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Flexible Budgets,

and
Management Control

1.
2.
3.

4.

Explain the similarities and differences in

planning variable and fixed overhead costs
Develop budgeted variable and fixed
efficiency variance, and the variable
spending variance, and the fixed overhead
production-volume variance
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5.

6.

7.
8.

Show how the 4-variance analysis approach

during the period
Explain the relationship between the salesvolume variance and the productionvolume variance
Calculate variances in activity-based
costing
Examine the use of overhead variances in
nonmanufacturing settings
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To effectively plan variable overhead costs,

managers should focus on activities that add
value and eliminate those that do not.

Fixed overhead planning is similar ~ plan only

for essential activities and plan to be as
efficient as possible.

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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 quantities of the allocation bases
allowed for the actual outputs produced.
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1.
2.

3.
4.

Choose the period to be used for the budget.

Select the cost-allocation bases to use in
allocating variable overhead costs to output
produced.
associated with each cost-allocation base.
Compute the rate per unit of each costallocation base used to allocate variable

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measures the difference between actual variable

This variance can be further broken down into the

Variable Overhead Efficiency Variance and the
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As a reminder, the flexible-budget amount

will be calculated by taking the budgeted
input allowed per output unit x the budgeted
variable overhead cost rate per input unit.
If, for example, our actual output were
10,000 units, the budgeted machine hours
were 4,000 and the budgeted variable
overhead cost per machine-hour were \$30,
then the flexible budget would be calculated
by taking 0.4 (= 4,000 / 10,000 to get
machine hours per unit) x \$30 x 10,000 actual
units.
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Variable overhead efficiency variance is the difference

between the actual quantity of the variable overhead
cost-allocation base used and the budgeted quantity of
the variable overhead cost-allocation base allowed for
the actual output X the budgeted variable overhead cost
per unit of the cost-allocation base.

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If, for example, our cost-allocation base

were machine hours and we actually had
4500, our budgeted machine hours were
4000, and the budgeted variable overhead
cost per machine hour were \$30, then the
taking (4,500 4,000) x \$30.

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Variable overhead spending variance is the

difference between actual and budgeted variable
overhead cost per unit of the cost-allocation
base, multiplied by the actual quantity of

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If, for example, the cost allocation base

were machine hours and the actual variable
overhead cost per machine hour were \$29,
the budgeted variable overhead cost per
machine hour were \$30 and the actual
quantity of machine hours used were 4,500,
then this variance by taking (29 30) x 4,500
resulting in a favorable variance (favorable
because actual cost per hour was less than
budgeted cost per hour) of \$4,500.

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This chart represents a summary of the variable overhead variances and

their relationship. You can see that at Level 2 (Chapter 7), we have the
flexible-budget variance which is broken down further in the Level 3
(Chapter 7) variances.
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Fixed overhead costs are, by definition, a

lump sum of costs that remain unchanged for
a given period despite potentially wide
changes in activity within the relevant range.

These costs are fixed in the sense that,

unlike variable costs, fixed costs do not
automatically increase or decrease with the
level of activity within the relevant range.

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1.
2.

3.
4.

Choose the period to be used for the budget.

Select the cost-allocation bases to use in
allocating fixed overhead costs to output
produced.
Identify the fixed overhead costs associated
with each cost-allocation base.
Compute the rate per unit of each costallocation base used to allocate fixed

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Fixed overhead flexible-budget variance is the

difference between actual fixed overhead costs and
fixed overhead costs in the flexible budget.

The fixed overhead spending variance is the same

variance as the Fixed Overhead Flexible-Budget
Variance

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Production-volume variance is the difference

between budgeted fixed overhead and fixed
overhead allocated on the basis of actual output
produced.
This variance is also known as the denominatorlevel variance.

For example, if our budgeted fixed overhead were \$276,000 with an

allocation per output of \$23/unit based on 12,000 units but we actually only
produced 10,000 units, we would have allocated only \$230,000 (\$23/unit x
10,000) resulting in an unfavorable production volume variance of \$46,000.
The variance here is unfavorable because, due to lower than planned
volume, we were unable to allocate the budgeted amount of fixed costs.
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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.
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4-VARIANCE
ANALYSIS
SPENDING
VARIANCE

EFFICIENCY
VARIANCE

PRODUCTIONVOLUME
VARIANCE

VARIABLE

YES

YES

NEVER A
VARIANCE

FIXED

YES

NEVER A
VARIANCE

YES

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You may recall from chapter 7 that the static budget

variance (the difference between the static budget
and the actual results) was \$93,100 Unfavorable for
Webb Company, our sample company.

The sales-volume variance (the difference between

the flexible budget and the static budget) was
\$64,000 Unfavorable.

The sales-volume variance consists of two

components: The operating-income volume
variance and the production-volume variance.
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Activity-based costing systems focus on individual

activities as the fundamental cost objects.

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Nonmanufacturing companies can benefit from

overhead variances just as manufacturing companies
can.

Variance analysis can be used to examine overhead

costs and make decisions about pricing, managing
costs and the mix of products.

Output measures will be different and can be

passenger-miles flown, patient days provided,
rooms-days occupied, ton-miles of freight hauled,
etc.
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TERMS TO LEARN

PAGE NUMBER REFERENCE

Denominator level

Page 292

Denominator-level variance

Page 298

variance

Page 297

variance

Page 297

Operating-income volume
variance

Page 307

Production-volume variance

Page 298

Standard costing

Page 290

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TERMS TO LEARN

Page 305

variance

Page 293