Presentation on theme: "Flexible Budgets, Variances, and Management Control: II"— Presentation transcript:
1 Flexible Budgets, Variances, and Management Control: II Chapter 8
2 Explain in what ways the planning of variable overhead Learning Objective 1Explain in what ways theplanning of variable overheadcosts and fixed overheadcosts are similar and inwhat ways they differ.
3 Planning of Variable and Fixed Overhead Costs Effective planning of variable overhead costsinvolves undertaking only those variableoverhead 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 overan extended time period.
4 Identify the features of a standard-costing system. Learning Objective 2Identify the features ofa standard-costing system.
5 × Standard Costing Direct Cost Cost Object Standard cost per input unitStandard inputallowed forone output unit×
6 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 budgets26,000 labor-hours for a budgeted output of13,000 suits in year 2004.
7 Developing Budgeted Variable Overhead Allocation Rates 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
8 Developing Budgeted Variable Overhead Allocation Rates What is the budgeted variable overheadcost rate per output unit (dress suit)?2.00 hours allowed per output unit × $12budgeted variable overhead cost rate perinput unit = $24 per suit (output unit)
9 Compute the variable overhead efficiency variance and Learning Objective 3Compute the variable overheadefficiency variance andthe variable overheadspending variance.
10 Variable Overhead Cost Variances The following data are for 2004 whenPasadena produced and sold 10,000 suits:Output units: ,000Labor-hours:Actual results: ,500Flexible-budget amount: ,000
14 Flexible-Budget Analysis The variable overhead flexible-budget variancemeasures the difference between the actualvariable overhead costs and the flexible-budgetvariable overhead costs.Actual results: $244,775– Flexible-budget amount $240,000 = $4,775 U
15 Flexible-Budget Analysis ActualCosts Incurred21,500 × $= $244,775Budgeted InputsAllowed for ActualOutputs at Budgeted Rate20,000 × $12.00= $240,000$4,775 UFlexible-budget variance
16 Flexible-Budget Analysis Actual Quantityof Inputs atBudgeted Rate21,500 × $12.00= $258,000Budgeted InputsAllowed for ActualOutputs at Budgeted Rate20,000 × $12.00= $240,000$18,000 UVariable overhead efficiency variance
19 Explain how the efficiency variance for a variable indirect-cost item Learning Objective 4Explain how the efficiency variancefor a variable indirect-cost itemdiffers from the efficiency variancefor a direct-cost item.
20 Efficiency Variance In the Pasadena Co.’s example, the 21,500 actual direct manufacturing labor-hours are 7.5% greaterthan the flexible-budget amount of 20,000 directmanufacturing labor-hours.(21,500 – 20,000) ÷ 20,000 = 7.5%Actual variable overhead costs of $244,775are only 2% greater than the flexible-budgetamount of $240,000.
21 Efficiency Variance Because actual variable overhead costs increase less than labor-hours, the actual variableoverhead cost per labor-hour ($ ) islower than the budgeted amount ($12.00).The key cause for Pasadena’s unfavorableefficiency variance is the higher-than-budgetedlabor-hours used.
23 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 budgetedoutput of 13,000 suits in year 2004.
24 Developing Budgeted Fixed Overhead Allocation Rates Step 3:Identify the fixed overhead costs. Pasadena’s fixedmanufacturing budget for 2004 is $286,000.Step 4:Compute the rate per unit of eachcost-allocation base. $286,000 ÷ 26,000 = $11
25 Developing Budgeted Fixed Overhead Allocation Rates 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)
28 Fixed Overhead Variances $80,000 UVolume variance$66,000 USpending variance$14,000 U
29 production-volume variance as a measure of the economic Learning Objective 6Explain two concernswhen interpreting theproduction-volume varianceas a measure of the economiccost of unused capacity.
30 Interpreting the Production-Volume Variance Management mayhave maintained someextra capacity.Production volumevariance focusesonly on costs.This variance results from “unitizing” fixed costs.
31 Interpreting the Production-Volume Variance 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.
32 analysis approach reconciles the actual overhead incurred Learning Objective 7Show how the 4-varianceanalysis approach reconcilesthe actual overhead incurredwith the overhead amountsallocated during the period.
33 Integrated Analysis A 4-variance analysis presents spending and efficiency variances for variable overheadcosts and spending and production-volumevariances for fixed overhead costs.Managers can reconcile the actual overheadcosts with the overhead amounts allocatedduring the period.
43 Different Purposes of Overhead Cost Analysis The greater the number of output unitsmanufactured, the higher the budgetedtotal variable manufacturing overheadcosts and the higher the total variablemanufacturing overhead costsallocated to output units.
44 Different Purposes of Overhead Cost Analysis Every output unit that Pasadena manufactureswill increase the fixed overhead allocatedto products by $22.Managers should not use this unitization offixed manufacturing overhead costs forplanning and control.
45 Journal Entries for Overhead Costs and Variances What is the journal entry to record variablemanufacturing overhead?Variable ManufacturingOverhead Control ,775Accounts Payable ,775To record actual variable manufacturing overheadcosts incurred
46 Journal Entries for Overhead Costs and Variances What is the journal entry to allocate variablemanufacturing overhead?Work in Process Control ,000Variable ManufacturingOverhead Allocated ,000To record variable manufacturing overhead costallocated: (2.00 × 10,000 × $12)What is the journal entry to isolate variances?
47 Journal Entries for Overhead Costs and Variances Variable ManufacturingOverhead Allocated 240,000Variable OverheadEfficiency Variance ,000Overhead Control ,775Spending Variance ,225To isolate variances for the accounting period
48 Journal Entries for Overhead Costs and Variances What is the journal entry to record fixedmanufacturing overhead?Fixed ManufacturingOverhead Control ,000AccumulatedDepreciation, etc ,000To record actual fixed manufacturingoverhead costs incurred
49 Journal Entries for Overhead Costs and Variances What is the journal entry to allocate fixedmanufacturing overhead?Work in Process Control ,000Fixed ManufacturingOverhead Allocated ,000To record fixed manufacturing overhead costallocated: (2.00 × 10,000 × $11)What is the journal entry to isolate variances?
50 Journal Entries for Overhead Costs and Variances Fixed ManufacturingOverhead Allocated 220,000Fixed OverheadSpending Variance ,000Volume Variance ,000Overhead Control ,000To isolate variances for the accounting period
51 Financial and Nonfinancial Performance Overhead variances are examples of financial performance measures.What are examples of nonfinancial measures?Actual labor time, relative to budgeted timeActual indirect materials usage per labor-hour, relative to budgeted indirect materials usage
52 Illustrate how the flexible- budget variance approach can Learning Objective 8Illustrate how the flexible-budget variance approach canbe used in activity-based costing.
53 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 canbe extended to ABC systems.