Flexible Budgets, Variances, and Management Control: II Chapter 8

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

8-1

Planning of Variable and Fixed Overhead Costs

Effective planning of variable overhead costs involves undertaking only those variable overhead activities that add value for customers using the product or service. The key challenge with planning fixed overhead is choosing the appropriate level of capacity or investment that will benefit the company over an extended time period.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8-2

Identify the features of a standard-costing system.

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

8-3

Standard Costing
Direct Cost Cost Object Standard input allowed for one output unit

Standard cost per input unit

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

8-4

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 budgets 26,000 labor-hours for a budgeted output of 13,000 suits in year 2004.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8-5

Developing Budgeted Variable Overhead Allocation Rates

Step 3: Identify the variable overhead costs. Pasadenas budgeted variable manufacturing costs for 2004 are $312,000. Step 4: Compute the rate per unit of each cost-allocation base. $312,000 26,000 hours = $12/hour
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8-6

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 input unit = $24 per suit (output unit)

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

8-7

Compute the variable overhead efficiency variance and the variable overhead spending variance.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8-8

Variable Overhead Cost Variances

The following data are for 2004 when Pasadena produced and sold 10,000 suits: Output units: Labor-hours: Actual results: Flexible-budget amount: 21,500 20,000
8-9

10,000

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 10

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
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 11

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
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 12

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
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 13

Flexible-Budget Analysis
Actual Costs Incurred 21,500 $11.3849 = $244,775 Budgeted Inputs Allowed for Actual Outputs at Budgeted Rate 20,000 $12.00 = $240,000

$4,775 U Flexible-budget variance

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 14

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

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 15

Flexible-Budget Analysis
Actual Costs Incurred 21,500 $11.3849 = $244,775 Actual Quantity of Inputs at Budgeted Rate 21,500 $12.00 = $258,000

$13,225 F Variable overhead spending variance

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 16

Variable Overhead Variances

Flexible-budget variance $4,775 U

Efficiency variance $18,000 U

Spending variance $13,225 F

8 - 17

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Compute a budgeted fixed overhead cost rate.

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

8 - 18

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 budgeted output of 13,000 suits in year 2004.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 19

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
8 - 20

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Developing Budgeted Fixed Overhead Allocation Rates

What is the budgeted fixed overhead cost rate per 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)
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 21

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

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 22

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

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 23

Fixed Overhead Variances

Fixed overhead variance $80,000 U

Volume variance $66,000 U

Spending variance $14,000 U

8 - 24

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Explain two concerns when interpreting the production-volume variance as a measure of the economic cost of unused capacity.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 25

Interpreting the ProductionVolume Variance

Management may Management may have maintained some have maintained some extra capacity. extra capacity. Production volume Production volume variance focuses variance focuses only on costs. only on costs.

This variance results from unitizing fixed costs. This variance results from unitizing fixed costs.

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

8 - 26

Interpreting the ProductionVolume Variance

Had Pasadena manufactured Had Pasadena manufactured 13,000 suits instead of 10,000, 13,000 suits instead of 10,000, allocated fixed overhead allocated fixed overhead would have been = $286,000 would have been = $286,000 (13,000 2.00 $11). (13,000 2.00 $11). No production-volume variance No production-volume variance would have occurred. would have occurred.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 27

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.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 28

Integrated Analysis
Actual variable overhead costs incurred $244,775

Flexible budget: budgeted inputs allowed budgeted rate $240,000

Flexible-budget variance $4,775 U Underallocated variable overhead

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 29

Integrated Analysis
Actual variable overhead costs incurred $244,775

Actual inputs budgeted rate $258,000

Variable overhead spending variance $13,225 F

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 30

Integrated Analysis
Actual inputs budgeted rate $258,000

Flexible budget: budgeted inputs allowed budgeted rate $240,000

Variable overhead efficiency variance $18,000 U

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 31

Integrated Analysis
Actual fixed overhead costs incurred $300,000

Budgeted fixed overhead costs $286,000

Fixed overhead spending variance $14,000 U

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 32

Integrated Analysis
Budgeted fixed overhead costs $286,000

Budgeted inputs allowed budgeted rate $220,000

Volume variance $66,000 U

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 33

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
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2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Integrated Analysis
4-Variance Analysis: Variable manufacturing overhead: Spending variance Efficiency variance Fixed manufacturing overhead: Spending variance Volume variance Total

$13,225 F 18,000 U 14,000 U 66,000 U $84,775 U

8 - 35

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Integrated Analysis
3-Variance Analysis Variable and fixed manufacturing overhead: Spending variance $13,225 F + $14,000 U = $ 775 U Variable manufacturing overhead: Efficiency variance 18,000 U Fixed manufacturing overhead: Volume variance 66,000 U Total $84,775 U
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 36

Integrated Analysis
2-Variance Analysis Variable and fixed manufacturing overhead: Spending variance $ 775 U Variable manufacturing overhead: Efficiency variance 18,000 U Flexible-budget variance: $18,775 U Fixed manufacturing overhead Volume variance: 66,000 U Total $84,775 U
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 37

Different Purposes of Overhead Cost Analysis

The greater the number of output units manufactured, the higher the budgeted total variable manufacturing overhead costs and the higher the total variable manufacturing overhead costs allocated to output units.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 38

Different Purposes of Overhead Cost Analysis

Every output unit that Pasadena manufactures will increase the fixed overhead allocated to products by $22. Managers should not use this unitization of fixed manufacturing overhead costs for planning and control.
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2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Journal Entries for Overhead Costs and Variances

What is the journal entry to record variable manufacturing overhead? Variable Manufacturing Overhead Control 244,775 Accounts Payable 244,775 To record actual variable manufacturing overhead costs incurred
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 40

Journal Entries for 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?
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 41

Journal Entries for 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
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 42

Journal Entries for 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
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 43

Journal Entries for 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?
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 44

Journal Entries for 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
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 8 - 45