixedOverhead Allocation RatesStep 1: Choose the period used for the budget.The budget period is typically twelve months.Step 2: Select the cost-allocation base.Pasadena budgets 26,000 labor-hours for a budgetedoutput of 13,000 suits in year 2004.


Developing Budgeted FixedOverhead Allocation RatesStep 3: Identify the fixed overhead costs. Pasadenas fixed manufacturing budget for 2004 is $286,000.Step 4: Compute the rate per unit of eachcost-allocation base. $286,000 26,000 = $11


Developing Budgeted FixedOverhead Allocation RatesWhat is the budgeted fixed overhead cost rateper output unit (dress suit)?2 hours allowed per output unit$11 budgeted fixed overhead cost rate per base$22 per suit (output unit)=


The Details: Fixed OH VariancesFixed Overhead Flexible-Budget Variance is the difference between actual fixed overhead costs and fixed overhead costs in the flexible budgetThis is the same amount for the Fixed Overhead Spending Variance

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flexible-budget varianceincurredamount

complex





Sheet3


Flexible-Budget VarianceActual CostsIncurred$300,000Flexible Budget:BudgetedFixed Overhead$286,000$14,000 UFixed overhead spending varianceFixed overhead flexible-budget variance


The Details: Fixed OH VariancesProduction-Volume Variance is the difference between budgeted fixed overhead and fixed overhead allocated on the basis of actual output producedThis variance is also known as the Denominator-Level Variance or the Output-Level Overhead Variance

simple





Production-Volume=Budgeted-Fixed Overhead allocated using

VarianceFixed Overheadbudgeted input allowed for

actual output units produced

complex





Variable{Actual variableBudgeted variable}Actual quantity of

Overhead=overhead cost-overhead costXvariable overhead

Spendingper unit ofper unit ofcost-allocation base

Variancecost-allocation basecost-allocation baseused for actual output

Sheet3


Production-Volume VarianceFlexible Budget:BudgetedFixed Overhead$286,000Fixed Overhead Allocated UsingBudgeted Input Allowed forActual Output Units Produced$220,000$66,000 UProduction-volume variance10,000 2.00 $11 = $220,000


Fixed Overhead VariancesFixed overhead variance (Difference between actual and allocated fixed OH) $80,000 UProduction-volume variance$66,000 USpending variance$14,000 U


Journal Entries for Fixed Overhead Costs and VariancesWhat is the journal entry to record fixedmanufacturing overhead?Fixed ManufacturingOverhead Control 300,000AccumulatedDepreciation, etc. 300,000To record actual fixed manufacturingoverhead costs incurred


Journal Entries for Fixed Overhead Costs and VariancesWhat is the journal entry to allocate fixedmanufacturing overhead?Work in Process Control 220,000Fixed ManufacturingOverhead Allocated 220,000To record fixed manufacturing overhead costallocated: (2.00 10,000 $11)What is the journal entry to isolate variances?


Journal Entries for Fixed Overhead Costs and VariancesFixed ManufacturingOverhead Allocated220,000Fixed OverheadSpending Variance 14,000Fixed OverheadVolume Variance 66,000Fixed ManufacturingOverhead Control 300,000To isolate variances for the accounting period


Learning Objective 5Interpreting the production-volume variance


Production-Volume VarianceThe production volume variance is an indicator of the use of capacity. If the company exceeded planned capacity, the variance is favorable. If the company fell short of planned capacity, the variance is unfavorable, as there was unused capacity.


Interpreting the Production-Volume VarianceManagement may have maintained some extra capacity to accommodate unexpected surges in demand.Production volume variance focusesonly on costs.Should unfavorable production volume variance be interpreted as a measure of the economic cost of unused capacity?


Production-Volume VarianceAnother way to view the production-volume variance is that a favorable variance indicates that overhead was over-allocated; if unfavorable, overhead is under-allocated.


Production-Volume VariancePossible causes of production-volume variance: 1. Weak demand 2. Quality problem 3. Strategic mistake


Learning Objective 6Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period.


A Roadmap: Variable Overhead

Actual Costs Incurred:Actual InputXActual Rate

Flexible Budget:Budgeted InputAllowed forActual OutputXBudgeted Rate

Actual InputsXBudgeted Rate

Allocated:Budgeted Input Allowed forActual OutputXBudgeted Rate

SpendingVariance

EfficiencyVariance

Never aVariance

Never aVariance

Flexible-BudgetVariance

Total Variable Overhead VarianceOver/Under Allocated Variable Overhead


A Roadmap: Fixed Overhead

Actual Costs Incurred:Actual InputXActual Rate

Flexible Budget:Budgeted InputAllowed forActual OutputXBudgeted Rate

Actual InputsXBudgeted Rate


SpendingVariance

EfficiencyVariance

Never aVariance

Never aVariance


Total Variable Overhead VarianceOver/Under Allocated Variable Overhead

Actual Costs Incurred

Flexible Budget:Same Budgeted Lump Sum (as in Static Budget)Regardless of Output Level

Same BudgetedLump Sum(as in Static Budget)Regardless of Output Level


SpendingVariance

Never aVariance

Production-VolumeVariance

Production-VolumeVariance


Total Fixed Overhead VarianceOver/Under Allocated Fixed Overhead


Integrated AnalysisA 4-variance analysis presents spending andefficiency variances for variable overheadcosts and spending and production-volumevariances for fixed overhead costs.Managers can reconcile the actual overheadcosts with the overhead amounts allocatedduring the period.


Integrated AnalysisActual manufacturing overhead incurred:Variable manufacturing overhead$244,775Fixed manufacturing overhead 300,000Total$544,775Overhead allocated:Variable manufacturing overhead$240,000Fixed manufacturing overhead 220,000Total$460,000Amount underallocated $ 84,775


Integrated Analysis 4-Variance Analysis: Spending V Efficiency V Volume VVariable OH: $13,225 F 18,000 U NeverFixed OH: 14,000 U Never 66,000 U


Integrated Analysis 3-Variance Analysis: Spending V Efficiency V Volume VTotal OH: $ 775 U 18,000 U 66,000 U


Integrated Analysis 2-Variance Analysis: Flexible V Production-Volume VTotal OH: 18,775 U 66,000 U


Production-Volume Variance and Sales-Volume Variance Flexible Operating income Static budget (1)based on allocated FC(2) Budget(3)Units Actual (x) Actual (x) Bgtd (y)Rev. Bgtd SP*x Bgtd SP*x Bgtd SP*yVC Bgtd/unit*x Bgtd/unit*x Bgtd/unit*yFC Bgtd Allocated BgtdOI Flexible OI Allocated OI Static OIFor OI:Difference between column 1 and 2: production-volume variance.Difference between column 2 and 3: operating income volume variance


Production-Volume Variance and Sales-Volume VarianceSales-volume variance

Production-volume variance

Operating income volume variance


Financial and Nonfinancial PerformanceOverhead variances are examples of financial performance measures.What are examples of nonfinancial measures?Actual labor time, relative to budgeted time Actual indirect materials usage per labor-hour, relative to budgeted indirect materials usage


Learning Objective 7Illustrate how the flexible-budget variance approach canbe used in activity-based costing.


Activity-Based Costing and Variance AnalysisABC systems classify costs of various activities into a cost hierarchy (output-unit level, batch level, product sustaining, and facility sustaining).The basic principles and concepts for variableand fixed manufacturing overhead costs canbe extended to ABC systems.


Activity-Based Costing and Variance Analysis Static ActualBudget Amounts1.Units produced and sold180,000151,2002.Batch size 150 1403.Number of batches 1,200 1,0804.Material-handling labor-hours per batch 6 6.255.Total labor-hours 7,200 6,7506.Variable OH cost per material-handling labor-hour $20 $217. Variable handling OH costs 144,000 141,7508.Fixed material-handling OH cost $216,000 $220,000


Activity-Based Costing and Variance AnalysisFlexible budget variance for variable handling OH=(Actual costs Flexible budget costs)=141,750 (151,200/150)*6*20=20,790 UVariable handling OH efficiency variance:(Actual Q of allocation base used- Budgeted Q of allocation base allowed)*budgeted variable OH per base=(6,750 6,048)*20=14,040 U


Activity-Based Costing and Variance AnalysisVariable handling OH spending variance:(Actual variable OH per base - Budgeted variable OH per base)* Actual Q of allocation base used=(21 20)*6,750=6, 750 U


Activity-Based Costing and Variance AnalysisFlexible budget variance for fixed handling OH (Spending variance)=4,000 UBudgeted fixed handling OH cost per unit of allocation base=Budgeted total fixed OH/ Budgeted total Q of base)=216,000/7,200 = 30Production-volume variance for fixed handling OH:=Budgeted fixed handling OH Fixed handling OH allocated=216,000 (151,200/150)*6*30=34,560 U

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ch8.ppt

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