Week10:FlexibleBudgets,OverheadCostVariancesand
ManagementControl
LearningObjectives:
– Explainthesimilaritiesanddifferencesinplanningvariable
overheadcostsandfixedoverheadcosts.
– Developbudgetedvariableoverheadcostratesandbudgeted
fixedoverheadcostrates
– Computethevariableoverheadflexible-budgetvariance,the
variableoverheadspendingvarianceandthevariableoverhead
efficiencyvariance.
– Computethefixedoverheadflexible-budgetvariance,thefixed
overheadspendingvarianceandthefixedoverheadproductionvolume
variance.
– Showhowthe4-varianceanalysisapproachreconcilesthe
actualoverheadincurred
DevelopingBudgetedVariableOverheadCostRates
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1.CHOOSEtheperiodtobeusedforthebudget
2.SELECTthecost-allocationbasestouseinallocatingvariableoverheadcoststooutput
produced
3.IDENTIFYthevariableoverheadcostsassociatedwitheachcost-allocationbase
4.COMPUTEtherateperunitofeachcost-allocationbaseusedtoallocatevariable
overheadcoststooutputproduced
StandardCosting
•
Acostingsystemthat:
o DIRECTCOST;tracesby=StandardPrices/StandardRatesxStandardQtyAllowedfor
ActualOutput
o INDIRECTCOST;allocatesoverheadcostonthebasisof=StandardO/HratesxStd.
qtyallocationbasesallowedfortheactualoutput
FlexibleBudget
•
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CalculatesbudgetedrevenuesandbudgetedcostsbasedonACTUALLEVELOFOUTPUTin
thebudgetedperiod
Isadjustedforchangesintheactivitylevelthatdifferfromthemasterbudgetamount
VariableOverheadFlexible-BudgetVariance
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MeasurestheDIFFERENCEbetweenactualvariableoverheadcostsincurredandflexiblebudgetvariableoverheadamounts
VARIABLEOVERHEADFLEXIBLE-BUDGETVARIANCE=
o =ActualCostsIncurred–FlexibleBudgetAmount
TheVariancecanfurtherbebrokendownto:
o VariableOverheadSpendingVariance
o VariableOverheadEfficiencyVariance
VariableOverheadSpendingVariance
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IsthedifferencebetweenACTUALandBUDGETEDvariableoverheadcostperunitofthe
cost-allocationbase,multipliedbytheACTUALQUANTITYofvariableoverheadcostallocationbaseused
VARIABLEOVERHEADSPENDINGVARIANCE=
o =(Actualvariableoverheadcostperunitofcostallocationbase–Budgetedvariable
overheadcostperunitofallocationbase)xACTUALQUANTITYofVOHCostallocationbaseused
o =(ARxBR)xActualQty.
VariableOverheadEfficiencyVariance
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ThedifferencebetweenACTUALQUANTITYofthevariableoverheadcostallocationbase
used,andtheBUDGETEDQTYofthevariableoverheadcost-allocationbaseallowedforthe
ACTUALOUTPUTxtheBUDGETEDvariableoverheadcostperunitofthecost-allocationbase
VARIABLEOVERHEADEFFICIENCYVARIANCE=
o =(ActualQtyofvariableoverheadcost-allocationbaseusedforactualoutput–
BudgetedQtyofvariableoverheadcost-allocationbaseusedforactualoutput)x
Budgetedvariableoverheadcostperunitofcost-allocationbase
o =(ActualQtyused–BudgetedQtyAllowed)xBudgetedRate
Example:
•
•
EFFICIENCYVARIANCE=holdconstantBUDGETEDRATE
SPENDINGVARIANCE=holdconstantACTUALINPUTQUANTITY
DevelopingBudgetedFixedOverheadRates
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FixedOverheadcostsare
o Alumpsumofcoststhatremainunchangedforagivenperioddespitepotentially
widechangesinactivitywithintherelevantrange
o ThesecostsareFIXEDinthesensethat,unlikeVARIABLECOSTS<fixedcostsDONOT
AUTOMATICALLYINCREASEorDECREASE,withthelevelofactivitywithinthe
relevantrange
DevelopingBudgetedFixedOverheadCostRates
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1.CHOOSEtheperiodtobeusedforthebudget
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•
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2.SELECTthecost-allocationbasestouseinallocatingFIXEDOVERHEADCOSTStooutput
produced
3.IDENTIFYthefixedoverheadcostsassociatedwitheachcost-allocationbase
4.COMPUTEtherateperunitofeachcost-allocationbaseusedtoallocatevariable
overheadcoststooutputproduced
FixedOverheadFlexible-BudgetVariance&fixedoverheadspendingvariance
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Fixedoverheadflexiblebudgetvariance:
o ThedifferencebetweenACTUALFIXEDoverheadcostsandfixedoverheadcostsin
theFLEXIBLEBUDGET
o ThefixedoverheadSPENDINGvarianceisthesamevarianceastheFIXEDOVERHEAD
FLEXBILEBUDGETVARIANCE
FMOHFlexibleBudgetVariance:
o =ActualCostsIncurred–FlexibleBudgetAmount
Noefficiencyvarianceforfixed;
o BecauseTOTALFIXEDCOSTSremainunchangedinrelationtoactivities
FixedOHVariances:Production-Volumevariances
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PRODUCTIONVOLUMEVARIANCE:
o ThedifferencebetweenBUDGETEDFIXEDOHandFIXEDOHALLOCATEDonthebasis
ofACTUALOUTPUTPRODUCED
o ThisvarianceisalsoknownastheDENOMINATORLEVELVARIANCE
ProductionVolumeVariance
o =BudgetedFixedOverhead–FixedOverheadallocatedforactualoutputunits
produced
Example2:
ACTUALCOSTSINCURRED
(1)
285,000
FLEXIBLEBUDGET:
SameBudgetedLumpSum(as
inStaticBudget)Regardlessof
OutputLevel
(2)
276,000
SPENDINGVARIANCE
=276,000–285,000
=9,000Unfavourable
FLEXIBLEBUDGETVARIANCE
=9,000Unfavourable
ALLOCATED:
BudgetedInputQtyAllowed
forActualOutputxBudgeted
Rate
(3)
=(0.4hr/unitx10,000unitsx
$57.50/hr)
=230,000
PRODUCTIONVOLUME
VARIANCE
=230,000–276,000
=46,000Unfavourable
IntegratedVarianceAnalysis
4VarianceAnalysis
SPENDINGVARIANCE
EFFICIENCYVARIANCE
VARIABLEOVERHEAD
FIXEDOH
Yes
Yes
Yes
NeveraVariance
PRODUCTIONVOLUMEVARIANCE
Neveravariance
Yes
LectureExamples
Example1
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VariableSpendingVariance=(AR–BR)xActualQty
VariableEfficiencyVariance=(ActualQty–BudgetedQtyAllowedforActualOutput)xBR
ACTUALCOSTS
INCURRED
(AQxAR)
(1)
ACTUALINPUTx
BUDGETEDRATE
(AQxBR)
(2)
$52,164(Given)
ActualRate=
52,164/4,536=$11.5
SPENDINGVARIANCE:
=54,432–52,164
=$2,268FAVOURABLE
=4,536x12
=$54,432
FLEXIBLEBUDGET
VARIANCE
=51,840–52,164
=324UNFAVOURABLE
FLEXIBLEBUDGET:
BudgetedInput
AllowedforActual
OutputxBudgeted
Rate
(3)
=4hrx1080x$12
=$51,840
ALLOCATED:
BudgetedInput
AllowedforActual
OutputxBudgeted
Rate
(4)
=$51,840
EFFICIENCY
VARIANCE:
=51,840–54,432
=2,592
UNFAVOURABLE
(NeveraVariance)
Example2
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BudgetedFixedOverheadRateperunitofAllocationBASe
o =62,400/1,040x4
o =$15/hour
ACTUALCOSTS
INCURRED
(1)
SameBudgetedLump
Sum(asinStatic
Budget)Regardlessof
OutputLevel
(2)
=63,916
(given)
SPENDINGVARIANCE
=62,400–63,916
=1,516U
62,400
(given)
FLEXIBLEBUDGET:
SameBudgetedLump
Sum(Asinstatic
budget)regardlessof
outputlevel
(3)
62,400
(given)
ALLOCATED:
BudgetedInput
AllowedforActual
OutputxBudgeted
Rate
(4)
=$15x1,080x4hrs
=64,800
PRODUCT-VOLUME
VARIANCE:
=64,800–62,400
=2,400F
FLEXIBLEBUDGET
=SpendingVariance
=1,516U
JournalEntries
VARIABLEMANUFACTURINGOVERHEAD
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DrVariableMOH
52,164
o CrVariousAccounts 52,164
o (Torecordactualvariablemanufacturedoverheadcosts)
DrWIPControl
51,840
o CrVariableMOHAllocated
51,840
o (toaddvariableMOHcoststoWIP)
DrVariableMOHAllocated
51,840
DrVariableMOHEfficiencyVariance 2,592
o CrVariableMOHSpendingVariance 2,268
o CrVariableMOH
52,164
o (torecordvariancesfortheaccountingperiod)
FIXEDMOH
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DrFixedMOH 63,916
o CrVariousAccounts o (torecordactualfixedMOHcosts)
DrWIPcontrol 64,800
o CrFixedMOHAllocated
o (toaddfixedMOHcoststoWIP)
DrFixedMOHAllocated
64,800
DrFixedMOHSpendingVariance
1,516
o CrProductionVolumeVariance
o CrFixedMOH o (Torecordvariancesfortheaccountingperiod)
63,916
64,800
2,400
63,916