1 copyright © 2008 cengage learning south-western. heitger/mowen/hansen flexible budgets and...
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1Copyright © 2008 Cengage Learning South-Western.
Heitger/Mowen/Hansen
Flexible Budgets and Overhead Analysis
Chapter Nine
Cornerstones of Managerial Accounting 2e
Cornerstones of Managerial Accounting 2e
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Objective # 1Objective # 1
Prepare a flexible budget, and use it for performance reporting.
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Performance Reports
• Compare actual costs with budgeted costs
• Two ways:◦ Compare actual costs with budgeted costs
for the budgeted level of activity
∙ Based on a static budget
◦ Compare actual costs with the actual level of activity∙ Based on a flexible budget
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Static Budget
• A budget for one particular level of activity• Performance report will compare:
◦ Direct materials, direct labor, and overhead costs budgeted for the planned level of activity with
◦ Actual costs for the actual level of activity∙ Resulting in unfavorable variances when actual
production exceeds the planned level
• To create a meaningful performance report:◦ Actual costs and expected costs must be compared
at the same level of activity
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Flexible Budget• Enables a firm to compute expected costs for a
range of activity levels• Two types:
◦ Before-the-fact -- Allows managers to see the expected outcomes for a range of activity levels ∙ Used to generate financial results for a number of
plausible scenarios◦ After-the-fact -- Created for the actual level of activity
∙ Used to compute what costs should have been for the actual level of activity
∙ Expected costs are then compared with the actual costs in order to assess performance
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Objective # 2Objective # 2
Calculate the variable overhead variances and explain their
meaning
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Total Overhead Variance
• Difference between applied and actual overhead
• Broken down into:◦ Total Variable Overhead Variance
∙ Broken further into:▫ Variable Overhead Spending Variance▫ Variable Overhead Efficiency Variance
◦ Total Fixed Overhead Variance∙ Broken further into:
▫ Fixed Overhead Spending Variance▫ Fixed Overhead Volume Variance
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Total Variable Overhead Variance
Actual Costs Applied Costs Total Variance– =
(AH X AVOR) – (SH X SVOR)
Hours allowed for production (SH)x
Standard Variable Overhead Rate (SVOR)
Actual Hours x Actual Variable Overhead Rate
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Variable Overhead Spending Variance
• Measures the aggregate effect of the differences between
◦ Actual variable overhead rate (AVOR)◦ Standard variable overhead rate (SVOR)
• Two ways to calculate:◦ Three-pronged columnar approach◦ Formula approach
∙ (AVOR – SVOR)AH
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Variable Overhead Efficiency Variance
• Measures the change in variable overhead consumption that occurs because of efficient (or inefficient) use of direct labor
• Two ways to calculate:◦ Three-pronged columnar approach◦ Formula approach
∙ (AH – SH)SVOR
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Example
VOH spending variance
(AVOR – SVOR)AH
Formula Approach:
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Example
VOH efficiency variance
(AH – SH) SVOR
Formula Approach:
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Objective # 3Objective # 3
Calculate the fixed overhead variances, and explain their
meaning
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Total Fixed Overhead Variance
• Difference between actual and applied fixed overhead
• When applied overhead = standard fixed overhead rate x standard hours allowed for the actual output
• Broken down into:◦ Fixed Overhead Spending Variance◦ Fixed Overhead Volume Variance
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Fixed Overhead Spending Variance
• Difference between◦ Actual fixed overhead rate (AFOH)◦ Budgeted fixed overhead rate (BFOH)
• Two ways to calculate:◦ Three-pronged columnar approach◦ Formula approach
∙ AFOH – SFOH
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Fixed Overhead Volume Variance
• Difference between◦ Budgeted fixed overhead (BFOH)
◦ Applied fixed overhead (ApFOH)
• Two ways to calculate:◦ Three-pronged columnar approach
◦ Formula approach∙ (SHp – SH)SFOR
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Example
Information:
• Standard fixed overhead rate (SFOR) $10.00 per direct labor hour
• Budgeted fixed overhead (BFOH) $1,800• Number of tee shirts produced 1,200 units• Hours allowed for production (SH) 144 hours
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Example
Fixed Overhead (FOH) Volume Variance
AFOH – BFOH
Formulas:
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Example
Fixed Overhead (FOH) Efficiency Variance
(SHp - SH) SFOR
Formulas:
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Objective # 4Objective # 4
Prepare an activity-based flexible budget.
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Activity-Based Budgeting
• A powerful planning and control tool
• Can be used to emphasize cost reduction through the elimination of wasteful activities and improving efficiency of necessary activities
• Two types:◦ Static activity budgets◦ Activity-based flexible budget