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Flexible Budgeting and the Management of Overhead and Support Activity Costs
McGraw-Hill/Irwin
Learning Objective 1
McGraw-Hill/Irwin
Flexible Budgets
Static budgets are prepared for a single, planned level of activity. Performance evaluation for overhead is difficult when actual activity differs from the planned level of activity.
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Hmm! Comparing static budgets with actual costs is like comparing apples and oranges.
Flexible Budgets
Hmm! Comparing static budgets with actual costs is like comparing apples and oranges.
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Variances 2,000 U
U = Unfavorable variance Cheese Company was unable to achieve the budgeted level of activity.
Since cost variances are favorable, have job controlling costs? 12,000 12,000
2,000 $ 89,000 2,000 $ 77,300
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How much of the favorable cost variance is due to lower activity, and how much is due to good cost control?
To answer the question, we must the budget to the actual level of activity.
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Flexible Budgets
Central Concept
If you can tell me what your activity was for the period, I will tell you what your costs and revenue should have been.
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Learning Objective 2
McGraw-Hill/Irwin
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8,000 10,000 12,000 Variable costs are expressed as a constant amount per hour. $ 32,000 24,000 Fixed 4,000 costs are expressed as a total amount that does not $ 60,000
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10,000
12,000
Total budgeted Variable costs Indirect labor 4.00 $ 32,000 overhead cost Indirect material 3.00 24,000 Power 0.50 Budgeted variable Total 4,000 Total variable cost cost $ per 7.50 $ 60,000 overhead activity activity unit Fixed costs
Depreciation Insurance Total fixed cost Total overhead costs
units
overhead cost
$12,000 2,000
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Power has a favorable Variable costs variance because the Indirect labor $ 4.00 actual cost is less than Indirect material 3.00 Power 0.50 the flexible budget cost.
Total variable costs $ Fixed Expenses Depreciation Insurance Total fixed costs Total overhead costs 7.50 $12,000 2,000
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Learning Objective 3
McGraw-Hill/Irwin
Standard Costing Work-in-Process Inventory Applied overhead: Standard allowed hours x Predetermined overhead rate
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Variable . . . . . $ . . 60,000 * . . . . . . . . . 8,000 machine hours . . . . . . . . .$ 7.50 per process hour Fixed . . . . . . . . . 14,000 * . . . . . . . . . 8,000 machine hours . . . . . . . . . 1.75 per process hour Total . . . . . . . .$. 74,000 . . . . . . . . . 8,000 machine hours . . . . . . . . .$ 9.25 per process hour
* From the flexible budget for planned activity of 8,000 machine hours
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Learning Objective 4
McGraw-Hill/Irwin
Variable overhead and the activity measure should vary in a similar pattern.
Identify variable overhead cost drivers.
Learning Objective 5
McGraw-Hill/Irwin
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Spending Variance
AH AR SVR SH
Efficiency Variance
= Actual Hours of Activity = Actual Variable Overhead Rate = Standard Variable Overhead Rate = Standard Hours Allowed
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Spending Variance
Efficiency Variance
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= +
Budgeted fixed overhead cost
$9,000
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$6,740
$6,740
The $140 unfavorable spending variance and the $200 unfavorable efficiency variance result in a $340 unfavorable flexible budget variance.
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Efficiency Variance
A function of the selected cost driver. It does not reflect overhead control.
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Fixed Overhead
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Budget Variance
Volume Variance
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Fixed Overhead
Recall that fixed overhead costs are applied to products and services using a predetermined fixed overhead rate (PFOHR):
Applied Fixed Overhead = PFOHR Standard Hours
PFOHR
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=
= =
Budgeted Fixed Overhead Planned Activity in Hours $9,000 3,000 machine hours $3.00 per machine hour
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Volume Variance
Results from the inability to operate at the activity level planned for the period. Has no significance for cost control.
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Learning Objective 6
McGraw-Hill/Irwin
Fixed costs: Indirect labor: Inspection Production supervisor Set up Depreciation: Equipment Insurance Property taxes Total fixed cost Total overhead cost
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Learning Objective 7
McGraw-Hill/Irwin
Fixed costs Depreciation $12,000 The Cheese Co. flexible Insurance 2,000 budget is based on a single Total fixed cost cost driver,costs machine hours Total overhead
If costs different cost drivers are identified for the Fixed Depreciation $12,000 $ 12,000 $ 12,000 $ 12,000 different variable costs, an activity-based flexible Insurance 2,000 2,000 2,000 2,000 budget should be prepared $ with different cost$ 14,000 Total fixed cost 14,000 $ 14,000 Total overhead costs $ 74,000 drivers. $ 89,000 $ 104,000 formulas based on the different
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Learning Objective 8
McGraw-Hill/Irwin
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Learning Objective 9
McGraw-Hill/Irwin
Price Variance
Materials price variance AQ(AP - SP) Labor rate variance AQ =Variable Actual overhead Quantity AP = spending Actual Price variance
Quantity Variance
Materials quantity variance SP(AQ - SQ) Labor efficiency variance SP = Standard Price Variable overhead SQ = Standard Quantity efficiency variance
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End of Chapter 11
Im here to your budget. Are you ready to ante up?
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