2. Flexible Budgets and Overhead Analysis Chapter 11

3. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Static Budgets and Performance Reports Let’s look at CheeseCo. Static budgets are prepared for a single, planned level of activity. Performance evaluation is difficult when actual activity differs from the planned level of activity. Hmm! Comparing static budgets with actual costs is like comparing apples and oranges.

4. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Static Budgets and Performance Reports CheeseCo

5. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Static Budgets and Performance Reports CheeseCo

6. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Static Budgets and Performance Reports U = Unfavorable variance CheeseCo was unable to achieve the budgeted level of activity. CheeseCo

7. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Static Budgets and Performance Reports CheeseCo F = Favorable variance that occurs when actual costs are less than budgeted costs.

8. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Static Budgets and Performance Reports Since cost variances are favorable, have we done a good job controlling costs? CheeseCo

9. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Static Budgets and Performance Reports I don’t think I can answer the question using a static budget. Actual activity is below budgeted activity. So, shouldn’t variable costs be lower if actual activity is lower?

10. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The relevant question is... “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. The relevant question is... “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. Static Budgets and Performance Reports

11. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Flexible Budgets Improve performance evaluation. May be prepared for any activity level in the relevant range. Show revenues and expenses that should have occurred at the actual level of activity. Reveal variances due to good cost control or lack of cost control.

12. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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.

13. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Preparing a Flexible Budget To a budget we need to know that: Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range. Fixed Variable

14. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Preparing a Flexible Budget Let’s prepare budgets for CheeseCo.

15. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Preparing a Flexible Budget CheeseCo Fixed costs are expressed as a total amount. Variable costs are expressed as a constant amount per hour. $40,000 ÷ 10,000 hours is $4.00 per hour.

16. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Preparing a Flexible Budget $4.00 per hour × 8,000 hours = $32,000 CheeseCo

17. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Preparing a Flexible Budget CostTotal Flexible Budgets FormulaFixed8,00010,00012,000 Per HourCostHours Machine hours8,000 10,000 12,000 Variable costs Indirect labor4.00 32,000$ Indirect material3.00 24,000 Power0.50 4,000 Total variable cost7.50$ 60,000$ Fixed costs Depreciation12,000$ $ Insurance2,000 Total fixed cost14,000$ Total overhead costs74,000$ ? CheeseCo

18. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check What should be the total overhead costs for the Flexible Budget at 10,000 hours? a. $92,500. b. $74,000. c. $89,000. d. $94,000. What should be the total overhead costs for the Flexible Budget at 10,000 hours? a. $92,500. b. $74,000. c. $89,000. d. $94,000.

19. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin What should be the total overhead costs for the Flexible Budget at 10,000 hours? a. $92,500. b. $74,000. c. $89,000. d. $94,000. What should be the total overhead costs for the Flexible Budget at 10,000 hours? a. $92,500. b. $74,000. c. $89,000. d. $94,000. Quick Check Total overhead cost = $14,000 + $7.50 per hour  10,000 hours = $14,000 + $75,000 = $89,000

20. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Preparing a Flexible Budget CostTotal Flexible Budgets FormulaFixed8,00010,00012,000 Per HourCostHours Machine hours8,000 10,000 12,000 Variable costs Indirect labor4.00 32,000$ 40,000$ Indirect material3.00 24,000 30,000 Power0.50 4,000 5,000 Total variable cost7.50$ 60,000$ 75,000$ Fixed costs Depreciation12,000$ $ $ Insurance2,000 Total fixed cost14,000$ $ Total overhead costs74,000$ 89,000$ CheeseCo Total fixed costs do not change in the relevant range.

21. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000. What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000.

22. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000. What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000. Quick Check Total overhead cost = $14,000 + $7.50 per hour  12,000 hours = $14,000 + $90,000 = $104,000

23. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Preparing a Flexible Budget CostTotal Flexible Budgets FormulaFixed8,00010,00012,000 Per HourCostHours Machine hours8,000 10,000 12,000 Variable costs Indirect labor4.00 32,000$ 40,000$ 48,000$ Indirect material3.00 24,000 30,000 36,000 Power0.50 4,000 5,000 6,000 Total variable cost7.50$ 60,000$ 75,000$ 90,000$ Fixed costs Depreciation12,000$ $ $ $ Insurance2,000 Total fixed cost14,000$ $ $ Total overhead costs74,000$ 89,000$ 104,000$ CheeseCo

24. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Let’s prepare a budget performance report for CheeseCo. Flexible Budget Performance Report

25. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Flexible Budget Performance Report

26. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F

27. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F Quick Check

28. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Flexible Budget Performance Report CheeseCo

29. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check What is the variance for indirect materials when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F What is the variance for indirect materials when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F

30. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin What is the variance for indirect materials when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F What is the variance for indirect materials when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F Quick Check

31. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Flexible Budget Performance Report CostTotal FormulaFixedFlexibleActual Per HourCostsBudgetResultsVariances Machine hours8,000 0 Variable costs Indirect labor4.00$ 32,000$ 34,000$ $ 2,000 U Indirect material3.00 24,000 25,500 1,500 U Power0.50 4,000 Total variable costs7.50$ 60,000$ Fixed Expenses Depreciation12,000$ $ Insurance2,000 Total fixed costs14,000$ Total overhead costs74,000$ CheeseCo

32. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check What is the variance for depreciation when the flexible budget for 8,000 hours is compared to the actual results? a. $0 b. $1,000 F c. $2,000 U d. $2,000 F What is the variance for depreciation when the flexible budget for 8,000 hours is compared to the actual results? a. $0 b. $1,000 F c. $2,000 U d. $2,000 F

33. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin What is the variance for depreciation when the flexible budget for 8,000 hours is compared to the actual results? a. $0 b. $1,000 F c. $2,000 U d. $2,000 F What is the variance for depreciation when the flexible budget for 8,000 hours is compared to the actual results? a. $0 b. $1,000 F c. $2,000 U d. $2,000 F Quick Check

34. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Flexible Budget Performance Report CheeseCo

35. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Remember the question: “How much of the total variance is due to activity and how much is due to cost control?” Flexible Budget Performance Report

36. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Static Budgets and Performance How much of the $11,650 is due to activity and how much is due to cost control?

37. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Flexible Budget Performance Report Difference between original static budget and actual overhead = $11,650 F. Overhead Variance Analysis Let’s place the flexible budget for 8,000 hours here.

38. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Flexible Budget Performance Report Overhead Variance Analysis This $15,000F variance is due to lower activity. Activity This $3,350U flexible budget variance is due to poor cost control. Cost control

39. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Flexible Budget Performance Report What causes the cost control variance? There are two primary reasons for unfavorable variable overhead variances: 1. Spending too much for resources. 2. Using the resources inefficiently.

40. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Overhead Rates and Overhead Analysis Overhead from the flexible budget for the denominator level of activity POHR = Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR): Assigned Overhead = POHR × Standard Activity Denominator level of activity

41. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Overhead Rates and Overhead Analysis – Example Let’s look at overhead rates in a budget for ColaCo.

42. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin ColaCo prepared this budget for overhead: Overhead Rates and Overhead Analysis – Example TotalVariableTotalFixed MachineVariableOverheadFixedOverhead HoursOverheadRateOverheadRate 2,000 4,000$ ?9,000$ ? 4,000 8,000 ?9,000 ? ColaCo applies overhead based on machine hour activity. Let’s calculate overhead rates.

43. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Overhead Rates and Overhead Analysis – Example Rate = Total Variable Overhead ÷ Machine Hours ColaCo prepared this budget for overhead: This rate is constant at all levels of activity. TotalVariableTotalFixed MachineVariableOverheadFixedOverhead HoursOverheadRateOverheadRate 2,000 4,000$ 2.00$ 9,000$ ? 4,000 8,000 2.00 9,000 ?

44. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin TotalVariableTotalFixed MachineVariableOverheadFixedOverhead HoursOverheadRateOverheadRate 2,000 4,000$ 2.00$ 9,000$ 4.50$ 4,000 8,000 2.00 9,000 2.25 Overhead Rates and Overhead Analysis – Example Rate = Total Fixed Overhead ÷ Machine Hours ColaCo prepared this budget for overhead: This rate decreases when activity increases.

45. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin TotalVariableTotalFixed MachineVariableOverheadFixedOverhead HoursOverheadRateOverheadRate 2,000 4,000$ 2.00$ 9,000$ 4.50$ 4,000 8,000 2.00 9,000 2.25 Overhead Rates and Overhead Analysis – Example The total POHR is the sum of the fixed and variable rates for a given activity level. ColaCo prepared this budget for overhead:

46. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Overhead Variances Let’s use the overhead rates, to determine variable and fixed overhead variances.

47. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin ColaCo’s actual production for the period required 3,200 standard machine hours. Actual variable overhead incurred for the period was $6,740. Actual machine hours worked were 3,300. Compute the variable overhead spending and efficiency variances. Variable Overhead Variances – Example

48. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Variable Overhead Variances AH × SR AH × AR Spending variance = AH(AR - SR) Efficiency variance = SR(AH - SH) SH × SR Spending Variance Efficiency Variance Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours

49. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 3,300 hours 3,200 hours × × $2.00 per hour $2.00 per hour Variable Overhead Variances – Example $6,740$6,600$6,400 Spending variance $140 unfavorable Efficiency variance $200 unfavorable $340 unfavorable flexible budget total variance Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours

50. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the spending variance? a. $450 U b. $450 F c. $700 F d. $700 U Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the spending variance? a. $450 U b. $450 F c. $700 F d. $700 U

51. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the spending variance? a. $450 U b. $450 F c. $700 F d. $700 U Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the spending variance? a. $450 U b. $450 F c. $700 F d. $700 U Quick Check Spending variance = AH (AR - SR) = Actual variable overhead incurred - AH  SR = $10,950 - 2,050 hours  $5 per hour = $10,950 - $10,250 = $700 U

52. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the efficiency variance? a. $450 U b. $450 F c. $250 F d. $250 U Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the efficiency variance? a. $450 U b. $450 F c. $250 F d. $250 U

53. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the efficiency variance? a. $450 U b. $450 F c. $250 F d. $250 U Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the efficiency variance? a. $450 U b. $450 F c. $250 F d. $250 U Quick Check Efficiency variance = SR (AH - SH) = $5 per hour (2,050 hours - 2,100 hours) = $250 F

54. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 2,050 hours 2,100 hours × × $5 per hour $5 per hour Variable Overhead Variances – Example Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours $10,950 $10,250 $10,500 Spending variance $700 unfavorable Efficiency variance $250 favorable $450 unfavorable flexible budget total variance

55. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Variable Overhead Variances – A Closer Look Spending Variance Efficiency Variance Results from paying more or less than expected for overhead items and from excessive usage of overhead items. Controlled by managing the overhead cost driver.

56. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Overhead Variances Now let’s turn our attention to fixed overhead.

57. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Overhead Rates and Overhead Analysis – Example ColaCo prepared this budget for overhead: What is ColaCo’s fixed overhead rate for an estimated activity of 3,000 machine hours? TotalVariableTotalFixed MachineVariableOverheadFixedOverhead HoursOverheadRateOverheadRate 2,000 4,000$ 2.00$ 9,000$ 4.50$ 4,000 8,000 2.00 9,000 2.25

58. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Overhead Rates and Overhead Analysis – Example ColaCo prepared this budget for overhead: Fixed Overhead Rate FR = $9,000 ÷ 3,000 machine hours FR = $3.00 per machine hour TotalVariableTotalFixed MachineVariableOverheadFixedOverhead HoursOverheadRateOverheadRate 2,000 4,000$ 2.00$ 9,000$ 4.50$ 4,000 8,000 2.00 9,000 2.25

59. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin ColaCo’s actual production required 3,200 standard machine hours. Actual fixed overhead was $8,450. Compute the fixed overhead budget and volume variances. Fixed Overhead Variances – Example

60. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Fixed Overhead Variances Budget Variance Volume Variance FR = Standard Fixed Overhead Rate SH = Standard Hours Allowed SH × FR Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied

61. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 3,200 hours × $3.00 per hour Budget variance $550 favorable Fixed Overhead Variances – Example $8,450$9,000$9,600 Volume variance $600 favorable SH × FR Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied

62. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance? a. $350 U b. $350 F c. $100 F d. $100 U Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance? a. $350 U b. $350 F c. $100 F d. $100 U

63. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance? a. $350 U b. $350 F c. $100 F d. $100 U Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance? a. $350 U b. $350 F c. $100 F d. $100 U Quick Check Budget variance = Actual fixed overhead - Budgeted fixed overhead = $14,800 - $14,450 = $350 U

64. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance? a. $250 U b. $250 F c. $100 F d. $100 U Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance? a. $250 U b. $250 F c. $100 F d. $100 U

65. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance? a. $250 U b. $250 F c. $100 F d. $100 U Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance? a. $250 U b. $250 F c. $100 F d. $100 U Quick Check Volume variance = Budgeted fixed overhead - SH  FR = $14,450 - 2,100 hours  $7 per hour = $14,450 - $14,700 = $250 F

66. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 2,100 hours × $7.00 per hour Budget variance $350 unfavorable $14,800$14,450 $14,700 Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied Volume variance $250 favorable SH × FR Quick Check

67. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Fixed Overhead Variances – A Closer Look Budget Variance Volume Variance Results from paying more or less than expected for overhead items. Results from operating at an activity level different from the denominator activity.

68. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Overhead Variances Let’s look at a graph showing fixed overhead variances. We will use ColaCo’s numbers from the previous example.

69. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Fixed Overhead Variances Volume Cost 3,000 Hours Expected Activity $9,000 budgeted fixed OH Fixed overhead applied to products

70. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Fixed Overhead Variances $8,450 actual fixed OH Volume Cost 3,000 Hours Expected Activity $9,000 budgeted fixed OH Fixed overhead applied to products $8,450 actual fixed OH $550 Favorable Budget Variance {

71. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin { Fixed Overhead Variances $8,450 actual fixed OH 3,200 machine hours × $3.00 fixed overhead rate $600 Favorable Volume Variance $9,600 applied fixed OH 3,200 Standard Hours Volume Cost 3,000 Hours Expected Activity $9,000 budgeted fixed OH Fixed overhead applied to products { $550 Favorable Budget Variance { $8,450 actual fixed OH

72. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Volume Variance – A Closer Look Volume Variance Results when standard hours allowed for actual output differs from the denominator activity. Unfavorable when standard hours < denominator hours Favorable when standard hours > denominator hours

73. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Volume Variance – A Closer Look Volume Variance Results when standard hours allowed for actual output differs from the denominator activity. Unfavorable when standard hours < denominator hours Favorable when standard hours > denominator hours Does not measure over- or under spending Occurs only because actual activity differs from the denominator activity

74. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Overhead Variances and Under- or Overapplied Overhead Cost In a standard cost system: Unfavorable variances are equivalent to underapplied overhead. Favorable variances are equivalent to overapplied overhead. The sum of the overhead variances equals the under- or overapplied overhead cost for a period.

75. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin End of Chapter 11