Thesis Final 4w5o44
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Flexible Budgets, Overhead Cost Variances, and Management Control
© 2009 Pearson Prentice Hall. All rights reserved.
Basic Concepts Managing overhead costs is challenging. Managers must
understand the behavior of overhead costs, plan for them, perform variance analysis, and act upon the results. In planning variable overhead costs, managers seek to eliminate activities that do not add value to the product or service. Examining how each item of variable overhead relates to delivering a superior product or service is part of this process.
© 2009 Pearson Prentice Hall. All rights reserved.
Basic Concepts Effective planning for fixed overhead costs is similar to
planning for variable overhead costs—focusing on eliminating the non-value added costs. An additional strategic issue for managers in fixed costs is choosing the appropriate level of capacity that will benefit the company in the long run. Timing is an important issue in this planning. By the beginning of the budget period most decisions regarding fixed costs will have been made. With variable costs, day-to-day operating decisions affect the level of variable costs incurred in the period. © 2009 Pearson Prentice Hall. All rights reserved.
Planning and Overhead Variable Overhead: as efficiently as possible, plan only
essential activities Fixed Overhead: as efficiently as possible, plan only essential activities, especially since fixed costs are predetermined well before the budget period begins
© 2009 Pearson Prentice Hall. All rights reserved.
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 © 2009 Pearson Prentice Hall. All rights reserved.
Overhead Variances Overhead is the most difficult cost to manage, and is
the least understood Overhead variances involve taking differences between equations as the analysis moves back and forth between actual results and budgeted amounts
© 2009 Pearson Prentice Hall. All rights reserved.
Developing Budgeted Variable Overhead Cost Rates Choose the period to be used for the budget Select the cost-allocation bases to use in allocating variable overhead costs to output produced 3. Identify the variable overhead costs associated with each cost-allocation base 4. Compute the rate per unit of each cost-allocation base used to allocate variable overhead costs to output produced 1. 2.
© 2009 Pearson Prentice Hall. All rights reserved.
Developing budgeted variable overhead cost-allocation rates
Step 1:
Choose the Period to Be Used for the Budget. Normally companies will use a 12-month period for budgeting, but a shorter time frame may be appropriate in given situations. Step 2: Select the Cost-Allocation Bases to Use in Allocating Variable Overhead Costs to Output Produced. In selecting the cost-allocation bases, management is seeking a cause-and-effect relationship between the cost and the base, or cost driver. Webb’s operating manager selected machine-hours as cost allocation base for variable and fixed overhead. © 2009 Pearson Prentice Hall. All rights reserved.
Developing budgeted variable overhead cost-allocation rates Based on engineering study, Webb estimates it will
take 0.40 of machine-hour per actual output unit. For its budgeted output of 144,000 jackets in 2008, Webb budgets 57,600 (0.40 * 144,000) machine hours. Step 3: Identify the Variable Overhead Costs Associated with Each Cost-Allocation Base. Webb groups all of its variable overhead costs in a single cost pool. Webb’s total budgeted variable overhead costs for 2008 are $1,728,000.
© 2009 Pearson Prentice Hall. All rights reserved.
Developing budgeted variable overhead cost-allocation rates Step 4:
Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Variable Overhead Costs to Output Produced. Dividing the amount in step 3 ($1,728,000) by the amount in step 2 (57,600), Webb estimated a rate of $30 per standard machine-hour for allocating its variable overhead costs. Webb calculates the budgeted overhead cost rate per unit by multiplying Budgeted input allowed per output (0.40) with Budgeted variable overhead cost rate per input unit ($30). © 2009 Pearson Prentice Hall. All rights reserved.
Data for Variable Overhead Cost Variances Output Units (Jackets) Machine-hours per output unit
Machine-hours (1*2) Variable overhead costs
Actual Flexible 10,000 10.000 0.45 0.40 4,500 4,000 $130,500 $120,000
Variable overhead costs per machine-hour $29.00 $30.00 Variable overhead costs per output unit $13.05 $12.00
© 2009 Pearson Prentice Hall. All rights reserved.
The Details: Variable OH Variances Variable Overhead Flexible-Budget Variance
measures the difference between actual variable overhead costs incurred and flexible-budget variable overhead amounts : = $130,500 = $10,500 U
Variable Overhead flexible-budget variance
=
Actual Costs Incurred
(c) 2009 Pearson Prentice Hall. All rights reserved.
$120,000
-
Flexible-budget amount
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 per unit of the cost-allocation base: = (4,500 hours – 0.40hr/unit *10,000) *$30 per hr = (4,500-4,000) *$30 per hr = $15,000 U Variable Overhead Efficiency Variance
=
{
Actual quantity of variable overhead cost-allocation base used for actual output
-
Budgeted quantity of variable overhead costallocation based allowed for actual output
(c) 2009 Pearson Prentice Hall. All rights reserved.
}X
Budgeted variable overhead cost per unit of cost-allocation base
The Details: Variable OH Variances Variable Overhead Spending Variance is the
difference between actual and budgeted variable overhead cost per unit of the cost-allocation base, multiplied by actual quantity of variable overhead cost-allocation base used for actual output: =($29 per machine hr - $30 per machine hr)* 4,500 machine hr= (-$1 per machine hr) * 4,500 machine hr= $4,500 F Variable Overhead Spending Variance
=
{
Actual variable overhead cost per unit of cost-allocation base
-
Budgeted variable overhead cost per unit of cost-allocation base
(c) 2009 Pearson Prentice Hall. All rights reserved.
}X
Actual quantity of variable overhead cost-allocation base used for actual output
Journal Entries for Variable Overhead Costs and Variances 1. Variable Overhead Control
130,500 s Payable & other s 130,500 2. Work-in-Process Control 120,000 Variable Overhead Allocated 120,000 3. Variable Overhead Allocated 120,000 Variable Overhead Efficiency Variance 15,000 Variable Overhead Control 130,500 Variable Overhead Spending Variance 4,500 © 2009 Pearson Prentice Hall. All rights reserved.
A Roap: Variable Overhead Actual Costs Incurred: Actual Input X Actual Rate
Actual Inputs X Budgeted Rate
Spending Variance
Flexible Budget: Budgeted Input Allowed for Actual Output X Budgeted Rate
Efficiency Variance
Flexible-Budget Variance
Total Variable Overhead Variance Over/Under Allocated Variable Overhead
© 2009 Pearson Prentice Hall. All rights reserved.
Allocated: Budgeted Input Allowed for Actual Output X Budgeted Rate
Never a Variance
Never a Variance
Variable Overhead Variance Analysis Illustrated
© 2009 Pearson Prentice Hall. All rights reserved.
Possible Reasons For Favorable Spending Variance Actual prices of individual inputs included in variable
overhead costs, such as the price of energy, indirect materials, or indirect labor, are lower than budgeted prices of the inputs. The favorable spending variance can be partially or completely traced to the efficient use of energy and other variable overhead items.
© 2009 Pearson Prentice Hall. All rights reserved.
Possible Causes of Exceeding Budget Workers were less skilled than expected in using
machines. Production scheduler inefficiently scheduled jobs, resulting in more machine hours used than budgeted. Machines were not maintained in good operating conditions. Webb’s sales staff promised a distributor a rush delivery, which resulted in more machine-hours used than budgeted. Budgeted machine time standards were set too tight. © 2009 Pearson Prentice Hall. All rights reserved.
Developing Budgeted Fixed Overhead Cost Rates 1. 2.
Choose the period to be used for the budget Select the cost-allocation bases to use in allocating fixed overhead costs to output produced. For simplicity we assume Webb expects to operate at capacity in fiscal year 2008– with a budgeted usage of 57,600 machine hours for budgeted output of 144,ooo jackets.
© 2009 Pearson Prentice Hall. All rights reserved.
Developing Budgeted Fixed Overhead Cost Rates 3.
Identify the fixed overhead costs associated with each cost-allocation base. Webb’s fixed overhead budget for 2008 is $3,312,000. 4. Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to output produced. Dividing the $3,312,000 from step 3 by the machine hour from step 2, Webb estimates a fixed overhead rate of $57.50 per machine-hour.
© 2009 Pearson Prentice Hall. All rights reserved.
The Details: Fixed OH Variances Fixed Overhead Flexible-Budget Variance is the
difference between actual fixed overhead costs ($285,000)and fixed overhead costs in the flexible budget ($276,000). This is the same amount for the Fixed Overhead Spending Variance: = $285,000 – 276,000 = $9,000 U Fixed Overhead flexible-budget variance
=
Actual Costs Incurred
-
(c) 2009 Pearson Prentice Hall. All rights reserved.
Flexible-budget amount
The Details: Fixed OH Variances Production-Volume Variance is the difference
between budgeted fixed overhead ($276,000) and fixed overhead allocated on the basis of actual output produced (0.40*10,000 units $57.50) =$230,000. This variance is also known as the Denominator-Level Variance or the Output-Level Overhead Variance: = $276,000 - $230,000 = $46,000 U Production-Volume Variance
=
Budgeted Fixed Overhead
-
Fixed Overhead allocated using budgeted input allowed for actual output units produced
(c) 2009 Pearson Prentice Hall. All rights reserved.
Production-Volume Variance Interpretation of this variance is difficult due to the nature
of the costs involved and how they are budgeted Fixed costs are by definition somewhat inflexible. While market conditions may cause production to flex up or down, the associated fixed costs remain the same Fixed costs may be set years in advance, and may be difficult to change quickly Contradiction: Despite this, examination of the fixed overhead budget formulae reveals that it is budgeted similar to a variable cost
© 2009 Pearson Prentice Hall. All rights reserved.
Journal Entries for Fixed Overhead Costs and Variances . Fixed Overhead Control
285,000 Salaries Payable & other s 285,000 2. Work-in-Process Control 230,000 Fixed Overhead Allocated 230,000 3. Fixed Overhead Allocated 230,000 Fixed Overhead Spending Variance 9,000 Fixed Overhead Production Volume Variance 46,000 Fixed Overhead Control 285,000 © 2009 Pearson Prentice Hall. All rights reserved.
A Roap: Fixed Overhead Actual Costs Incurred
Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level Spending Variance
Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level
Never a Variance
Flexible-Budget Variance
Total Fixed Overhead Variance Over/Under Allocated Fixed Overhead
© 2009 Pearson Prentice Hall. All rights reserved.
Allocated: Budgeted Input Allowed for Actual Output X Budgeted Rate
ProductionVolume Variance
ProductionVolume Variance
Fixed Overhead Variance Analysis Illustrated
© 2009 Pearson Prentice Hall. All rights reserved.
Fixed Overhead Behavior
© 2009 Pearson Prentice Hall. All rights reserved.
Integrated Variance Analysis Illustrated
© 2009 Pearson Prentice Hall. All rights reserved.
© 2009 Pearson Prentice Hall. All rights reserved.
© 2009 Pearson Prentice Hall. All rights reserved.
Basic Concepts Managing overhead costs is challenging. Managers must
understand the behavior of overhead costs, plan for them, perform variance analysis, and act upon the results. In planning variable overhead costs, managers seek to eliminate activities that do not add value to the product or service. Examining how each item of variable overhead relates to delivering a superior product or service is part of this process.
© 2009 Pearson Prentice Hall. All rights reserved.
Basic Concepts Effective planning for fixed overhead costs is similar to
planning for variable overhead costs—focusing on eliminating the non-value added costs. An additional strategic issue for managers in fixed costs is choosing the appropriate level of capacity that will benefit the company in the long run. Timing is an important issue in this planning. By the beginning of the budget period most decisions regarding fixed costs will have been made. With variable costs, day-to-day operating decisions affect the level of variable costs incurred in the period. © 2009 Pearson Prentice Hall. All rights reserved.
Planning and Overhead Variable Overhead: as efficiently as possible, plan only
essential activities Fixed Overhead: as efficiently as possible, plan only essential activities, especially since fixed costs are predetermined well before the budget period begins
© 2009 Pearson Prentice Hall. All rights reserved.
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 © 2009 Pearson Prentice Hall. All rights reserved.
Overhead Variances Overhead is the most difficult cost to manage, and is
the least understood Overhead variances involve taking differences between equations as the analysis moves back and forth between actual results and budgeted amounts
© 2009 Pearson Prentice Hall. All rights reserved.
Developing Budgeted Variable Overhead Cost Rates Choose the period to be used for the budget Select the cost-allocation bases to use in allocating variable overhead costs to output produced 3. Identify the variable overhead costs associated with each cost-allocation base 4. Compute the rate per unit of each cost-allocation base used to allocate variable overhead costs to output produced 1. 2.
© 2009 Pearson Prentice Hall. All rights reserved.
Developing budgeted variable overhead cost-allocation rates
Step 1:
Choose the Period to Be Used for the Budget. Normally companies will use a 12-month period for budgeting, but a shorter time frame may be appropriate in given situations. Step 2: Select the Cost-Allocation Bases to Use in Allocating Variable Overhead Costs to Output Produced. In selecting the cost-allocation bases, management is seeking a cause-and-effect relationship between the cost and the base, or cost driver. Webb’s operating manager selected machine-hours as cost allocation base for variable and fixed overhead. © 2009 Pearson Prentice Hall. All rights reserved.
Developing budgeted variable overhead cost-allocation rates Based on engineering study, Webb estimates it will
take 0.40 of machine-hour per actual output unit. For its budgeted output of 144,000 jackets in 2008, Webb budgets 57,600 (0.40 * 144,000) machine hours. Step 3: Identify the Variable Overhead Costs Associated with Each Cost-Allocation Base. Webb groups all of its variable overhead costs in a single cost pool. Webb’s total budgeted variable overhead costs for 2008 are $1,728,000.
© 2009 Pearson Prentice Hall. All rights reserved.
Developing budgeted variable overhead cost-allocation rates Step 4:
Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Variable Overhead Costs to Output Produced. Dividing the amount in step 3 ($1,728,000) by the amount in step 2 (57,600), Webb estimated a rate of $30 per standard machine-hour for allocating its variable overhead costs. Webb calculates the budgeted overhead cost rate per unit by multiplying Budgeted input allowed per output (0.40) with Budgeted variable overhead cost rate per input unit ($30). © 2009 Pearson Prentice Hall. All rights reserved.
Data for Variable Overhead Cost Variances Output Units (Jackets) Machine-hours per output unit
Machine-hours (1*2) Variable overhead costs
Actual Flexible 10,000 10.000 0.45 0.40 4,500 4,000 $130,500 $120,000
Variable overhead costs per machine-hour $29.00 $30.00 Variable overhead costs per output unit $13.05 $12.00
© 2009 Pearson Prentice Hall. All rights reserved.
The Details: Variable OH Variances Variable Overhead Flexible-Budget Variance
measures the difference between actual variable overhead costs incurred and flexible-budget variable overhead amounts : = $130,500 = $10,500 U
Variable Overhead flexible-budget variance
=
Actual Costs Incurred
(c) 2009 Pearson Prentice Hall. All rights reserved.
$120,000
-
Flexible-budget amount
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 per unit of the cost-allocation base: = (4,500 hours – 0.40hr/unit *10,000) *$30 per hr = (4,500-4,000) *$30 per hr = $15,000 U Variable Overhead Efficiency Variance
=
{
Actual quantity of variable overhead cost-allocation base used for actual output
-
Budgeted quantity of variable overhead costallocation based allowed for actual output
(c) 2009 Pearson Prentice Hall. All rights reserved.
}X
Budgeted variable overhead cost per unit of cost-allocation base
The Details: Variable OH Variances Variable Overhead Spending Variance is the
difference between actual and budgeted variable overhead cost per unit of the cost-allocation base, multiplied by actual quantity of variable overhead cost-allocation base used for actual output: =($29 per machine hr - $30 per machine hr)* 4,500 machine hr= (-$1 per machine hr) * 4,500 machine hr= $4,500 F Variable Overhead Spending Variance
=
{
Actual variable overhead cost per unit of cost-allocation base
-
Budgeted variable overhead cost per unit of cost-allocation base
(c) 2009 Pearson Prentice Hall. All rights reserved.
}X
Actual quantity of variable overhead cost-allocation base used for actual output
Journal Entries for Variable Overhead Costs and Variances 1. Variable Overhead Control
130,500 s Payable & other s 130,500 2. Work-in-Process Control 120,000 Variable Overhead Allocated 120,000 3. Variable Overhead Allocated 120,000 Variable Overhead Efficiency Variance 15,000 Variable Overhead Control 130,500 Variable Overhead Spending Variance 4,500 © 2009 Pearson Prentice Hall. All rights reserved.
A Roap: Variable Overhead Actual Costs Incurred: Actual Input X Actual Rate
Actual Inputs X Budgeted Rate
Spending Variance
Flexible Budget: Budgeted Input Allowed for Actual Output X Budgeted Rate
Efficiency Variance
Flexible-Budget Variance
Total Variable Overhead Variance Over/Under Allocated Variable Overhead
© 2009 Pearson Prentice Hall. All rights reserved.
Allocated: Budgeted Input Allowed for Actual Output X Budgeted Rate
Never a Variance
Never a Variance
Variable Overhead Variance Analysis Illustrated
© 2009 Pearson Prentice Hall. All rights reserved.
Possible Reasons For Favorable Spending Variance Actual prices of individual inputs included in variable
overhead costs, such as the price of energy, indirect materials, or indirect labor, are lower than budgeted prices of the inputs. The favorable spending variance can be partially or completely traced to the efficient use of energy and other variable overhead items.
© 2009 Pearson Prentice Hall. All rights reserved.
Possible Causes of Exceeding Budget Workers were less skilled than expected in using
machines. Production scheduler inefficiently scheduled jobs, resulting in more machine hours used than budgeted. Machines were not maintained in good operating conditions. Webb’s sales staff promised a distributor a rush delivery, which resulted in more machine-hours used than budgeted. Budgeted machine time standards were set too tight. © 2009 Pearson Prentice Hall. All rights reserved.
Developing Budgeted Fixed Overhead Cost Rates 1. 2.
Choose the period to be used for the budget Select the cost-allocation bases to use in allocating fixed overhead costs to output produced. For simplicity we assume Webb expects to operate at capacity in fiscal year 2008– with a budgeted usage of 57,600 machine hours for budgeted output of 144,ooo jackets.
© 2009 Pearson Prentice Hall. All rights reserved.
Developing Budgeted Fixed Overhead Cost Rates 3.
Identify the fixed overhead costs associated with each cost-allocation base. Webb’s fixed overhead budget for 2008 is $3,312,000. 4. Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to output produced. Dividing the $3,312,000 from step 3 by the machine hour from step 2, Webb estimates a fixed overhead rate of $57.50 per machine-hour.
© 2009 Pearson Prentice Hall. All rights reserved.
The Details: Fixed OH Variances Fixed Overhead Flexible-Budget Variance is the
difference between actual fixed overhead costs ($285,000)and fixed overhead costs in the flexible budget ($276,000). This is the same amount for the Fixed Overhead Spending Variance: = $285,000 – 276,000 = $9,000 U Fixed Overhead flexible-budget variance
=
Actual Costs Incurred
-
(c) 2009 Pearson Prentice Hall. All rights reserved.
Flexible-budget amount
The Details: Fixed OH Variances Production-Volume Variance is the difference
between budgeted fixed overhead ($276,000) and fixed overhead allocated on the basis of actual output produced (0.40*10,000 units $57.50) =$230,000. This variance is also known as the Denominator-Level Variance or the Output-Level Overhead Variance: = $276,000 - $230,000 = $46,000 U Production-Volume Variance
=
Budgeted Fixed Overhead
-
Fixed Overhead allocated using budgeted input allowed for actual output units produced
(c) 2009 Pearson Prentice Hall. All rights reserved.
Production-Volume Variance Interpretation of this variance is difficult due to the nature
of the costs involved and how they are budgeted Fixed costs are by definition somewhat inflexible. While market conditions may cause production to flex up or down, the associated fixed costs remain the same Fixed costs may be set years in advance, and may be difficult to change quickly Contradiction: Despite this, examination of the fixed overhead budget formulae reveals that it is budgeted similar to a variable cost
© 2009 Pearson Prentice Hall. All rights reserved.
Journal Entries for Fixed Overhead Costs and Variances . Fixed Overhead Control
285,000 Salaries Payable & other s 285,000 2. Work-in-Process Control 230,000 Fixed Overhead Allocated 230,000 3. Fixed Overhead Allocated 230,000 Fixed Overhead Spending Variance 9,000 Fixed Overhead Production Volume Variance 46,000 Fixed Overhead Control 285,000 © 2009 Pearson Prentice Hall. All rights reserved.
A Roap: Fixed Overhead Actual Costs Incurred
Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level Spending Variance
Flexible Budget: Same Budgeted Lump Sum (as in Static Budget) Regardless of Output Level
Never a Variance
Flexible-Budget Variance
Total Fixed Overhead Variance Over/Under Allocated Fixed Overhead
© 2009 Pearson Prentice Hall. All rights reserved.
Allocated: Budgeted Input Allowed for Actual Output X Budgeted Rate
ProductionVolume Variance
ProductionVolume Variance
Fixed Overhead Variance Analysis Illustrated
© 2009 Pearson Prentice Hall. All rights reserved.
Fixed Overhead Behavior
© 2009 Pearson Prentice Hall. All rights reserved.
Integrated Variance Analysis Illustrated
© 2009 Pearson Prentice Hall. All rights reserved.
© 2009 Pearson Prentice Hall. All rights reserved.
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