Cost Accounting, Chapter 8 11ch08
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
costs are similar and in
what ways they differ.
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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
investment that will benefit the company over an extended time period.
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Learning Objective 2
Identify the features of
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Standard Costing
Standard Costing
Standard input allowed for one output unit Standard cost
per input unit
×
Cost Object Direct Cost
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Developing Budgeted Variable
Overhead Allocation Rates
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
Overhead Allocation Rates
Developing Budgeted Variable
Overhead Allocation Rates
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
Overhead Allocation Rates
Developing Budgeted Variable
Overhead Allocation Rates
What is the budgeted variable overhead cost rate per output unit (dress suit)? 2.00 hours allowed per output unit × $12
budgeted variable overhead cost rate per input unit = $24 per suit (output unit)
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Learning Objective 3
Compute the variable overhead
efficiency variance and
the variable overhead
spending variance.
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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
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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Flexible-Budget Analysis
Flexible-Budget Analysis
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
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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Flexible-Budget Analysis
Flexible-Budget Analysis
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
Variable Overhead Variances
Flexible-budget variance $4,775 U
Efficiency variance $18,000 U
Spending variance $13,225 F
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Learning Objective 4
Explain how the efficiency variance
for a variable indirect-cost item
differs from the efficiency variance
for a direct-cost item.
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Efficiency Variance
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%
Actual variable overhead costs of $244,775 are only 2% greater than the flexible-budget
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Efficiency Variance
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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Learning Objective 5
Compute a budgeted
fixed overhead cost rate.
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Developing Budgeted Fixed
Overhead Allocation Rates
Developing Budgeted Fixed
Overhead 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 budgeted output of 13,000 suits in year 2004.
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Developing Budgeted Fixed
Overhead Allocation Rates
Developing Budgeted Fixed
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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Developing Budgeted Fixed
Overhead Allocation Rates
Developing Budgeted Fixed
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
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
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 Variances
Fixed overhead variance $80,000 U
Volume variance $66,000 U
Spending variance $14,000 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
Production-Volume Variance
Interpreting the
Production-Volume Variance
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.
This variance results from “unitizing” fixed costs. This variance results from “unitizing” fixed costs.
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Interpreting the
Production-Volume Variance
Interpreting the
Production-Volume Variance
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.
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
with the overhead amounts
allocated during the period.
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Integrated Analysis
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
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
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
Integrated Analysis
Actual inputs ×
budgeted rate $258,000
Flexible budget: budgeted inputs
allowed × budgeted rate $240,000
Variable overhead efficiency variance
$18,000 U
–
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Integrated Analysis
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
Integrated Analysis
Budgeted fixed overhead
costs $286,000
Budgeted inputs allowed ×
budgeted rate $220,000 Volume variance
$66,000 U
–
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Integrated Analysis
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
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
Integrated Analysis
3-Variance Analysis
Variable and fixed manufacturing overhead: Spending variance
$13,225 F + $14,000 U = $ 775 U Variable manufacturing overhead:
Efficiency variance 18,000 U Fixed manufacturing overhead: Volume variance 66,000 U
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Integrated Analysis
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
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
Overhead Cost Analysis
Different Purposes of
Overhead Cost Analysis
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
To record actual variable manufacturing overhead costs incurred
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Journal Entries for Overhead
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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Journal Entries for Overhead
Costs and Variances
Journal Entries for Overhead
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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Journal Entries for Overhead
Costs and Variances
Journal Entries for Overhead
Costs and Variances
What is the journal entry to record fixed manufacturing overhead?
Fixed Manufacturing
Overhead Control 300,000 Accumulated
Depreciation, etc. 300,000 To record actual fixed manufacturing
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Journal Entries for Overhead
Costs and Variances
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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Journal Entries for Overhead
Costs and Variances
Journal Entries for Overhead
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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End of Chapter 8
End of Chapter 8
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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 fixed manufacturing overhead?
Fixed Manufacturing
Overhead Control 300,000 Accumulated
Depreciation, etc. 300,000 To record actual fixed manufacturing
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Journal Entries for Overhead
Costs and Variances
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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Journal Entries for Overhead
Costs and Variances
Journal Entries for Overhead
Costs and Variances
Fixed Manufacturing
Overhead Allocated 220,000 Fixed Overhead
Spending Variance 14,000 Fixed Overhead
Volume Variance 66,000 Fixed Manufacturing
Overhead Control 300,000
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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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