cost management - strategies for decision making
TRANSCRIPT
8/10/2019 Cost Management - Strategies for Decision Making
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Hilton • Maher • Selto
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17Flexible Budgets, Overhead
Cost Management, and
Activity-Based Budgeting
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved .
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A flexible budget is valid fora range of activity
A static budgetis based on a
particular plannedlevel of activity
This range of activity isthe relevant range
A flexible overhead budgetis defined as a detailed planfor controlling overhead cost
valid in the firm’s relevant range of activity
What Are Flexible Overhead
Budgets?
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Flexible budget
Activity(machine hours) 4,500 6,000 7,500
Budgeted
electricity cost $900 $1,200 $1,500
Static budget
Activity (machine
hours) 6,000
Budgeted electricitycost $1,200
Based on planned
June production of4,000 tents, at 1.5
machine hours pertent.
We cannot tell fromthis budget what itwould cost to make
3,000 tents.
Based ononly ONE
anticipatedactivitylevel
Includes several
possible activity levels
Static Budget Versus Flexible
Budget
Exh.
17-1
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ActualElectricity Cost
BudgetedElectricity Cost(static budget)
$1,050 $1,200
The manager is comparing the electricity cost incurred at theACTUAL activity level (3,000 tents) with the budgeted electricity
cost at the PLANNED activity level (4,000 tents).
These activity levels are different, therefore we wouldexpect the electricity cost to be different
Advantages Of Flexible
Budgets
Cost Variance
$150 Favorable
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ActualElectricity Cost
BudgetedElectricity Cost(flexible budget)
Cost Variance
$1,050 $900 $150 Unfavorable
The manager is comparing the electricity cost incurred at theACTUAL activity level, 3,000 tents with the budgeted electricity
cost at the ACTUAL activity level, (3,000 tents x 1.5 machine
hours) = 4,500 machine hours
Electrical cost was greater than it should have been,given the actual level of output
Advantages Of Flexible
Budgets
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Product
Units
Produced
Standard
Machine
Hours Per
Unit
Total
Standard
Allowed
Machine
HoursTree Line Model 1,200 1.5 1,800
River's Edge Model 900 1.8 1,620
Valley Model 700 2 1,400
Total 2,800 4,820
Output measuresrequire different inputs
Outputmeasures canbe used if youonly make one
product
Flexible budget must bebased on outputs that
can be compared
Activity Measure: Based On
Input Or Output
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1.5 standardallowed
machinehours per
tent
Activity: Standard allowed
machine hours 4,500 6,000 7,500
Budgeted electricity costs $900 $1,200 $1,500
Flexible budget (based on input)
Activity: tentsmanufactured 3,000 4,000 5,000Budgeted electricity costs $900 $1,200 $1,500
Flexible budget (based on output)
Usually not a meaningful measure in a multi-product firm because
it would require us to add numbers of unlike products
Output ismeasured interms of the
standardallowed
input, givenactual output
Flexible Budgets: Inputs
Versus Outputs
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If you recall, this issimilar to the
PredeterminedCost-Driver Rate
discussed inChapter 4.
Total Budgeted
Monthly
Overhead Cost
=
BudgetedVariable-
Overhead Cost
per Activity Unit
×
Total
Activity
Units
+
Budgeted Fixed-
Overhead Cost
per Month.
EXAMPLEAssume that the company needs flexiblebudget numbers for three activity levels:
4,500 hours, 6,000 hours, and 7,500
hours.Also, assume that the PredeterminedBudgeted Variable-Overhead Cost perActivity Unit is $6 per hour. BudgetedFixed-Overhead Cost for the month is
$30,000.Flexible Budget?
Formula Flexible Budget
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$57,000$66,000
$75,000
= $6 ×4,5006,000
7,500
+ $30,000
The flexed total budgeted monthly overheadfor each activity level can now be used
effectively in planning and varianceanalysis.
Formula Flexible Budget
Total Budgeted
Monthly
Overhead Cost
=
BudgetedVariable-
Overhead Cost
per Activity Unit
×
Total
Activity
Units
+
Budgeted Fixed-
Overhead Cost
per Month
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Manufacturing Overhead Work-in-Process Inventory
Actual
overhead
Applied
overhead
Actualhours
Predeterminedoverhead
rate
X
Applied
overhead
Actualhours
Predeterminedoverhead
rate
X
Overhead Application -
Normal Costing
The Difference
between NormalCosting and
StandardCosting lies inthe quantity of
hours used
Exh.
17-4
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Manufacturing Overhead Work-in-Process Inventory
Actual
overhead
Applied
overheadStandardallowedhours
Predeterminedor standardoverhead
rate
X
Applied
overheadStandardallowedhours
Predeterminedor standardoverhead
rate
X
Overhead Application -
Standard Costing
The Difference
between NormalCosting and
StandardCosting lies inthe quantity of
hours used
Exh.
17-4
E h
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Both normal-costing and standard-costing systems use anoverhead rate computed at the beginning of the accounting
period (predetermined overhead rate)
Budgeted
Overhead
Planned Monthly
Activity
Predetermined
Overhead Rate
Variable $36,000 6,000 machine hours $6.00
Fixed $30,000 6,000 machine hours $5.00
Total $66,000 6,000 machine hours $11.00
Computed annually
Predetermined Overhead
Rates
Exh.
17-5
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Choice Of Activity Measure
How should the cost manager select theactivity measure for the flexible budget?
The variable overhead cost
and the activity measure
should move together
Direct labor time hastraditionally been the most
popular activity measure in
manufacturing firms
As automation increases, more
firms are switching to machine
hours or process time
Dollar measures, such as
direct-labor or
material costs can be
misleading because
they are subject to
price-level changes
and other fluctuations
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Koala manufactured 3,000 tree line tents X 1.5 machine hours per tent= standard allowed 4,500 machine hours
Actual machine hoursfor June = 4,800
The total variable overheadvariance for June =
Actual variable overhead $30,480Budget variable overhead $27,000
$ 3,480 F
Overhead Cost Variances
For standard allowed 4,500 machine hours the budget overhead (fromExhibit 17-3) for June =
Variable overhead $27,000
Fixed overhead $30,000From the cost accounting records, the actual overhead for June =
Variable overhead $30,480Fixed overhead $32,500
$62,980
Exh
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The VARIABLE-OVERHEAD SPENDING VARIANCE is the difference between
the actual variable overhead cost and the product of the standardvariable -overhead rate and the actual hours of an activity base
(or cost driver)
Variable Overhead Variances
Exh.
17-6
? ? ? ?4,800 machine
hours
$6.35 per
machine hour
4,800 machine
hours
$6.00 per
machine hour
Actual variable overhead
Actual machinehours (AH)
Actual rate(AVR)
Actual machinehours (AH)
Standard rate(SVR)
Actual machine hours × the
standard rate
$30,480 $28,800
$1,680 UnfavorableVariable-overheadspending variance
Exh
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$27,000$28,800
? ? ? ?
The VARIABLE-OVERHEAD EFFICIENCY VARIANCE is the difference between
the actual and the standard hours of an activity base (or cost driver)multiplied by the standard variable overhead rate
Flexible budget:
variable overhead
Standard allowedmachine hours (SH)
Standard rate(SVR)
Actual machinehours (AH)
Standard rate(SVR)
Actual machine hours times
the standard rate
Variable Overhead Variances
4,500 machinehours
$6.00 permachine hour
4,800 machinehours
$6.00 permachine hour
Exh.
17-6
$1,800 UnfavorableVariable-overheadefficiency variance
Exh
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? ? ? ?
The flexible budget amount for variable overhead $27,000 is the
amount that will be applied to Work-in-Process forproduct-costing purposes
Flexible budget:variable overhead
Standard allowedmachine hours (SH)
Standard rate(SVR)
Variable overhead appliedto work in process
$27,000
Standard allowedmachine hours (SH)
Standard rate(SVR)
4,500 machinehours
$6.00 permachine hour
4,500 machinehours
$6.00 permachine hour
No difference
Variable Overhead Variances
Exh.
17-6
$27,000
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?The unfavorable variance
resulting from using moremachine hours than the standard
quantity, given actual output
The actual labor rate per hourdiffers from the standard rate
Efficiency variance Spending variance
The variable overhead efficiencyvariance has nothing to do with
efficient or inefficient use ofvariable overhead items
An unfavorable variance meansthat the total actual cost of
variable overhead is > expected,after adjusting for the actual
quantity of machine hours used
The spending variance is thereal control variance for variable
overhead
How To Interpret The
Variable Overhead Variances
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The FIXED-OVERHEAD BUDGET VARIANCE is the differencebetween actual fixed overhead and budgeted fixed overhead
Fixed-overhead
budget variance
Actual Fixed
overhead
Budgeted fixed
overhead= -
Fixed-overheadbudget variance
Actual Fixedoverhead =
$32,500
Budgeted fixedoverhead =
$30,000
= -
Unfavorable variance of$2,500, because we spent
more than budgeted
Fixed Overhead Budget
Variance
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The FIXED-OVERHEAD VOLUME VARIANCE is the differencebetween budgeted fixed overhead and actual fixed overhead.Assume that the predetermined fixed overhead per machine
hour = $5 and that it is based on 4,500 machine hours.
Fixed-overheadvolume variance
Budgeted fixedoverhead
Applied fixedoverhead= -
Applied fixed
overhead =$22,500
Fixed-overhead
volume variance
Budgeted
fixed overhead =$30,000
= -
Variance = $7,500 U, because we produced less than budgeted.
Fixed Overhead Volume
Variance
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Budget Variance Volume Variance
The real controlvariance forfixed overhead
because itcompares actual
expenditures with
budgeted fixedoverhead costs
Reconciles the two different purposesof the cost accounting system
For cost-management
purposes, the cost-accounting systemrecognizes that fixedoverhead does not
change as productionactivity varies
For product-costingpurposes, budgeted
fixed overhead isdivided by plannedactivity to obtain apredetermined orstandard fixed-overhead rate
Managerial Interpretation Of
Fixed-Overhead Variances
Exh
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(1) Actualfixed O/H
(2) Budgetedfixed O/H
(3)Fixed overhead applied
to work in process
Standard allowedmachine hours
Standard fixedoverhead rate
X
4,500machine hrs
$5.00 permachine hr
X
$30,000$32,500
Fixed-overheadbudget variance =
$2,500 U
Fixed-overheadvolume variance =
$7,500 U
$22,500
Fixed Overhead Budget And
Volume Variances
Exh.
17-8
Exh.
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Fixed overhead
$30,000
$22,500
0
Applied fixed overhead($5.00 per standard
allowed machinehour)
Budgeted fixed
overhead
Machinehours
Volume variance$7,500
4,500 Standardallowed hours,
given actualoutput
6,000Plannedmonthlyactivity
Appliedfixed
overhead
in June
Budgeted Versus Applied
Fixed Overhead
Exh.
17-9
Exh.
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4-, 3-, & 2-way Variance Analysis
Four-way analysis
Three-way analysis
Two-way analysis
Variable-overheadspendingvariance
Fixed-overheadbudget
variance
Variable-overheadefficiencyvariance
Fixed-overheadvolumevariance
$1,680 U $2,500 U $1,800 U $7,500 U
Combined spendingvariance
$4,180 U $1,800 U $7,500 U
$5,980 U
Combined budget variance
Underapplied overhead
$7,500 U
$62,980 actual overhead - overhead
applied to WIP, 49,500 = $13,480
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Using The Overhead Cost
Performance Report In Cost
ManagementAn Overhead Cost Performance Report
Shows the fixed overheadbudget variance ,along with
the actual and budgeted costfor each fixed overhead item.
Shows the variable overheadspending and efficiencyvariances, along with the
actual and budgeted cost foreach variable overhead item.
The report would be used by management toexercise control over each of the overhead costs.
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Manufacturing Overhead
Actual $62,980 $49,500 Applied
Credit:Indirect-material inventoryWages payable
Utilities payableAccumulated depreciationPrepaid insurance andproperty taxesEngineering salaries payable
19,35032,610
2,1701,3001,050
6,500
Debit:Work-in-process inventory
Applied overhead:$11.00 (predeterminedoverhead rate) X4,500 (standard allowedhours
$49,500
$13,480
Debit:Cost of goods sold
$13,480
Using Standard Costs In
Product Costing
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An activity-based flexible budget may provide more useful costmanagement information than a conventional flexible budget
The traditional budget Activity-based flexible budget
Costs are categorizedas variable based on
volume measures
Machinehours
Directlaborhours
Costs are categorizedas variable based onseveral cost drivers
Cost that may seem fixed withrespect to a single volume-basedcost driver may be variable with
respect to other non-volume relatedcost drivers
Activity-Based Flexible Budget