Cost Accounting, Chapter 8 11ch08

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Flexible Budgets, Variances,

and Management Control: II

Flexible Budgets, Variances,

and Management Control: II

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Learning Objective 1

Explain in what ways the

planning of variable overhead

costs and fixed overhead

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Planning of Variable and

Fixed Overhead Costs

Planning of Variable and

Fixed Overhead Costs

Effective planning of variable overhead costs involves undertaking only those variable

overhead activities that add value for customers using the product or service.

The key challenge with planning fixed overhead is choosing the appropriate level of capacity or

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Identify the features of

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Standard Costing

Standard input allowed for one output unit Standard cost

per input unit

×

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Developing Budgeted Variable

Overhead Allocation Rates

Step 1:

Choose the time period used to compute the budget.

Pasadena Co. uses a twelve-month budget period. Step 2:

Select the cost-allocation base. Pasadena budgets 26,000 labor-hours for a budgeted output of

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Developing Budgeted Variable

Step 3:

Identify the variable overhead costs.

Pasadena’s budgeted variable

manufacturing costs for 2004 are $312,000. Step 4:

Compute the rate per unit of each cost-allocation base.

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Developing Budgeted Variable

What is the budgeted variable overhead cost rate per output unit (dress suit)? 2.00 hours allowed per output unit × $12

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Compute the variable overhead

efficiency variance and

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Variable Overhead

Cost Variances

Variable Overhead

Cost Variances

The following data are for 2004 when Pasadena produced and sold 10,000 suits:

Output units: 10,000

Labor-hours:

Actual results: 21,500

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Variable Overhead

Cost Variances

Variable Overhead

Cost Variances

Labor-hours per output unit:

Actual results: 21,500 ÷ 10,000 = 2.15 Flexible-budget amount: 20,000 ÷ 10,000 = 2.00

Variable manufacturing overhead costs:

Actual results: $244,775

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Variable Overhead

Cost Variances

Variable Overhead

Cost Variances

Variable manufacturing overhead cost per labor-hour:

Actual results:

$244,775 ÷ 21,500 = $11.3849 Flexible-budget amount:

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Variable Overhead

Cost Variances

Variable Overhead

Cost Variances

Variable manufacturing overhead cost per output unit:

Actual results:

$244,775 ÷ 10,000 = $24.4775 Flexible-budget amount:

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Flexible-Budget Analysis

The variable overhead flexible-budget variance measures the difference between the actual variable overhead costs and the flexible-budget

variable overhead costs. Actual results: $244,775

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Actual

Costs Incurred 21,500 × $11.3849

= $244,775

Budgeted Inputs Allowed for Actual

Outputs at Budgeted Rate 20,000 × $12.00

= $240,000

$4,775 U

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Flexible-Budget Analysis

Actual Quantity of Inputs at Budgeted Rate 21,500 × $12.00

= $258,000

Budgeted Inputs Allowed for Actual

Outputs at Budgeted Rate 20,000 × $12.00

= $240,000

$18,000 U

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Actual Costs Incurred

21,500 × $11.3849 = $244,775

Actual Quantity of Inputs at Budgeted Rate 21,500 × $12.00

= $258,000

$13,225 F

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Variable Overhead Variances

Flexible-budget variance $4,775 U

Efficiency variance $18,000 U

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Explain how the efficiency variance

for a variable indirect-cost item

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Efficiency Variance

In 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%

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Efficiency Variance

Because actual variable overhead costs increase less than labor-hours, the actual variable

overhead cost per labor-hour ($11.3849) is lower than the budgeted amount ($12.00). The key cause for Pasadena’s unfavorable efficiency variance is the higher-than-budgeted

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Developing Budgeted Fixed

Step 1:

Choose the time period used to compute the budget.

The budget period is typically twelve months. Step 2:

Select the cost-allocation base.

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Overhead Allocation Rates

Step 3:

Identify the fixed overhead costs. Pasadena’s fixed manufacturing budget for 2004 is $286,000.

Step 4:

Compute the rate per unit of each

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Overhead Allocation Rates

What is the budgeted fixed overhead cost rate per output unit (dress suit)?

2.00 hours allowed per output unit

$11 budgeted fixed overhead cost rate per input unit

$22 per suit (output unit)

×

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Flexible-Budget Variance

Actual Costs Incurred $300,000

Flexible Budget: Budgeted

Fixed Overhead $286,000

$14,000 U

Fixed overhead spending variance

Fixed overhead flexible-budget variance

–

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Production-Volume Variance

Flexible Budget: Budgeted

Fixed Overhead $286,000

Fixed Overhead Allocated Using Budgeted Input Allowed for Actual Output Units Produced

$220,000

$66,000 U

Production-volume variance 10,000 × 2.00 × $11 = $220,000

–

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Fixed Overhead Variances

Fixed overhead variance $80,000 U

Volume variance $66,000 U

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Learning Objective 6

Explain two concerns

when interpreting the

production-volume variance

as a measure of the economic

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Interpreting the

Management may have maintained some

extra capacity. Management may have maintained some

extra capacity.

Production volume variance focuses

only on costs. Production volume

variance focuses only on costs.

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Interpreting the

Had Pasadena manufactured 13,000 suits instead of 10,000,

allocated fixed overhead would have been = $286,000

(13,000 × 2.00 × $11). Had Pasadena manufactured 13,000 suits instead of 10,000,

allocated fixed overhead would have been = $286,000

(13,000 × 2.00 × $11).

No production-volume variance would have occurred.

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Learning Objective 7

Show how the 4-variance

analysis approach reconciles

the actual overhead incurred

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Integrated Analysis

A 4-variance analysis presents spending and efficiency variances for variable overhead costs and spending and production-volume

variances for fixed overhead costs.

Managers can reconcile the actual overhead costs with the overhead amounts allocated

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Integrated Analysis

Actual variable overhead costs

incurred $244,775

Flexible budget: budgeted inputs

allowed × budgeted rate $240,000

Flexible-budget variance $4,775 U

Underallocated variable overhead

–

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Integrated Analysis

Actual variable overhead costs

incurred $244,775

Actual inputs ×

budgeted rate $258,000

Variable overhead spending variance

$13,225 F

–

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Integrated Analysis

Actual inputs ×

Flexible budget: budgeted inputs

allowed × budgeted rate $240,000

Variable overhead efficiency variance

$18,000 U

–

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Integrated Analysis

Actual fixed overhead costs

incurred $300,000

Budgeted fixed overhead

costs $286,000

Fixed overhead spending variance

$14,000 U

–

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Integrated Analysis

Budgeted fixed overhead

costs $286,000

Budgeted inputs allowed ×

Volume variance $66,000 U

–

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Integrated Analysis

Actual manufacturing overhead incurred: Variable manufacturing overhead $244,775 Fixed manufacturing overhead 300,000

Total $544,775

Overhead allocated:

Variable manufacturing overhead $240,000 Fixed manufacturing overhead 220,000

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Integrated Analysis

4-Variance Analysis: Variable manufacturing overhead:

Spending variance $13,225 F

Efficiency variance 18,000 U

Fixed manufacturing overhead:

Spending variance 14,000 U

Volume variance 66,000 U

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Integrated Analysis

3-Variance Analysis

Variable and fixed manufacturing overhead: Spending variance

$13,225 F + $14,000 U = $ 775 U Variable manufacturing overhead:

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Integrated Analysis

2-Variance Analysis

Variable and fixed manufacturing overhead: Spending variance $ 775 U

Variable manufacturing overhead: Efficiency variance 18,000 U

Flexible-budget variance: $18,775 U Fixed manufacturing overhead

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Different Purposes of

Overhead Cost Analysis

The greater the number of output units manufactured, the higher the budgeted total variable manufacturing overhead

costs and the higher the total variable manufacturing overhead costs

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Different Purposes of

Every output unit that Pasadena manufactures will increase the fixed overhead allocated

to products by $22.

Managers should not use this unitization of fixed manufacturing overhead costs for

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Journal Entries for Overhead

Costs and Variances

Journal Entries for Overhead

Costs and Variances

What is the journal entry to record variable manufacturing overhead?

Variable Manufacturing

Overhead Control 244,775

Accounts Payable 244,775

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Costs and Variances

Journal Entries for Overhead

Costs and Variances

What is the journal entry to allocate variable manufacturing overhead?

Work in Process Control 240,000 Variable Manufacturing

Overhead Allocated 240,000 To record variable manufacturing overhead cost allocated: (2.00 × 10,000 × $12)

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Costs and Variances

Variable Manufacturing

Overhead Allocated 240,000 Variable Overhead

Efficiency Variance 18,000 Variable Manufacturing

Overhead Control 244,775 Variable Overhead

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Costs and Variances

What is the journal entry to record fixed manufacturing overhead?

Fixed Manufacturing

Overhead Control 300,000 Accumulated

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Journal Entries for Overhead

Costs and Variances

What is the journal entry to allocate fixed manufacturing overhead?

Work in Process Control 220,000 Fixed Manufacturing

Overhead Allocated 220,000 To record fixed manufacturing overhead cost allocated: (2.00 × 10,000 × $11)

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Costs and Variances

Fixed Manufacturing

Overhead Allocated 220,000 Fixed Overhead

Spending Variance 14,000 Fixed Overhead

Volume Variance 66,000 Fixed Manufacturing

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Financial and Nonfinancial

Performance

Financial and Nonfinancial

Performance

Overhead 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,

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Activity-Based Costing and

Variance Analysis

Activity-Based Costing and

Variance Analysis

ABC 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 variable and fixed manufacturing overhead costs can

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