You are on page 1of 64

CHAPTER 8

Flexible Budgets,
Overhead Cost Variances,
and
Management Control

Learning Objective 1

Explain the similarities and


differences in planning
variable and fixed
overhead costs.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-2

Planning of Variable and


Fixed Overhead Costs
OH costs are more difficult to manage than

direct costs: the relationship between


production volume and OH costs is not easy
to determine.
Separating OH into variable and fixed OH.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-3

Planning of Variable and


Fixed Overhead Costs
Variable OH: energy, machine maintenance,

engineering support, and indirect materials


Fixed OH: plant leasing costs, depreciation
on plant equipment, and salaries of the plant
managers.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-4

Planning of Variable and


Fixed Overhead Costs
Variable OH cost planning:
1. Effective planning of variable overhead costs
involves undertaking only those variable overhead
activities that add value for customers using the
product or service.
2. Examining how each item of variable overhead
relates to delivering a superior product or service is
part of this process.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-5

Planning of Variable and


Fixed Overhead Costs
Fixed OH cost planning:
1. Focusing on eliminating the non-value added costs
2. Choosing the appropriate level of capacity or
investment that will benefit the company over an
extended time period since fixed costs are
predetermined well before the budget period begins.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-6

Standard Costing
Standard costing is a costing system that

utilized predetermined quantities and cost of


inputs into the manufacturing process.
Traces direct costs to output by multiplying the
standard prices or rate by the standard
quantities of inputs allowed for actual outputs
produced
Allocates overhead costs on the basis of the
standard overhead-cost rates time the standard
quantities of the allocation bases allowed for the
actual outputs produced
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-7

Learning Objective 2
Developing Budgeted Variable
Overhead Allocation Rates.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-8

Developing Budgeted Variable


Overhead Allocation Rates
Step 1: Choose the period to be used for the budget.
Pasadena Co. uses a 12-month budget period.
Step 2: Select the cost-allocation base.
Pasadena budgets select labor-hours as the cost
allocation base. 26,000 labor-hours for a budgeted
output of 13,000 suits in year 2004.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-9

Developing Budgeted Variable


Overhead Allocation Rates
Step 3: Identify the variable overhead costs
associated with each cost-allocation base.
Pasadenas budgeted variable OH costs for
2004 are $312,000.
Step 4: Compute the rate per unit of each
cost-allocation base.
Budgeted variable cost rate per base
$312,000 26,000 hours = $12/hour
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-10

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 base
= $24 per suit (output unit)

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-11

Learning Objective 3

Compute the variable overhead


efficiency variance and
spending variance.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-12

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:
Flexible-budget amount:

21,500
20,000

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-13

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
Flexible-budget amount:
$240,000
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-14

Variable Overhead
Cost Variances
Variable manufacturing overhead
cost per labor-hour:
Actual results:
$244,775 21,500 = $11.3849
Flexible-budget amount:
$240,000 20,000 = $12.00
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-15

Variable Overhead
Cost Variances
Variable manufacturing overhead
cost per output unit:
Actual results:
$244,775 10,000 = $24.4775
Flexible-budget amount:
$240,000 10,000 = $24.00
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-16

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


Flexible-budget amount $240,000 = $4,775 U
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-17

Flexible-Budget Analysis

Actual
Costs Incurred
$244,775

Budgeted Inputs
Allowed for Actual
Outputs at Budgeted Rate
20,000 $12.00
= $240,000

$4,775 U
Flexible-budget variance
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-18

The Details:
Variable OH Variances
Variable Overhead Efficiency Variance is the

difference between actual quantity of the costallocation base used and budgeted quantity of the
cost-allocation base, times budgeted OH rate.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-19

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
Variable overhead efficiency variance
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-20

Interpretation of Efficiency Variance


Direct cost efficiency variance: whether more or
fewer direct materials or direct labor hours are
used per output than budgeted.
OH cost efficiency: whether more or fewer cost
allocation bases are used than budgeted.
The key cause for Pasadenas unfavorable
efficiency variance is the higher-than-budgeted
labor-hours used.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-21

Interpretation of Efficiency Variance


Possible causes:
1. Less skilled workers
2. Production schedule inefficiency
3. Poor machine maintenance
4. A rush delivery
5. Standards too tight

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-22

The Details:
Variable OH Variances
Variable Overhead Spending Variance is the

difference between actual and budgeted variable


overhead cost rate, multiplied by actual quantity of
variable overhead cost-allocation base used

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-23

Flexible-Budget Analysis

Actual Costs Incurred


$244,775

Actual Quantity
of Inputs at
Budgeted Rate
21,500 $12.00
= $258,000

$13,225 F
Variable overhead spending variance
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-24

Variable Overhead Variances


Flexible-budget variance
$4,775 U

Efficiency variance
$18,000 U

Spending variance
$13,225 F

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-25

Interpretation Spending Variance


Actual variable OH cost rate is lower than budgeted.
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 amount of $240,000.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-26

Interpretation Spending Variance


Possible causes:
1. Actual prices of individual inputs are lower
than budgeted.
2. The percentage increase in actual quantity
usage of individual items is less than
percentage increase in labor hours.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-27

Journal Entries for Variable Overhead


Costs and Variances
What is the journal entry to record variable
manufacturing overhead?
Variable Manufacturing
Overhead Control
244,775
Accounts Payable (and other)
244,775
To record actual variable manufacturing overhead
costs incurred
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-28

Journal Entries for Variable 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)
What is the journal entry to isolate variances?
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-29

Journal Entries for Variable Overhead


Costs and Variances
Variable Manufacturing
Overhead Allocated
240,000
Variable Overhead
Efficiency Variance
18,000
Variable Manufacturing
Overhead Control
244,775
Variable Overhead
Spending Variance
13,225
To isolate variances for the accounting period
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-30

Learning Objective 4

Compute a budgeted
fixed overhead cost rate.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-31

Developing Budgeted Fixed


Overhead Allocation Rates
Fixed overhead costs are, by definition, a lump sum
of costs that remain unchanged in total for a given
period despite wide changes in the level of activity.
These costs are fixed in the sense that they do not
automatically increase or decrease with the level of
activity within the relevant range.
Fixed costs are expressed on a per-unit basis to
facilitate assigning a unit cost to the product or
service.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-32

Developing Budgeted Fixed


Overhead Allocation Rates
Step 1: Choose the period used for 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.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-33

Developing Budgeted Fixed


Overhead Allocation Rates
Step 3: Identify the fixed overhead costs.
Pasadenas 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

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-34

Developing Budgeted Fixed


Overhead Allocation Rates
What is the budgeted fixed overhead cost rate
per output unit (dress suit)?
2 hours allowed per output unit

$11 budgeted fixed overhead cost rate per base

$22 per suit (output unit)


To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-35

The Details:
Fixed OH Variances
Fixed Overhead Flexible-Budget Variance is the

difference between actual fixed overhead costs and


fixed overhead costs in the flexible budget
This is the same amount for the Fixed Overhead
Spending Variance

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-36

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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-37

The Details:
Fixed OH Variances
Production-Volume Variance is the difference between

budgeted fixed overhead and fixed overhead allocated


on the basis of actual output produced
This variance is also known as the Denominator-Level
Variance or the Output-Level Overhead Variance

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-38

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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-39

Fixed Overhead Variances


Fixed overhead variance (Difference between
actual and allocated fixed OH)
$80,000 U

Production-volume variance
$66,000 U

Spending variance
$14,000 U

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-40

Journal Entries for Fixed 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
overhead costs incurred
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-41

Journal Entries for Fixed 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)
What is the journal entry to isolate variances?
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-42

Journal Entries for Fixed 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
To isolate variances for the accounting period
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-43

Learning Objective 5

Interpreting the
production-volume variance

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-44

Production-Volume Variance
The production volume variance is an

indicator of the use of capacity. If the


company exceeded planned capacity, the
variance is favorable. If the company fell
short of planned capacity, the variance is
unfavorable, as there was unused capacity.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-45

Interpreting the ProductionVolume Variance


Should unfavorable production volume variance be
interpreted as a measure of the economic cost of
unused capacity?

Management
Management may
may have
have maintained
maintained some
some
extra
extra capacity
capacity to
to accommodate
accommodate unexpected
unexpected
surges
surges in
in demand.
demand.
Production
Production volume
volume variance
variance focuses
focuses
only
only on
on costs.
costs.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-46

Production-Volume Variance
Another way to view the production-volume

variance is that a favorable variance indicates


that overhead was over-allocated; if
unfavorable, overhead is under-allocated.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-47

Production-Volume Variance
Possible causes of production-volume

variance:
1. Weak demand
2. Quality problem
3. Strategic mistake

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-48

Learning Objective 6

Show how the 4-variance


analysis approach reconciles
the actual overhead incurred
with the overhead amounts
allocated during the period.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-49

A Roadmap: Variable Overhead

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-50

A Roadmap: Fixed Overhead

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-51

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
during the period.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-52

Integrated Analysis
Actual manufacturing overhead incurred:
Variable manufacturing overhead
Fixed manufacturing overhead
Total
Overhead allocated:
Variable manufacturing overhead
Fixed manufacturing overhead
Total
Amount underallocated

$244,775
300,000
$544,775
$240,000
220,000
$460,000
$ 84,775

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-53

Integrated Analysis
4-Variance Analysis:
Spending V
Variable OH: $13,225 F
Fixed OH:
14,000 U

Efficiency V
18,000 U
Never

Volume V
Never
66,000 U

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-54

Integrated Analysis
3-Variance Analysis:

Total OH:

Spending V
$ 775 U

Efficiency V
18,000 U

Volume V
66,000 U

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-55

Integrated Analysis
2-Variance Analysis:

Total OH:

Flexible V
18,775 U

Production-Volume V
66,000 U

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-56

Production-Volume Variance and SalesVolume Variance


Units
Rev.
VC
FC
OI

Flexible
Operating income
budget (1) based on allocated FC(2)
Actual (x)
Actual (x)
Bgtd SP*x Bgtd SP*x
Bgtd/unit*x Bgtd/unit*x
Bgtd
Allocated
Flexible OI Allocated OI

Static
Budget(3)
Bgtd (y)
Bgtd SP*y
Bgtd/unit*y
Bgtd
Static OI

For OI:
Difference between column 1 and 2: production-volume
variance.
Difference between column 2 and 3: operating income
volume variance
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-57

Production-Volume Variance and SalesVolume Variance


Sales-volume variance

Production-volume
variance

Operating income
volume variance

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-58

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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-59

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
be extended to ABC systems.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-61

Activity-Based Costing and Variance


Analysis
1.Units produced and sold
2.Batch size
3.Number of batches
4.Material-handling
labor-hours per batch
5.Total labor-hours
6.Variable OH cost per
material-handling labor-hour
7. Variable handling OH costs
8.Fixed material-handling
OH cost

Static
Budget
180,000
150
1,200

Actual
Amounts
151,200
140
1,080

6
7,200

6.25
6,750

$20
144,000

$21
141,750

$216,000

$220,000

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-62

Activity-Based Costing and


Variance Analysis
Flexible budget variance for variable handling OH
=(Actual costs Flexible budget costs)
=141,750 (151,200/150)*6*20
=20,790 U
Variable handling OH efficiency variance:
(Actual Q of allocation base used- Budgeted Q of
allocation base allowed)*budgeted variable OH per base
=(6,750 6,048)*20
=14,040 U
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-63

Activity-Based Costing and


Variance Analysis
Variable handling OH spending variance:
(Actual variable OH per base - Budgeted variable OH
per base)* Actual Q of allocation base used
=(21 20)*6,750
=6, 750 U

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-64

Activity-Based Costing and


Variance Analysis
Flexible budget variance for fixed handling OH (Spending
variance)=4,000 U
Budgeted fixed handling OH cost per unit of allocation base

=Budgeted total fixed OH/ Budgeted total Q of base)


=216,000/7,200 = 30
Production-volume variance for fixed handling OH:
=Budgeted fixed handling OH Fixed handling OH
allocated
=216,000 (151,200/150)*6*30
=34,560 U
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.

8-65

You might also like