Garrison Noreen Brewer 11th Edition Chapter 11

,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Copyright 2006. The McGraw-Hill Companies, Inc.,McGraw-Hill/Irwin,11,th,EditionChapter 11,Flexible Budgets and Overhead Analysis,Chapter Eleven,Static Budgets and Performance Reports,Static budgetsare prepared fora single,plannedlevel,of activity.,Performance evaluation is difficult when actual activity differs from the planned level of activity.,Hmm! Comparingstatic budgets withactual costs is likecomparing applesand oranges.,Flexible Budgets,Improve performance evaluation.,May be prepared for any activity level in the relevant range.,Show costs that should have beenincurred at the actual level ofactivity, enabling “apples to apples”cost comparisons.,Reveal variances related tocost control.,Lets look at CheeseCo.,CheeseCo,Static Budgets and Performance Reports,CheeseCo,Static Budgets and Performance Reports,U = Unfavorable variance,CheeseCo was unable to achieve the budgeted level of activity.,CheeseCo,Static Budgets and Performance Reports,CheeseCo,F = Favorable variance,that occurs when actual costs are less than budgeted costs.,Static Budgets and Performance Reports,Since cost variances are favorable, havewe done a good job controlling costs?,CheeseCo,Static Budgets and Performance Reports,I dont think Ican answer thequestion usinga static budget.,Actual activity is belowbudgeted activity.,So, shouldnt variable costsbe lower if actual activityis lower?,Static Budgets and Performance Reports,The relevant question is . . .,“How much of the favorable cost variance is due to lower activity, and how much is due to good cost control?”,To answer the question,we mustthe budget to theactual level of activity.,Static Budgets and Performance Reports,Preparing a Flexible Budget,To a budget we need to know that:,Total variable,costs,change,in direct proportion to changes in activity.,Total fixed,costs remain,unchanged,within therelevant range.,Fixed,Variable,Preparing a Flexible Budget,Lets prepare budgets for CheeseCo.,Preparing a Flexible Budget,Fixed costs areexpressed as atotal amount.,Variable costs are expressed as a constant amount per hour.,$40,000 10,000 hours is$4.00 per hour.,CheeseCo,Preparing a Flexible Budget,$4.00 per hour 8,000 hours = $32,000,CheeseCo,Preparing a Flexible Budget,CheeseCo,Preparing a Flexible Budget,Total fixed costsdo not change inthe relevant range.,CheeseCo,Quick Check,What should be the total overhead costs for the Flexible Budget at 12,000 hours?,a. $92,500.,b. $89,000.,c. $106,800.,d. $104,000.,What should be the total overhead costs for the Flexible Budget at 12,000 hours?,a. $92,500.,b. $89,000.,c. $106,800.,d. $104,000.,Quick Check,Total overhead cost,= $14,000 + $7.50 per hour, 12,000 hours,= $14,000 + $90,000 = $104,000,Preparing a Flexible Budget,Lets prepare a,budget performance report for CheeseCo.,Flexible Budget Performance Report,CheeseCo,Flexible budget is prepared for thesame activity level (8,000 hours) as actually achieved.,Flexible Budget Performance Report,Quick Check,What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results?,a. $2,000 U,b. $2,000 F,c. $6,000 U,d. $6,000 F,What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results?,a. $2,000 U,b. $2,000 F,c. $6,000 U,d. $6,000 F,Quick Check,CheeseCo,Flexible Budget Performance Report,Quick Check,What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results?,a. $1,500 U,b. $1,500 F,c. $4,500 U,d. $4,500 F,What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results?,a. $1,500 U,b. $1,500 F,c. $4,500 U,d. $4,500 F,Quick Check,CheeseCo,Flexible Budget Performance Report,Remember the question:,“How much of the total variance is due to lower activity and how much isdue to cost control?”,Flexible Budget Performance Report,Static Budgets and Performance,How much of the $11,650 favorable variance is due to lower activity and how much is due to cost control?,Difference between original static budgetand actual overhead = $11,650 F.,Overhead Variance Analysis,Lets place the flexible budget for 8,000 hours here.,Flexible Budget Performance Report,Overhead Variance Analysis,This $15,000,F,variance is due to lower activity.,Activity,This $3,350,U,variance is dueto poor cost control.,Cost control,Flexible Budget Performance Report,The Measure of Activity, A Critical Choice,Three importantfactors in selecting anactivity base for an overheadflexible budget,Activity base andvariable overheadshould becausally related.,Activity base shouldnot be expressedin dollars orother currency.,Activity base shouldbe simple andeasily understood.,Variable Overhead Variances,A Closer Look,If flexible budgetis based on,actual,hours,If flexible budgetis based on,standard,hours,Only a,spending,variance can becomputed.,Both,spending,and,efficiency,variances can be computed.,ColaCos actual production for the period required 3,200 standard machine hours. Actual variable overhead incurred for the period was $6,740. Actual machine hours worked were 3,300. The standard variable overhead cost per machine hour is $2.00.,Compute the variable overhead spending variance first using actual hours. Then use standard hours allowed to calculate the variable overheadefficiency variance.,Variable Overhead Variances Example,Actual Flexible Budget Variable for Variable Overhead Overhead at Incurred Actual Hours,AH SR,AH AR,Spending Variance,Spending variance = AH(AR, SR),Variable Overhead Variances,AH = Actual hoursAR = Actual variable overhead rateSR = Standard variable overhead rate,Actual Flexible Budget Variable for Variable Overhead Overhead at Incurred Actual Hours,3,300 hours$2.00 per hour= $6,600,$6,740,Spending Variance= $140 unfavorable,Variable Overhead Variances Example,Variable Overhead Variances A Closer Look,Spending Variance,Results from paying moreor less than expected foroverhead items and from excessive usage ofoverhead items.,Now, lets use the standard hours allowed, along with the actual hours, to compute the efficiency variance.,AH SR,AH AR,Spending variance = AH(AR - SR),Efficiency variance = SR(AH - SH),SH SR,Spending Variance,EfficiencyVariance,Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours,Variable Overhead Variances,3,300 hours 3,200 hours $2.00 per hour $2.00 per hour,Variable Overhead Variances Example,$6,740,$6,600,$6,400,Spending variance$140 unfavorable,Efficiency variance$200 unfavorable,$340 unfavorable flexible budget total variance,Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours,Efficiency Variance,Controlled bymanaging theoverhead cost driver.,Variable Overhead Variances A Closer Look,Quick Check,Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the spending variance?,a. $450 U,b. $450 F,c. $700 F,d. $700 U,Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the spending variance?,a. $450 U,b. $450 F,c. $700 F,d. $700 U,Quick Check,Spending variance = AH (AR - SR),= Actual variable overhead incurred (AH, SR),= $10,950,(2,050 hours $5 per hour),= $10,950,$10,250,= $700 U,Quick Check,Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the efficiency variance?,a. $450 U,b. $450 F,c. $250 F,d. $250 U,Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the efficiency variance?,a. $450 U,b. $450 F,c. $250 F,d. $250 U,Quick Check,Efficiency variance = SR (AH,SH),=,$5 per hour (2,050 hours,2,100 hours),= $250 F,2,050 hours 2,100 hours $5 per hour $5 per hour,Quick Check Summary,Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours,$10,950,$10,250,$10,500,Spending variance$700 unfavorable,Efficiency variance$250 favorable,$450 unfavorable flexible budget total variance,Activity-based Costingand the Flexible Budget,It is unlikely that allvariable overhead will bedriven by a single activity.,Activity-based costingcan be used when multipleactivity bases drivevariable overhead costs.,Overhead Rates and Overhead Analysis,Overhead from theflexible budget for thedenominator level of activity,POHR =,Recall that overhead costs are assigned to products and services using a,predetermined overhead rate (POHR):,Assigned Overhead = POHR Standard Activity,Denominator level of activity,The predetermined overhead ratecan be broken down into fixedand variable components.,The variablecomponent is usefulfor preparing and analyzingvariable overheadvariances.,The fixedcomponent is usefulfor preparing and analyzingfixed overheadvariances.,Overhead Rates and Overhead Analysis,Normal versus Standard Cost Systems,In a,normal cost,system, overhead isapplied to work inprocess based onthe actual numberof hours workedin the period.,In a,standard cost,system, overhead isapplied to work inprocess based onthe standard hoursallowed for the outputof the period.,Budget Variance,VolumeVariance,FR = Standard Fixed Overhead RateSH = Standard Hours AllowedDH = Denominator Hours,SH FR,Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied,Fixed Overhead Variances,DH, FR,ColaCo prepared this budget for overhead:,Overhead Rates and OverheadAnalysis Example,Total,Variable,Total,Fixed,Machine,Variable,Overhead,Fixed,Overhead,Hours,Overhead,Rate,Overhead,Rate,3,000,6,000,$,?,9,000,$,?,4,000,8,000,?,9,000,?,ColaCo applies overhead basedon machine-hour activity.,Lets calculate overhead rates.,Rate = Total,Variable,Overhead Machine Hours,This rate is constant at all levels of activity.,Total,Variable,Total,Fixed,Machine,Variable,Overhead,Fixed,Overhead,Hours,Overhead,Rate,Overhead,Rate,3,000,6,000,$,2.00,$,9,000,$,?,4,000,8,000,2.00,9,000,?,ColaCo prepared this budget for overhead:,Overhead Rates and OverheadAnalysis Example,Total,Variable,Total,Fixed,Machine,Variable,Overhead,Fixed,Overhead,Hours,Overhead,Rate,Overhead,Rate,3,000,6,000,$,2.00,$,9,000,$,3.00,$,4,000,8,000,2.00,9,000,2.25,Rate = Total,Fixed,Overhead Machine Hours,This rate decreases when activity increases.,ColaCo prepared this budget for overhead:,Overhead Rates and OverheadAnalysis Example,Total,Variable,Total,Fixed,Machine,Variable,Overhead,Fixed,Overhead,Hours,Overhead,Rate,Overhead,Rate,3,000,6,000,$,2.00,$,9,000,$,3.00,$,4,000,8,000,2.00,9,000,2.25,The total POHR is the sum ofthe fixed and variable ratesfor a given activity level.,ColaCo prepared this budget for overhead:,Overhead Rates and OverheadAnalysis Example,ColaCos actual production required 3,200,standard,machine hours. Actual fixed overhead was $8,450. The predetermined overhead rate is based on 3,000 machine hours.,Fixed Overhead Variances Example,Overhead Variances,Now lets turn our attention to calculating,fixed overhead variances,.,Fixed Overhead Variances Example,Budget variance$550 favorable,$8,450,$9,000,Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied,Fixed Overhead Variances A Closer Look,Budget Variance,Results from spendingmore or less thanexpected for fixedoverhead items.,Now, lets use the standard hours allowed to compute the fixed overhead volume variance.,3,200 hours $3.00 per hour,Budget variance$550 favorable,Fixed Overhead Variances Example,$8,450,$9,000,$9,600,Volume variance$600 favorable,SH FR,Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied,Volume Variance A Closer Look,VolumeVariance,Results when standard hoursallowed for actual output differsfrom the denominator activity.,Unfavorable,when standard hours denominator hours,Volume Variance A Closer Look,VolumeVariance,Results when standard hoursallowed for actual output differsfrom the denominator activity.,Unfavorable,when standard hours denominator hours,Does not measure over- or under spending,It results from treating fixedoverhead as if it were avariable cost.,Quick Check,Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance?,a. $350 U,b. $350 F,c. $100 F,d. $100 U,Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance?,a. $350 U,b. $350 F,c. $100 F,d. $100 U,Quick Check,Budget variance,= Actual fixed overhead,Budgeted fixed overhead,=,$14,800,$14,450,= $350 U,Quick Check,Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance?,a. $250 U,b. $250 F,c. $100 F,d. $100 U,Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance?,a. $250 U,b. $250 F,c. $100 F,d. $100 U,Quick Check,Volume variance,= Budgeted fixed overhead,(SH, FR),=,$14,450,(2,100 hours $7 per hour),= $14,450,$14,700,= $250 F,2,100 hours $7.00 per hour,Budget variance$350 unfavorable,$14,800,$14,450,$14,700,Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied,Volume variance$250 favorable,SH FR,Quick Check Summary,Overhead Variances,Lets look at a graph showing fixed overhead variances. We will use ColaCos numbers from the previous example.,Fixed Overhead Variances,Activity,Cost,3,000 Hours ExpectedActivity,$9,000 budgeted fixed OH,Fixed overhead,applied to products,Fixed Overhead Variances,$8,450 actual fixed OH,Activity,Cost,3,000 Hours ExpectedActivity,$9,000 budgeted fixed OH,Fixed overhead,applied to products,$8,450 actual fixed OH,$550FavorableBudget Variance,Fixed Overhead Variances,$8,450 actual fixed OH,3,200 machine hours $3.00 fixed overhead rate,$600FavorableVolume Variance,$9,600 applied fixed OH,3,200 StandardHours,Activity,Cost,3,000 Hours ExpectedActivity,$9,000 budgeted fixed OH,Fixed overhead,applied to products,$550FavorableBudget Variance,$8,450 actual fixed OH,Overhead Variances and Under- or Overapplied Overhead Cost,In a standardcost system:,Unfavorable,variances are equivalentto underapplied overhead.,Favorable,variances are equivalentto overapplied overhead.,The sum of the overhead variancesequals the under- or overappliedoverhead cost for a period.,End of Chapter 11,