1. Flexible Budgets/Variances II Chapter Eight

2. Developing Budgeted Variable Overhead Allocation Rates Step 1: Choose the time period used to compute the budget.. Webb Co. uses a twelve-month budget period. Step 2: Select the cost-allocation base. Webb budgets 57,600 machine-hours for a budgeted output of 144,000 jackets in year 2008, or 0.40 MH per jacket.

3. Developing Budgeted Variable Overhead Allocation Rates Step 3: Determine the variable overhead costs.. Webb’s budgeted variable manufacturing costs for 2008 are $1,728,000. Step 4: Compute the spending rate per unit of the allocation base. $1,728,0000 ÷ 57,600 MH = $30/MH

4. Developing Budgeted Variable Overhead Allocation Rates What is the budgeted variable overhead cost rate per output unit (jacket)? 0.40 MH allowed per output unit × $30 budgeted variable overhead cost rate per MH (input) = $12 per jacket (output)

5. Variable Overhead Data For April 2008 Cost Item/Allocation Base Actual Result Flexible- Budget Amount 1. Output units (jackets)10,000 2. Machine-hours4,5004,000 3. Machine-hours per output unit0.450.40 4. Variable manufacturing overhead costs $130,500$120,000 5. Variable manufacturing overhead costs per machine-hour $29.00$30.00 6. Variable manufacturing overhead costs per output unit $13.05$12.00

6. Variable Overhead Variance Analysis

7. 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. Webb budgets 57,600 machine-hours for a budgeted output of 144,000 jackets in year 2008, or 0.40MH per jacket.

8. Developing Budgeted Fixed Overhead Allocation Rates Step 3: Determine the fixed overhead costs. Webb’s manufacturing budget for 2008 is $3,312,000, or $276,000 per month Step 4: Compute the rate per unit of the allocation base. $3,312,000 ÷ 57,600 = $57.50 per machine hour

9. Developing Budgeted Fixed Overhead Allocation Rates What is the budgeted fixed overhead cost rate per output unit (jacket)? 0.40 hours allowed per output unit $57.50 budgeted fixed overhead cost rate/machine hour $23 per jacket (output unit) × =

10. Fixed Overhead Variance Analysis

11. Journal Entries For Variable Overhead 1. Variable Overhead Control130,500 Accounts Payable and various other accounts 130,500 To record actual variable overhead costs incurred. 2. Work-in-Process Control 120,000 Variable Overhead Allocated 120,000 To record variable overhead cost allocated

12. Journal Entries For Variable Overhead (cont.) 3. Variable Overhead Allocated 120,000 Variable Overhead Efficiency Variance 15,000 Variable Overhead Control 130,500 Variable Overhead Spending Variance 4,500 To record variances for the accounting period. Cost of Goods Sold 10,500 Variable Overhead Spending Variance 4,500 Variable Overhead Efficiency Variance 15,000

13. Journal Entries For Fixed Overhea d 1. Fixed Overhead Control 285,000 Salaries Payable, Accumulated Depreciation and various other accounts 285,000 To record actual fixed overhead costs incurred. 2. Work-in-Process Control 230,000 Fixed Overhead Allocated 230,000 To record fixed overhead costs allocated,

14. Journal Entries For Fixed Overhead (cont.) 3. Fixed Overhead Allocated 230,000 Fixed Overhead Spending Variance 9,000 Fixed Overhead Production-Volume Variance 46,000 Fixed Overhead Control 285,000 To record variances for the accounting period. Cost of Goods Sold 9,000 Fixed Overhead Spending Variance 9,000 Cost of Goods Sold 46,000 Fixed Overhead Production Volume Variance 46,000

15. Static/Flexible Budgets in Standard Cost Format Flexible Budget Volume Variances Static Budget Units Sold10,0002,000 U12,000 Sales @ $120 each$1,200,000$240,000 U$1,440,000 Standard Cost of Sales Direct Material @ $60-600,000120,000 F-720,000 Direct Labor @ $16-160,00032,000 F-192,000 Variable Manufacturing Overhead @ $12-120,00024,000 F-144,000 Fixed Manufacturing Overhead @ $23-230,00046,000 F-276,000 Total Standard Cost @ $111-1,110,000222,000 F-1,332,000 Gross Margin90,00018,000 U$108,000 Production Volume Variance-46,00046,000 U Operating Income$44,00064,000 U$108,000

16. Sales Volume Variance Analyzed Sales-volume variance $64,000 U Operating-income volume variance $18,000 Production-volume variance $46,000 U Level 2 Level 3

17. Actual Results/Flexible Budgets in Standard Cost Format Actual Results VariancesFlexible Budget Units Sold 10,000 Sales @ $125/$120 each $1,250,000$50,000$1,200,000 Standard Cost of Sales Direct Material @ $60 -600,000 Direct Labor @ $16 -160,000 Variable Manufacturing Overhead @ $12 -120,000 Fixed Manufacturing Overhead @ $23 -230,000 Total Standard Cost @ $111 -1,110,000 Gross Margin 140,00050,00090,000 Production Volume Variance -46,000 Other Variances -79,100 Operating Income $14,900-29,100$44,000