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McGraw-Hill/Irwin
Flexible Budgets
May be prepared for any activity level in the relevant range.
Show costs that should have been incurred at the actual level of activity, enabling apples to apples cost comparisons.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
U = Unfavorable variance CheeseCo was unable to achieve the budgeted level of activity.
McGraw-Hill/Irwin
F = Favorable variance that occurs when actual costs are less than budgeted costs.
McGraw-Hill/Irwin
Since cost variances are favorable, have we done a good job controlling costs?
McGraw-Hill/Irwin
McGraw-Hill/Irwin
To answer the question, we must the budget to the actual level of activity.
McGraw-Hill/Irwin
To
Fixed
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 10,000 12,000
Fixed costs $4.00 Depreciation Insurance Total fixed cost Total overhead costs
McGraw-Hill/Irwin
Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 10,000 12,000
Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 10,000 $ 40,000 30,000 5,000 $ 75,000 $ 12,000 2,000 $ 14,000 $ 89,000 12,000
4.00 $ 32,000 3.00 fixed costs 24,000 Total 0.50 4,000 do not change in 7.50 $ 60,000 $ 12,000 2,000 $ 14,000 $ 74,000
Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 10,000 $ 40,000 30,000 5,000 $ 75,000 $ 12,000 2,000 $ 14,000 $ 89,000 12,000 $ 48,000 36,000 6,000 $ 90,000 $ 12,000 2,000 $ 14,000 $ 104,000
McGraw-Hill/Irwin
Variances 0
Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350
Variances 0 $ 2,000 U
$ 32,000
Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350
McGraw-Hill/Irwin
McGraw-Hill/Irwin
McGraw-Hill/Irwin
McGraw-Hill/Irwin
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Spending Variance
AH = Actual hours AR = Actual variable overhead rate SR = Standard variable overhead rate
$6,740
Now, lets use the standard hours allowed, along with the actual hours, to compute the efficiency variance.
McGraw-Hill/Irwin
Spending Variance
Efficiency Variance
$6,600
McGraw-Hill/Irwin
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
McGraw-Hill/Irwin Copyright 2006. The McGraw-Hill Companies, Inc.
Quick Check
Spending variance = AH (AR - SR) Yoder Enterprises actual production for the period=required 2,100 standard directlabor Actual variable overhead incurred (AH SR)
hours. Actual variable overhead for the period = $10,950 (2,050 hours $5 per hour) was $10,950. Actual direct labor hours worked = $10,950 $10,250 were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What = $700 U was the spending variance? a. $450 U b. $450 F c. $700 F d. $700 U
McGraw-Hill/Irwin Copyright 2006. The McGraw-Hill Companies, Inc.
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
McGraw-Hill/Irwin Copyright 2006. The McGraw-Hill Companies, Inc.
Quick Check
Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period Efficiency variance = SR (AH labor SH) hours worked was $10,950. Actual direct were 2,050. The predetermined variable = $5 per hour (2,050 hours 2,100 hours) overhead rate is $5 per direct labor hour. What = $250 F was the efficiency variance? a. $450 U b. $450 F c. $250 F d. $250 U
McGraw-Hill/Irwin Copyright 2006. The McGraw-Hill Companies, Inc.
$10,950
Spending variance $700 unfavorable
$10,500
Efficiency variance $250 favorable
Activity-based costing can be used when multiple activity bases drive variable overhead costs.
McGraw-Hill/Irwin
Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR):
Assigned Overhead = POHR Standard Activity Overhead from the flexible budget for the denominator level of activity
Denominator level of activity
POHR
McGraw-Hill/Irwin
The predetermined overhead rate can be broken down into fixed and variable components.
The variable component is useful for preparing and analyzing variable overhead variances. The fixed component is useful for preparing and analyzing fixed overhead variances.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Budget Variance
Volume Variance
Lets calculate overhead rates. ColaCo applies overhead based on machine-hour activity.
McGraw-Hill/Irwin Copyright 2006. The McGraw-Hill Companies, Inc.
The total POHR is the sum of the fixed and variable rates for a given activity level.
McGraw-Hill/Irwin Copyright 2006. The McGraw-Hill Companies, Inc.
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.
McGraw-Hill/Irwin
Overhead Variances
$8,450
$9,000
Now, lets use the standard hours allowed to compute the fixed overhead volume variance.
McGraw-Hill/Irwin
Volume Variance
Results when standard hours allowed for actual output differs from the denominator activity.
Unfavorable when standard hours < denominator hours
McGraw-Hill/Irwin
variable cost.
Unfavorable when standard hours < denominator hours
McGraw-Hill/Irwin
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
McGraw-Hill/Irwin Copyright 2006. The McGraw-Hill Companies, Inc.
Quick Check
actual production for the = Actual fixed overhead Budgeted fixed overhead period required 2,100 standard direct labor hours. Actual fixed overhead for the period = $14,800 $14,450 was $14,800. The budgeted fixed overhead = $14,450. $350 U was 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
McGraw-Hill/Irwin Copyright 2006. The McGraw-Hill Companies, Inc.
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
McGraw-Hill/Irwin Copyright 2006. The McGraw-Hill Companies, Inc.
Quick Check
the period required 2,100 standard direct labor $14,450 (2,100 hours $7 per hour) hours. = Actual fixed overhead for the period = $14,450 $14,700 was $14,800. The budgeted fixed overhead = $250 F The predetermined fixed was $14,450. 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
McGraw-Hill/Irwin Copyright 2006. The McGraw-Hill Companies, Inc.
Volume variance Yoder Enterprises actual production for = Budgeted fixed overhead (SH FR)
Overhead Variances
Lets look at a graph showing fixed overhead variances. We will use ColaCos numbers from the previous example.
McGraw-Hill/Irwin Copyright 2006. The McGraw-Hill Companies, Inc.
Activity
Activity
{ $550 { Favorable
Budget Variance
The sum of the overhead variances equals the under- or overapplied overhead cost for a period.
McGraw-Hill/Irwin Copyright 2006. The McGraw-Hill Companies, Inc.
Thank You!!!
McGraw-Hill/Irwin