8 - 1 ©2003 prentice hall business publishing, cost accounting 11/e, horngren/datar/foster flexible...

8 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Flexible Budgets, Variances,and Management Control: IIFlexible Budgets, Variances,and Management Control: II

Chapter 8


Learning Objective 1

Explain in what ways theplanning of variable overhead

costs and fixed overheadcosts are similar and inwhat ways they differ.


Planning of Variable andFixed Overhead Costs

Planning of Variable andFixed Overhead Costs

Effective planning of variable overhead costsinvolves undertaking only those variable

overhead activities that add value forcustomers using the product or service.

The key challenge with planning fixed overheadis choosing the appropriate level of capacity orinvestment that will benefit the company over

an extended time period.



Identify the features ofa standard-costing system.


Standard CostingStandard Costing

Standard inputallowed for

one output unit

Standard costper input unit ×

Cost ObjectDirect Cost


Developing Budgeted VariableOverhead 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 of13,000 suits in year 2004.




Step 3:Identify the variable overhead costs.

Pasadena’s budgeted variablemanufacturing costs for 2004 are $312,000.

Step 4:Compute the rate per unit ofeach cost-allocation base.

$312,000 ÷ 26,000 hours = $12/hour




What is the budgeted variable overheadcost rate per output unit (dress suit)?

2.00 hours allowed per output unit × $12budgeted variable overhead cost rate per

input unit = $24 per suit (output unit)



Compute the variable overheadefficiency variance andthe variable overhead

spending variance.


Variable OverheadCost Variances


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

Output units: 10,000

Labor-hours:Actual results: 21,500Flexible-budget amount: 20,000




Labor-hours per output unit:Actual results: 21,500 ÷ 10,000 = 2.15Flexible-budget amount: 20,000 ÷ 10,000 = 2.00

Variable manufacturing overhead costs:Actual results: $244,775Flexible-budget amount: $240,000




Variable manufacturing overheadcost per labor-hour:

Actual results:$244,775 ÷ 21,500 = $11.3849

Flexible-budget amount:$240,000 ÷ 20,000 = $12.00




Variable manufacturing overheadcost per output unit:

Actual results:$244,775 ÷ 10,000 = $24.4775

Flexible-budget amount:$240,000 ÷ 10,000 = $24.00


Flexible-Budget AnalysisFlexible-Budget Analysis

The variable overhead flexible-budget variancemeasures the difference between the actual

variable overhead costs and the flexible-budgetvariable overhead costs.

Actual results: $244,775– Flexible-budget amount $240,000 = $4,775 U



ActualCosts Incurred

21,500 × $11.3849= $244,775

Budgeted InputsAllowed for Actual

Outputs at Budgeted Rate20,000 × $12.00

= $240,000

$4,775 UFlexible-budget variance



Actual Quantityof Inputs at

Budgeted Rate21,500 × $12.00

= $258,000

Budgeted InputsAllowed for Actual

Outputs at Budgeted Rate20,000 × $12.00

= $240,000

$18,000 UVariable overhead efficiency variance



ActualCosts

Incurred21,500 × $11.3849

= $244,775

Actual Quantityof Inputs at

Budgeted Rate21,500 × $12.00

= $258,000

$13,225 FVariable overhead spending variance


Variable Overhead VariancesVariable Overhead Variances

Flexible-budget variance$4,775 U

Efficiency variance$18,000 U

Spending variance$13,225 F



Explain how the efficiency variancefor a variable indirect-cost item

differs from the efficiency variancefor a direct-cost item.


Efficiency VarianceEfficiency Variance

In the Pasadena Co.’s example, the 21,500 actualdirect manufacturing labor-hours are 7.5% greaterthan the flexible-budget amount of 20,000 direct

manufacturing labor-hours.

(21,500 – 20,000) ÷ 20,000 = 7.5%

Actual variable overhead costs of $244,775are only 2% greater than the flexible-budget

amount of $240,000.


Efficiency VarianceEfficiency Variance

Because actual variable overhead costs increaseless than labor-hours, the actual variable

overhead cost per labor-hour ($11.3849) islower than the budgeted amount ($12.00).

The key cause for Pasadena’s unfavorableefficiency variance is the higher-than-budgeted

labor-hours used.



Compute a budgetedfixed overhead cost rate.


Developing Budgeted FixedOverhead Allocation RatesDeveloping Budgeted FixedOverhead Allocation Rates

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.

Pasadena budgets 26,000 labor-hours for a budgetedoutput of 13,000 suits in year 2004.



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

cost-allocation base. $286,000 ÷ 26,000 = $11



What is the budgeted fixed overhead cost rateper 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)

×

=


Flexible-Budget VarianceFlexible-Budget Variance

Actual CostsIncurred$300,000

Flexible Budget:Budgeted

Fixed Overhead$286,000

$14,000 UFixed overhead spending variance

Fixed overhead flexible-budget variance

––


Production-Volume VarianceProduction-Volume Variance

Flexible Budget:Budgeted

Fixed Overhead$286,000

Fixed Overhead Allocated UsingBudgeted Input Allowed for

Actual Output Units Produced$220,000

$66,000 UProduction-volume variance

10,000 × 2.00 × $11 = $220,000

––


Fixed Overhead VariancesFixed Overhead Variances

Fixed overhead variance$80,000 U

Volume variance$66,000 U

Spending variance$14,000 U



Explain two concerns when interpreting the

production-volume varianceas a measure of the economic

cost of unused capacity.


Interpreting the Production-Volume Variance


Management mayhave maintained some

extra capacity.

Management mayhave maintained some

extra capacity.

Production volumevariance focuses

only on costs.

Production volumevariance focuses

only on costs.

This variance results from “unitizing” fixed costs.This variance results from “unitizing” fixed costs.




Had Pasadena manufactured13,000 suits instead of 10,000,

allocated fixed overheadwould have been = $286,000

(13,000 × 2.00 × $11).

Had Pasadena manufactured13,000 suits instead of 10,000,

allocated fixed overheadwould have been = $286,000

(13,000 × 2.00 × $11).

No production-volume variancewould have occurred.

No production-volume variancewould have occurred.



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


Integrated AnalysisIntegrated Analysis

A 4-variance analysis presents spending andefficiency variances for variable overheadcosts and spending and production-volume

variances for fixed overhead costs.

Managers can reconcile the actual overheadcosts with the overhead amounts allocated

during the period.



Actual variableoverhead costs

incurred$244,775

Flexible budget:budgeted inputs

allowed × budgeted rate$240,000

Flexible-budget variance$4,775 U

Underallocated variable overhead

––



Actual variableoverhead costs

incurred$244,775

Actual inputs×

budgeted rate$258,000

Variable overheadspending variance

$13,225 F

––



Actual inputs×


Flexible budget:budgeted inputs

allowed × budgeted rate$240,000

Variable overheadefficiency variance

$18,000 U

––



Actual fixedoverhead costs

incurred$300,000

Budgeted fixedoverhead

costs$286,000

Fixed overheadspending variance

$14,000 U

––



Budgeted fixedoverhead

costs$286,000

Budgeted inputs allowed×


Volume variance$66,000 U

––



Actual 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



4-Variance Analysis:Variable manufacturing overhead:Spending variance $13,225 FEfficiency variance 18,000 UFixed manufacturing overhead:Spending variance 14,000 UVolume variance 66,000 UTotal $84,775 U



3-Variance AnalysisVariable and fixed manufacturing overhead:Spending variance$13,225 F + $14,000 U = $ 775 UVariable manufacturing overhead:Efficiency variance 18,000 UFixed manufacturing overhead:Volume variance 66,000 UTotal $84,775 U



2-Variance AnalysisVariable and fixed manufacturing overhead:Spending variance $ 775 UVariable manufacturing overhead:Efficiency variance 18,000 UFlexible-budget variance: $18,775 UFixed manufacturing overheadVolume variance: 66,000 UTotal $84,775 U


Different Purposes of Overhead Cost AnalysisDifferent Purposes of Overhead Cost Analysis

The greater the number of output unitsmanufactured, the higher the budgetedtotal variable manufacturing overheadcosts and the higher the total variable

manufacturing overhead costsallocated to output units.


Different Purposes of Overhead Cost AnalysisDifferent Purposes of Overhead Cost Analysis

Every output unit that Pasadena manufactureswill increase the fixed overhead allocated

to products by $22.

Managers should not use this unitization offixed manufacturing overhead costs for

planning and control.


Journal Entries for Overhead Costs and Variances


What is the journal entry to record variablemanufacturing overhead?

Variable ManufacturingOverhead Control 244,775

Accounts Payable 244,775To record actual variable manufacturing overheadcosts incurred




What is the journal entry to allocate variablemanufacturing overhead?

Work in Process Control 240,000Variable ManufacturingOverhead Allocated 240,000

To record variable manufacturing overhead costallocated: (2.00 × 10,000 × $12)

What is the journal entry to isolate variances?




Variable ManufacturingOverhead Allocated 240,000Variable OverheadEfficiency Variance 18,000

Variable ManufacturingOverhead Control 244,775Variable OverheadSpending Variance 13,225

To isolate variances for the accounting period




What is the journal entry to record fixedmanufacturing overhead?

Fixed ManufacturingOverhead Control 300,000

AccumulatedDepreciation, etc. 300,000

To record actual fixed manufacturingoverhead costs incurred




What is the journal entry to allocate fixedmanufacturing overhead?

Work in Process Control 220,000Fixed ManufacturingOverhead Allocated 220,000

To record fixed manufacturing overhead costallocated: (2.00 × 10,000 × $11)

What is the journal entry to isolate variances?




Fixed ManufacturingOverhead Allocated 220,000Fixed OverheadSpending Variance 14,000Fixed OverheadVolume Variance 66,000

Fixed ManufacturingOverhead Control 300,000

To isolate variances for the accounting period


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, relative to budgeted indirect materials usage


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 variableand fixed manufacturing overhead costs can

be extended to ABC systems.


End of Chapter 8End of Chapter 8

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