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# CHAPTER 8

FLEXIBLE BUDGETS, VARIANCES,
AND MANAGEMENT CONTROL: II
LEARNING OBJECTIVES
1. Explain in what ways the planning of variable overhead costs and fixed overhead costs are similar
and in what ways they differ
2. Identify the features of a standard-costing system
3. Compute the variable overhead efficiency variance and the variable overhead spending variance
4. Explain how the efficiency variance for a variable indirect-cost item differs from the efficiency
variance for a direct-cost item
5. Compute the budgeted fixed overhead cost rate
6. Explain two concerns when interpreting the production-volume variance as a measure of the
economic cost of unused capacity
7. Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead
amounts allocated during the period
8. Illustrate how the flexible-budget variance approach can be used in activity-based costing

CHAPTER OVERVIEW
Chapter 8 extends the budgeting process to the indirect manufacturing costs, both variable and fixed. The
planning for these costs focuses on undertaking only essential activities and then being efficient in that
undertaking with emphasis on satisfying customers. The control aspect of the budgeting process is
described and illustrated through the use of standard costing and variance analysis.
Variance analysis for indirect costs demands careful interpretation of the variances primarily because of
the manner in which the costs are assigned to the cost object. Indirect costs are allocated on the basis of a
cost driver or cost-allocation base. In calculating the efficiency variance for variable overhead costs one
is actually calculating the difference in the use of the cost-allocation base not the use of the overhead
items. For direct variable costs, a price variance could be calculated but not for indirect variable costs.
The difference in price from actual to budgeted is a part of the difference in quantity of variable overhead
items used and is labeled as a spending variance to incorporate both differences.
Fixed overhead variances add another dimension to variance analysis because of the use of a costallocation base: behavior of the cost in relation to changes in level of activity. Fixed costs are budgeted as
a total cost or lump sum. However, when fixed costs are used in a standard costing system and allocated
on a per unit basis, they take on the “look” of a variable cost. The resulting production-volume variance,
calculated as a difference between a lump sum amount and an allocation of a per unit cost, must be
carefully examined for meaning.

Flexible Budgets, Variances, and Management Control: II

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Journal entries for overhead costs and variances Assign Problems 8-29 and 8-30. Inventory costing for financial reporting purpose a. Variable overhead costs vary in proportion to number of output units produced b.c 6. a. Financial and nonfinancial performance measures: signals to direct managers’ attention to problems B.a 7. Planning and control purposes [Exhibit 8-4] Assign Problem 8-31. and 8-26. Other considerations of overhead variance analysis A. Nonmanufacturing fixed costs used when reimbursed on basis of full actual costs plus a percentage of those costs and in capacity planning and utilization decisions as well as management of those costs Assign Exercises 8-24.d 10.a 8.c .d 5.d 2.H.b 3. Fixed overhead costs allocated on per unit basis an inventoriable cost (unitized) based on level of output units produced and will not necessarily remain fixed in total but change I. III.a 4. Activity-based costing and variance analysis 1. Overhead cost variances in nonmanufacturing and service settings 1. Different purposes of manufacturing overhead cost analysis [Surveys of Company Practice] 1. Illustration of batch-level variance analysis [Exhibit 8-5] Do multiple choice 10.b 9. Variable overhead costs vary in proportion to number of output units produced b. Assign Problems 8-37 and 8-38 CHAPTER QUIZ SOLUTIONS: 106 Chapter 8 1. Learning Objective 8: Illustrate how the flexible-budget variance approach can be used in activity-based costing C. Manufacturing and nonmanufacturing variable cost often used in decisions about pricing and which products to push or de-emphasize 2. Basic principles and concepts for variable and fixed manufacturing overhead costs can be applied to ABC systems 2. 8-25. Fixed overhead costs remain fixed in total over given range of output units 2.