17-1
17
Flexible Budgets, Overhead
Cost Management and
Activity-Based Budgeting
Student Tutorial
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-2
What Are Flexible Overhead
Budgets?
AAflexible
flexiblebudget
budgetis
isvalid
validfor
for
aa range
rangeof
ofactivity
activity
This
Thisrange
rangeof
ofactivity
activityis
is
the
therelevant
relevantrange
range
AAstatic
staticbudget
budget
is
isbased
basedon
onaa
particular
particularplanned
planned
level
level of
ofactivity
activity
AAflexible
flexibleoverhead
overheadbudget
budget
is
isdefined
definedas
asaadetailed
detailedplan
plan
for
forcontrolling
controllingoverhead
overheadcost
cost
valid
validin
inthe
thefirm’s
firm’srelevant
relevant
range
rangeof
ofactivity
activity
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-3
What Are Flexible Overhead
Budgets?
AAflexible
flexiblebudget
budgetis
isvalid
validfor
for
aa range
rangeof
ofactivity
activity
This
Thisrange
rangeof
ofactivity
activityis
is
the
therelevant
relevantrange
range
AAflexible
flexibleoverhead
overheadbudget
budget
is
isdefined
definedas
asaadetailed
detailedplan
plan
for
forcontrolling
controllingoverhead
overheadcost
cost
valid
validin
inthe
thefirm’s
firm’srelevant
relevant
range
rangeof
ofactivity
activity
Irwin/McGraw-Hill Ryerson
AAstatic
staticbudget
budget
is
isbased
basedon
onaa
particular
particularplanned
planned
level
level of
ofactivity
activity
Let’s
Let’slook
lookat
at the
the
Koala
KoalaCamp
CampGear
Gear
example
examplefrom
fromthe
the
text.
text.
©McGraw-Hill Ryerson, 2001
Static Budget Versus Flexible
Budget
Based on
only one
anticipated
activity
level
Static budget
Activity (machine
hours)
Budgeted electricity
cost
6,000
$1,200
Based on
planned June
production of
4,00 tents, at
1.5 machine
hours per tent
Flexible budget
Activity
(machine hours)
Budgeted
electricity cost
4,500
6,000
7,500
$900
$1,200
$1,500
Includes several possible activity levels
Irwin/McGraw-Hill Ryerson
17-4
©McGraw-Hill Ryerson, 2001
Static Budget Versus Flexible
Budget
17-5
Convert the following static budget to a flexible budget
Static budge t
Activity (dire ct
labour hours)
Based on
planned
production of
10,000 direct
labour hours
× $2
10,000
Budge te d indirect
labour cost
$20,000
Flexible budget
Activity (dire ct
labour hours)
Budge te d
indirect labour
cost
Irwin/McGraw-Hill Ryerson
9,000
10,000
11,000
?
?
?
©McGraw-Hill Ryerson, 2001
Static Budget Versus Flexible
Budget
17-6
Convert the following static budget to a flexible budget
Static budge t
Activity (dire ct
labour hours)
10,000
Budge te d indirect
labour cost
$20,000
Based on
planned
production of
10,000 direct
labour hours
× $2
Flexible budget
Activity (dire ct
labour hours)
Budge te d
indirect labour
cost
Irwin/McGraw-Hill Ryerson
9,000
10,000
11,000
$18,000
$20,000
$22,000
©McGraw-Hill Ryerson, 2001
17-7
Advantages Of Flexible Budgets
Actual
Actual
ElectricityCost
Cost
Electricity
$1,050
Budgeted
Budgeted
ElectricityCost
Cost
Electricity
(staticbudget)
budget)
(static
$1,200
CostVariance
Variance
Cost
$150 Favourable
Themanager
manageris
iscomparing
comparingthe
theelectricity
electricitycost
costincurred
incurred
The
atthe
theACTUAL
ACTUAL activity
activitylevel,
level,3,000
3,000tents
tentswith
withthe
the
at
budgetedelectricity
electricitycost
costat
atthe
thePLANNED
PLANNED
budgeted
activitylevel,
level,4000
4000tents
tents
activity
Theseactivity
activitylevels
levelsare
aredifferent,
different,therefore
thereforewe
wewould
would
These
expectthe
theelectricity
electricitycost
costto
tobe
bedifferent
different
expect
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-8
Advantages Of Flexible Budgets
Actual
Actual
ElectricityCost
Cost
Electricity
$1,050
Budgeted
Budgeted
ElectricityCost
Cost
Electricity
(flexiblebudget)
budget)
(flexible
$900
CostVariance
Variance
Cost
$150 Unfavourable
Themanager
manageris
iscomparing
comparingthe
theelectricity
electricitycost
costincurred
incurred
The
atthe
theACTUAL
ACTUAL activity
activitylevel,
level,3,000
3,000tents
tentswith
withthe
the
at
budgetedelectricity
electricity cost
costat
atthe
theACTUAL
ACTUALactivity
activitylevel,
level,
budgeted
(3,000tents
tentsxx1.5
1.5machine
machinehours)
hours)==4,500
4,500machine
machinehours
hours
(3,000
Electricalcost
costwas
wasgreater
greaterthan
thanititshould
shouldhave
havebeen,
been,given
giventhe
the
Electrical
actual level
levelof
ofoutput
output
actual
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-9
The Activity Measure: Based On
Input Or Output
Whyare
arethe
theactivity
activitylevels
levelsin
inthe
theflexible
flexiblebudget
budgetbased
basedon
on
Why
machinehours,
hours,an
aninput
inputmeasure,
measure,instead
insteadof
ofnumber
numberof
of
machine
tentsproduced,
produced,an
anoutput
outputmeasure?
measure?
tents
Output measures
can be used if
you only
manufacture
one product
Flexiblebudget
budget
Flexible
forelectrical
electricalcost
cost
for
4,820xx.20
.20==
4,820
$964
$964
Units
Product
Produced
Tree Line Model
1,200
River's Edge Model
900
Valley Model
700
Total
2,800
Output measures require
different inputs
Irwin/McGraw-Hill Ryerson
Standard
Machine
Hours Per
Unit
1.5
1.8
2
Total
Standard
Allowed
Machine
Hours
1,800
1,620
1,400
4,820
Flexible budget
must be based on
outputs that can
be compared
©McGraw-Hill Ryerson, 2001
Flexible Budgets: Inputs Versus
Outputs
Output is measured
in terms of of the
standard allowed
input, given actual
output
1.5standard
standard
1.5
allowed
allowed
machine
machine
hoursper
per
hours
tent
tent
Flexible budget (based on input)
Activity: Standard allowed machine
hours
Budgeted electricity costs
4,500
6,000
7,500
$900
$1,200
$1,500
Flexible budget (based on output)
Activity: tents manufactured
3,000
Budgeted electricity costs
$900
4,000
$1,200
5,000
$1,500
Usually not a meaningful measure in a multiproduct firm because it would require us to add
numbers of unlike products
Irwin/McGraw-Hill Ryerson
17-10
©McGraw-Hill Ryerson, 2001
17-11
Formula Flexible Budget
Total Budgeted
Monthly
Overhead Cost
IfIfyou
yourecall,
recall,this
this
is
issimilar
similarto
tothe
the
Predetermined
Predetermined
Cost-Driver
Cost-DriverRate
Rate
discussed
discussedin
in
Chapter
Chapter6.
6.
Irwin/McGraw-Hill Ryerson
Budgeted
Total
Variable=
× Activity
Overhead Cost
Units
.
per Activity
Unit
Budgeted Fixed+ Overhead Cost
per Month
Assume that the company needs
flexible budget numbers for three
activity levels: 4,500 hours, 6,000
hours, and 7,500 hours.
Also, assume that the Predetermined
Budgeted Variable-Overhead Cost
per Activity Unit is $6 per hour.
Budgeted Fixed-Overhead Cost for
the month is $30,000.
©McGraw-Hill Ryerson, 2001
17-12
Formula Flexible Budget
Budgeted
Total
Variable=
× Activity
Overhead Cost
Units
per Activity Unit
Total Budgeted
Monthly
Overhead Cost
$57,000
$66,000
$75,000
=
$6
×
Budgeted Fixed+ Overhead Cost
per Month
4,500
6,000
7,500
+
$30,000
The flexed total budgeted monthly
overhead for each activity level can
now be used effectively in planning
and variance analysis.
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-13
Overhead Application
Normal Costing
Manufacturing Overhead
Actual
overhead
The
TheDifference
Difference
between
betweenNormal
Normal
Costing
Costingand
and
Standard
Standard
Costing
Costinglies
liesin
in
the
thequantity
quantityof
of
hours
hoursused
used
Irwin/McGraw-Hill Ryerson
Work-in-Process Inventory
Applied
overhead
Applied
overhead
Actual
hours
Actual
hours
×
×
Predetermined
overhead
rate
Predetermined
overhead
rate
©McGraw-Hill Ryerson, 2001
17-14
Overhead Application
Standard Costing
Manufacturing Overhead
Actual
overhead
The
TheDifference
Difference
between
betweenNormal
Normal
Costing
Costingand
and
Standard
Standard
Costing
Costinglies
liesin
in
the
thequantity
quantityof
of
hours
hoursused
used
Irwin/McGraw-Hill Ryerson
Work-in-Process Inventory
Applied
overhead
Applied
overhead
Standard
allowed
hours
Standard
allowed
hours
×
×
Predetermined
or standard
overhead
rate
Predetermined
or standard
overhead
rate
©McGraw-Hill Ryerson, 2001
17-15
Predetermined Overhead Rates
SpartaCompany’s
Company’sexpected
expectedannual
annualfixed
fixedoverhead
overheadis
is$500,000
$500,000
Sparta
andits
itsexpected
expectedvariable
variableoverhead
overheadis
is$100,000.
$100,000. The
Thecompany
company
and
has aarelevant
relevantrange
rangeof
of75,000
75,000to
to125,000
125,000machine
machinehours.
hours.
has
Spartaestimates
estimatesthe
the activity
activitylevel
levelto
tobe
be100,000
100,000machine
machinehours.
hours.
Sparta
Computethe
thepredetermined
predeterminedoverhead
overheadrate.
rate.
Compute
Variable
Fixed
Total
Irwin/McGraw-Hill Ryerson
Budgeted Planned Monthly
Overhead Activity
$100,000
?
$500,000
?
$600,000
?
Predetermined
Overhead Rate
?
?
?
©McGraw-Hill Ryerson, 2001
17-16
Predetermined Overhead Rates
SpartaCompany’s
Company’sexpected
expectedannual
annualfixed
fixedoverhead
overheadis
is$500,000
$500,000
Sparta
andits
itsexpected
expectedvariable
variableoverhead
overheadis
is$100,000.
$100,000. The
Thecompany
company
and
has aarelevant
relevantrange
rangeof
of75,000
75,000to
to125,000
125,000machine
machinehours.
hours.
has
Spartaestimates
estimatesthe
the activity
activitylevel
levelto
tobe
be100,000
100,000machine
machinehours.
hours.
Sparta
Computethe
thepredetermined
predeterminedoverhead
overheadrate.
rate.
Compute
Variable
Fixed
Total
Irwin/McGraw-Hill Ryerson
Budgeted
Overhead
$100,000
$500,000
Planned Monthly Predetermined
Activity
Overhead Rate
100,000 machine hrs.
$1.00
100,000 machine hrs.
$5.00
$600,000 100,000 machine hrs.
$6.00
©McGraw-Hill Ryerson, 2001
17-17
Predetermined Overhead Rates
Bothnormal-costing
normal-costingand
andstandard-costing
standard-costing systems
systems
Both
usean
an overhead
overheadrate
ratecomputed
computedat
at the
thebeginning
beginningof
of
use
theaccounting
accountingperiod
period(predetermined
(predeterminedoverhead
overheadrate)
rate)
the
Variable
Fixed
Total
Budgeted
Overhead
$36,000
$30,000
Planned Monthly Predetermined
Activity
Overhead Rate
6,000 machine hours
$6.00
6,000 machine hours
$5.00
$66,000 6,000 machine hours
$11.00
Computed annually
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
Choice Of Activity Measure
17-18
Howshould
shouldthe
thecost
costmanager
managerselect
selectthe
theactivity
activitymeasure
measurefor
forthe
the
How
flexiblebudget?
budget?
flexible
Thevariable
variableoverhead
overheadcost
cost
The
andthe
theactivity
activitymeasure
measure
and
shouldmove
movetogether
together
should
Directlabour
labourtime
timehas
has
Direct
traditionallybeen
beenthe
themost
most
traditionally
popularactivity
activity measure
measurein
in
popular
manufacturingfirms
firms
manufacturing
Irwin/McGraw-Hill Ryerson
Dollarmeasures,
measures,such
suchas
as
Dollar
direct-labouror
ormaterial
materialcosts
costs
direct-labour
canbe
bemisleading
misleadingbecause
because
can
theyare
aresubject
subjectto
toprice-level
price-level
they
changesand
andother
otherfluctuations
fluctuations
changes
Asautomation
automationincreases,
increases,more
more
As
firmsare
are switching
switchingto
tomachine
machine
firms
hours or
orprocess
processtime
time
hours
©McGraw-Hill Ryerson, 2001
Overhead Cost Variances
Koalamanufactured
manufactured3,000
3,000tree
treeline
linetents
tentsXX1.5
1.5machine
machinehours
hoursper
pertent
tent
Koala
standardallowed
allowed4,500
4,500machine
machinehours
hours
==standard
For standard
standardallowed
allowed4,500
4,500machine
machinehours
hoursthe
thebudget
budgetoverhead
overhead(from
(from
For
Exhibit17-3
17-3in
inthe
thetext)
text)for
forJune
June==
Exhibit
Variableoverhead
overhead
$27,000
Variable
$27,000
Fixedoverhead
overhead
$30,000
Fixed
$30,000
Fromthe
thecost
costaccounting
accountingrecords,
records,the
theactual
actualoverhead
overhead for
forJune
June==
From
Variableoverhead
overhead
$30,480
Variable
$30,480
Fixedoverhead
overhead
$32,500
Fixed
$32,500
$62,980
$62,980
Actualmachine
machine
Actual
hours
hours
forJune
June==4,800
4,800
for
Irwin/McGraw-Hill Ryerson
Thetotal
totalvariable
variableoverhead
overhead
The
variancefor
for June
June==
variance
Actualvariable
variableoverhead
overhead
$30,480
Actual
$30,480
Budgetvariable
variableoverhead
overhead
$27,000
Budget
$27,000
3,480 UU
$$3,480
©McGraw-Hill Ryerson, 2001
17-19
Overhead Cost Variances
17-20
TheNashville
NashvilleToy
ToyCompany
Companymakes
makestoy
toyairplanes
airplanesat
at .5
.5
The
machinehours
hoursper
perairplane.
airplane. During
During the
thefiscal
fiscalperiod
period
machine
theymanufactured
manufactured 2,000
2,000airplanes.
airplanes.
they
StandardAllowed
AllowedMachine
MachineHrs
Hrs ==1,000
1,000machine
machinehrs
hrs
Standard
For1,000
1,000standard
standardallowed
allowed machine
machinehrs,
hrs,the
thebudgeted
budgeted
For
overheadfor
forthe
thefiscal
fiscal period
period ==
overhead
Variableoverhead
overhead
$50,000
Variable
$50,000
Fixedoverhead
overhead
$100,000
Fixed
$100,000
Fromthe
thecost
costaccounting
accountingrecords,
records,the
theactual
actualoverhead
overhead
From
forJune
June==
for
Variableoverhead
overhead
51,500
Variable
$$51,500
Fixedoverhead
overhead
$105,000
Fixed
$105,000
$156,500
$156,500
Computethe
thetotal
total variable
variable
Compute
overheadvariance
variance
overhead
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
Overhead Cost Variances
Total Variable
Variable Overhead
Overhead Variance
Variance
Total
Actualmachine
machinehours
hours
Actual
forJune
June== 1,050
1,050
for
Actual Machine
Hours
Overhead
Actual Variable
Overhead
1,050
Budget Variable
Overhead
1,050
Variable Overhead Variance
Irwin/McGraw-Hill Ryerson
$51,500
$50,000
-$1,500 U
©McGraw-Hill Ryerson, 2001
17-21
17-22
Variable Overhead Variances
TheVARIABLE-OVERHEAD
VARIABLE-OVERHEADSPENDING
SPENDINGVARIANCE
VARIANCEis
isthe
thedifference
differencebetween
between
The
theactual
actualvariable
variableoverhead
overheadcost
costand
andthe
theproduct
productof
ofthe
thestandard
standard
the
variable-overhead
-overheadrate
rateand
andthe
theactual
actualhours
hoursof
ofan
anactivity
activitybase
base
variable
(orcost
costdriver)
driver)
(or
Actualvariable
variableoverhead
overhead
Actual
Actualmachine
machinehours
hourstimes
times
Actual
thestandard
standardrate
rate
the
Actualmachine
machine
Actual
hours(AH)
(AH)
hours
Actualrate
rate
Actual
(AVR)
(AVR)
Actualmachine
machine
Actual
hours(AH)
(AH)
hours
Standardrate
rate
Standard
(SVR)
(SVR)
4,800machine
machine
4,800
hours
hours
$6.35per
per
$6.35
machinehour
hour
machine
4,800machine
machine
4,800
hours
hours
$6.00per
per
$6.00
machinehour
hour
machine
$30,480
$30,480
$28,800
$28,800
$1,680Unfavourable
Unfavourable
$1,680
Variable-overhead
Variable-overhead
spendingvariance
variance
spending
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-23
Variable Overhead Variances
Standards:
Standards:
Machine
Machinehours
hoursper
perunit
unit==22
Variable
Variableoverhead
overheadstandard
standardrate
rate==$5
$5per
perhour
hour
Budgeted
Budgetedlevel
levelof
ofproduction
production4,000
4,000units
units
Actual:
Actual:
Machine
Machinehours
hours==7,900
7,900
Production
Production3,900
3,900units
units
Variable
VariableOverhead
Overhead==$40,290
$40,290
The
Thevariable
variableoverhead
overheadspending
spendingvariance
varianceis:
is:
A.
A. $500
$500UU
B.
B. $290
$290UU
C.
C. $790
$790UU
D.
D. $290
$290FF
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-24
Variable Overhead Variances
Standards:
Standards:
Machine
Machinehours
hoursper
perunit
unit==22
Variable
Variableoverhead
overheadstandard
standardrate
rate==$5
$5per
perhour
hour
Budgeted
Budgetedlevel
levelof
ofproduction
production4,000
4,000units
units
Actual:
Actual:
Machine
Machinehours
hours==7,900
7,900
Production
Production3,900
3,900units
units
Variable
VariableOverhead
Overhead==$40,290
$40,290
The
Thevariable
variableoverhead
overheadspending
spendingvariance
varianceis:
is:
A.
A. $500
$500UU
Try again. You want the difference
B.
$290
U
B. $290 U between actual overhead and budgeted
C.
C. $790
$790UU
overhead for actual hours.
D.
D. $290
$290FF
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-25
Variable Overhead Variances
Standards:
Standards:
Machine
Machinehours
hoursper
perunit
unit==22
Variable
Variableoverhead
overheadstandard
standardrate
rate==$5
$5per
perhour
hour
Budgeted
Budgetedlevel
levelof
ofproduction
production4,000
4,000units
units
Actual:
Actual:
Machine
Machinehours
hours==7,900
7,900
Production
Production3,900
3,900units
units
Variable
VariableOverhead
Overhead==$40,290
$40,290
The
Thevariable
variableoverhead
overheadspending
spendingvariance
varianceis:
is:
A.
A. $500
$500UU
Try again. You want the difference
B.
$290
U
B. $290 U between actual overhead and budgeted
C.
C. $790
$790UU
overhead for actual hours.
D.
D. $290
$290FF
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-26
Variable Overhead Variances
Standards:
Standards:
Machine
Machinehours
hoursper
perunit
unit==22
Variable
Variableoverhead
overheadstandard
standardrate
rate==$5
$5per
perhour
hour
Budgeted
Budgetedlevel
levelof
ofproduction
production4,000
4,000units
units
Actual:
Actual:
Machine
Machinehours
hours==7,900
7,900
Production
Production3,900
3,900units
units
Variable
VariableOverhead
Overhead==$40,290
$40,290
The
Thevariable
variableoverhead
overheadspending
spendingvariance
varianceis:
is:
A.
A. $500
$500UU
B.
B. $290
$290UU 40,290 - ( 7,900 × 5 ) = 790
C.
C. $790
$790UU
D.
D. $290
$290FF
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-27
Variable Overhead Variances
Standards:
Standards:
Machine
Machinehours
hoursper
perunit
unit==22
Variable
Variableoverhead
overheadstandard
standardrate
rate==$5
$5per
perhour
hour
Budgeted
Budgetedlevel
levelof
ofproduction
production4,000
4,000units
units
Actual:
Actual:
Machine
Machinehours
hours==7,900
7,900
Production
Production3,900
3,900units
units
Variable
VariableOverhead
Overhead==$40,290
$40,290
The
Thevariable
variableoverhead
overheadspending
spendingvariance
varianceis:
is:
A.
A. $500
$500UU
Try again. You want the difference
B.
$290
U
B. $290 U between actual overhead and budgeted
C.
C. $790
$790UU
overhead for actual hours.
D.
D. $290
$290FF
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-28
Variable Overhead Variances
TheVARIABLE-OVERHEAD
VARIABLE-OVERHEADEFFICIENCY
EFFICIENCYVARIANCE
VARIANCEis
isthe
thedifference
differencebetween
between
The
theactual
actualand
andthe
the standard
standardhours
hoursof
ofan
anactivity
activitybase
base(or
(orcost
costdriver)
driver)
the
multipliedby
bythe
thestandard
standardvariable
variableoverhead
overheadrate
rate
multiplied
Actualmachine
machinehours
hourstimes
times
Actual
thestandard
standardrate
rate
the
Flexiblebudget:
budget:
Flexible
variableoverhead
overhead
variable
Actualmachine
machine
Actual
hours(AH)
(AH)
hours
Standardrate
rate
Standard
(SVR)
(SVR)
Standardallowed
allowed
Standard
machinehours
hours(SH)
(SH)
machine
Standardrate
rate
Standard
(SVR)
(SVR)
4,800machine
machine
4,800
hours
hours
$6.00per
per
$6.00
machinehour
hour
machine
4,500machine
machine
4,500
hours
hours
$6.00per
per
$6.00
machinehour
hour
machine
$27,000
$27,000
$28,800
$28,800
$1,800Unfavourable
Unfavourable
$1,800
Variable-overhead
Variable-overhead
efficiencyvariance
variance
efficiency
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-29
Variable Overhead Variances
Standards:
Standards:
Machine
Machinehours
hoursper
perunit
unit==22
Variable
Variableoverhead
overheadstandard
standardrate
rate==$5
$5per
perhour
hour
Budgeted
Budgetedlevel
levelof
ofproduction
production4,000
4,000units
units
Actual:
Actual:
Machine
Machinehours
hours==7,900
7,900
Production
Production3,900
3,900units
units
Variable
VariableOverhead
Overhead==$40,290
$40,290
The
Thevariable
variableoverhead
overheadefficiency
efficiencyvariance
varianceis
is
A.
A. $500
$500UU
B.
B. $500
$500FF
C.
C. $1,000
$1,000UU
D.
D. $1,000
$1,000FF
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-30
Variable Overhead Variances
Standards:
Standards:
Machine
Machinehours
hoursper
perunit
unit==22
Variable
Variableoverhead
overheadstandard
standardrate
rate==$5
$5per
perhour
hour
Budgeted
Budgetedlevel
levelof
ofproduction
production4,000
4,000units
units
Actual:
Actual:
Machine
Machinehours
hours==7,900
7,900
Production
Production3,900
3,900units
units
Variable
VariableOverhead
Overhead==$40,290
$40,290
The
Thevariable
variableoverhead
overheadefficiency
efficiencyvariance
varianceis
is
A.
A. $500
$500UU
( 7,800 × 5 ) - ( 7,900 × 5 ) = 500
B.
B. $500
$500FF
C.
C. $1,000
$1,000UU
D.
D. $1,000
$1,000FF
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-31
Variable Overhead Variances
Standards:
Standards:
Machine
Machinehours
hoursper
perunit
unit==22
Variable
Variableoverhead
overheadstandard
standardrate
rate==$5
$5per
perhour
hour
Budgeted
Budgetedlevel
levelof
ofproduction
production4,000
4,000units
units
Actual:
Actual:
Machine
Machinehours
hours==7,900
7,900
Production
Production3,900
3,900units
units
Variable
VariableOverhead
Overhead==$40,290
$40,290
The
Thevariable
variableoverhead
overheadefficiency
efficiencyvariance
varianceis
is
A.
A. $500
$500UU
Try again. You want the difference
B.
$500
F
B. $500 F
between actual hours @ standard price
C.
$1,000
U
C. $1,000 U
and flexible budget overhead.
D.
D. $1,000
$1,000FF
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-32
Variable Overhead Variances
Standards:
Standards:
Machine
Machinehours
hoursper
perunit
unit==22
Variable
Variableoverhead
overheadstandard
standardrate
rate==$5
$5per
perhour
hour
Budgeted
Budgetedlevel
levelof
ofproduction
production4,000
4,000units
units
Actual:
Actual:
Machine
Machinehours
hours==7,900
7,900
Production
Production3,900
3,900units
units
Variable
VariableOverhead
Overhead==$40,290
$40,290
The
Thevariable
variableoverhead
overheadefficiency
efficiencyvariance
varianceis
is
A.
A. $500
$500UU
Try again. You want the difference
B.
$500
F
B. $500 F
between actual hours @ standard price
C.
$1,000
U
C. $1,000 U
and flexible budget overhead.
D.
D. $1,000
$1,000FF
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-33
Variable Overhead Variances
Standards:
Standards:
Machine
Machinehours
hoursper
perunit
unit==22
Variable
Variableoverhead
overheadstandard
standardrate
rate==$5
$5per
perhour
hour
Budgeted
Budgetedlevel
levelof
ofproduction
production4,000
4,000units
units
Actual:
Actual:
Machine
Machinehours
hours==7,900
7,900
Production
Production3,900
3,900units
units
Variable
VariableOverhead
Overhead==$40,290
$40,290
The
Thevariable
variableoverhead
overheadefficiency
efficiencyvariance
varianceis
is
A.
A. $500
$500UU
Try again. You want the difference
B.
$500
F
B. $500 F
between actual hours @ standard price
C.
$1,000
U
C. $1,000 U
and flexible budget overhead.
D.
D. $1,000
$1,000FF
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
Variable Overhead Variances
17-34
Theflexible
flexiblebudget
budget amount
amountfor
forvariable
variableoverhead
overhead$27,000
$27,000
The
isthe
theamount
amount that
thatwill
willbe
beapplied
appliedto
to Work-in-Process
Work-in-Processfor
for
is
product-costingpurposes
purposes
product-costing
Variableoverhead
overheadapplied
applied
Variable
towork
workin
inprocess
process
to
Flexiblebudget:
budget:
Flexible
variableoverhead
overhead
variable
Standardallowed
allowed
Standard
machinehours
hours(SH)
(SH)
machine
Standardrate
rate
Standard
(SVR)
(SVR)
4,500machine
machine
4,500
hours
hours
$6.00per
per
$6.00
machinehour
hour
machine
Standardallowed
allowed
Standard
machinehours
hours(SH)
(SH)
machine
4,500machine
machine
4,500
hours
hours
$27,000
$27,000
Standardrate
rate
Standard
(SVR)
(SVR)
$6.00per
per
$6.00
machinehour
hour
machine
$27,000
$27,000
Nodifference
difference
No
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-35
How To Interpret The Variable
Overhead Variances
Efficiency
Efficiencyvariance
variance
The
Theunfavourable
unfavourablevariance
variance
resulting
resultingfrom
fromusing
usingmore
more
machine
machinehours
hoursthan
thanthe
thestandard
standard
quantity,
quantity,given
givenactual
actualoutput
output
The
Thevariable
variableoverhead
overhead
efficiency
variance
efficiency variancehas
has
nothing
nothingto
todo
dowith
withefficient
efficient
or
orinefficient
inefficientuse
useof
of
variable
variableoverhead
overheaditems
items
Irwin/McGraw-Hill Ryerson
Spending
Spendingvariance
variance
The
Theactual
actualvariable
variableoverhead
overhead
rate
rateper
perhour
hourdiffers
differsfrom
fromthe
the
standard
standardrate
rate
An
Anunfavourable
unfavourablevariance
variancemeans
means
that
thatthe
thetotal
totalactual
actualvariable
variable
overhead
overhead>> than
thanexpected,
expected,after
after
adjusting
adjustingfor
forthe
theactual
actualquantity
quantity
of
ofmachine
machinehours
hoursused
used
The
Thespending
spendingvariance
varianceis
isthe
the
real
realcontrol
controlvariance
variancefor
forvariable
variable
overhead
overhead
©McGraw-Hill Ryerson, 2001
17-36
Fixed Overhead Variances
The
TheFIXED-OVERHEAD
FIXED-OVERHEADBUDGET
BUDGETVARIANCE
VARIANCEis
isthe
thedifference
difference
between
betweenactual
actualfixed
fixedoverhead
overheadand
andbudgeted
budgetedfixed
fixedoverhead
overhead
Fixed-overhead
Fixed-overhead
budget
budgetvariance
variance
Fixed-overhead
Fixed-overhead
budget
budgetvariance
variance
==
Actual
ActualFixed
Fixed
overhead
overhead
==
Actual
ActualFixed
Fixed
overhead
overhead==
$32,500
$32,500
--
Budgeted
Budgetedfixed
fixed
overhead
overhead
--
Budgeted
Budgetedfixed
fixed
overhead
overhead==
$30,000
$30,000
Unfavourable variance of
$2,500, because we spent
more than budgeted
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-37
Fixed Overhead Variances
The
TheFIXED-OVERHEAD
FIXED-OVERHEADVOLUME
VOLUMEVARIANCE
VARIANCEis
isthe
thedifference
difference
between
betweenbudgeted
budgetedfixed
fixedoverhead
overheadand
andactual
actualfixed
fixedoverhead
overhead
Fixed-overhead
Fixed-overhead
volume
volumevariance
variance
==
Budgeted
Budgetedfixed
fixed
overhead
overhead
Predetermined
Predetermined
fixed
fixedoverhead
overhead
rate
rate==$5.00
$5.00per
perMH
MH
Fixed-overhead
Fixed-overhead
volume
volumevariance
variance
==
Budgeted
Budgeted
fixed
fixedoverhead
overhead==
$30,000
$30,000
--
Applied
Appliedfixed
fixed
overhead
overhead
--
Standard
Standardallowed
allowed
hours
hours==4,500
4,500
machine
machinehours
hours
--
Applied
Appliedfixed
fixed
overhead
overhead==
$22,500
$22,500
Unfavourable variance of $7,500, because
we produced less than budgeted.
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-38
Managerial Interpretation Of FixedOverhead Variances
Budget
BudgetVariance
Variance
The
Thereal
realcontrol
control
variance
variancefor
for
fixed
fixedoverhead
overhead
because
becauseitit
compares
comparesactual
actual
expenditures
expenditureswith
with
budgeted
budgetedfixed
fixed
overhead
overheadcosts
costs
Irwin/McGraw-Hill Ryerson
Volume
VolumeVariance
Variance
Reconciles
Reconcilesthe
thetwo
twodifferent
differentpurposes
purposes
of
ofthe
thecost
costaccounting
accountingsystem
system
For
Forcost-management
cost-management
purposes,
purposes,the
thecostcostaccounting
accountingsystem
system
recognizes
recognizesthat
thatfixed
fixed
overhead
does
not
overhead does not
change
changeas
asproduction
production
activity
activityvaries
varies
For
Forproduct-costing
product-costing
purposes,
purposes,budgeted
budgeted
fixed
fixedoverhead
overhead
is
isdivided
dividedby
byplanned
planned
activity
activityto
toobtain
obtainaa
or
orstandard
standardfixedfixedoverhead
overheadrate
rate
©McGraw-Hill Ryerson, 2001
Fixed Overhead Budget And
Volume Variances
(1)
(1)
Actual
Actual
fixed
fixed
overhead
overhead
(2)
(2)
Budgeted
Budgeted
fixed
fixed
overhead
overhead
(3)
(3)
Fixedoverhead
overheadapplied
applied
Fixed
towork
workin
inprocess
process
to
Standard
Standard
allowed
allowed
machine
machine
hours
hours
4,500
4,500
machine
machine
hours
hours
$32,500
$32,500
Fixed-overhead
Fixed-overhead
budgetvariance
variance
budget
Irwin/McGraw-Hill Ryerson
XX
$5.00per
per
$5.00
machine
machine
hour
hour
$22,500
$22,500
$30,000
$30,000
$2,500UU
$2,500
XX
Standard
Standard
fixed
fixed
overhead
overhead
rate
rate
$7,500UU
$7,500
Fixed-overhead
Fixed-overhead
volumevariance
variance
volume
©McGraw-Hill Ryerson, 2001
17-39
17-40
Budgeted Versus Applied Fixed
Overhead
Applied fixed
Fixed overhead
overhead ($5.00
per standard
allowed machine
hour)
$30,000
Volume variance
$7,500
Budgeted fixed
overhead
$22,500
Applied
fixed
overhead
in June
0
Irwin/McGraw-Hill Ryerson
Machine
hours
4,500 Standard 6,000
allowed hours, Planned
given actual monthly
output
activity
©McGraw-Hill Ryerson, 2001
Four-, Three- And Two-way
Variance Analysis
Four-way analysis
Variableoverhead
spending
variance
Fixedoverhead
budget
variance
Variableoverhead
efficiency
variance
Fixedoverhead
volume
variance
$1,680 U
$2,500 U
$1,800 U
$7,500 U
Combined spending variance
Three-way analysis
$4,180 U
$1,800 U
$7,500 U
Combined budget variance
Two-way analysis
$5,980 U
$62,980 actual overhead overhead applied to WIP, 49,500 =
$13,480
Irwin/McGraw-Hill Ryerson
$7,500 U
Underapplied
overhead
©McGraw-Hill Ryerson, 2001
17-41
17-42
Fixed Overhead Variances
The
TheFIXED-OVERHEAD
FIXED-OVERHEADBUDGET
BUDGETVARIANCE
VARIANCEis
isthe
thedifference
difference
between
betweenactual
actualfixed
fixedoverhead
overheadand
andbudgeted
budgetedfixed
fixedoverhead
overhead
Fixed-overhead
Fixed-overhead
budget
budgetvariance
variance
Fixed-overhead
Fixed-overhead
budget
budgetvariance
variance
==
Actual
ActualFixed
Fixed
overhead
overhead
==
Actual
ActualFixed
Fixed
overhead
overhead==
$81,500
$81,500
--
Budgeted
Budgetedfixed
fixed
overhead
overhead
--
Budgeted
Budgetedfixed
fixed
overhead
overhead==
$80,000
$80,000
Unfavourable variance of
$1,500, because we spent
more than budgeted
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-43
Fixed Overhead Variances
Standards:
Standards:
Machine
Machine hours
hours per
per unit
unit == 22
Fixed
Fixed overhead
overhead standard
standard rate
rate == $10
$10 per
per hour
hour
Budgeted
Budgeted level
level of
of production
production 4,000
4,000 units
units
Actual:
Actual:
Machine
Machine hours
hours == 7,900
7,900
Production
Production 3,900
3,900 units
units
Fixed
Fixed Overhead
Overhead == $81,500
$81,500
What
What is
is the
the fixed
fixed overhead
overhead volume
volume variance?
variance?
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
17-44
Fixed Overhead Variances
The
TheFIXED-OVERHEAD
FIXED-OVERHEADVOLUME
VOLUMEVARIANCE
VARIANCEis
isthe
thedifference
difference
between
betweenbudgeted
budgetedfixed
fixedoverhead
overheadand
andactual
actualfixed
fixedoverhead
overhead
Fixed-overhead
Fixed-overhead
volume
volumevariance
variance
==
Budgeted
Budgetedfixed
fixed
overhead
overhead
Predetermined
Predetermined
fixed
fixedoverhead
overhead
rate
rate==$10.00
$10.00per
perMH
MH
Fixed-overhead
Fixed-overhead
volume
volumevariance
variance
==
Budgeted
Budgeted
fixed
fixedoverhead
overhead==
$80,000
$80,000
--
Applied
Appliedfixed
fixed
overhead
overhead
--
Standard
Standardallowed
allowed
hours
hours==7,800
7,800
machine
machinehours
hours
--
Applied
Appliedfixed
fixed
overhead
overhead==
$78,000
$78,000
Unfavourable variance of $2,000, because
we produced less than budgeted.
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001
Four-, Three- And Two-way
Variance Analysis
Four-way analysis
Variableoverhead
spending
variance
Fixedoverhead
budget
variance
Variableoverhead
efficiency
variance
Fixedoverhead
volume
variance
$790 U
$1,500 U
$500 U
$2,000 U
Combined spending variance
Three-way analysis
$2,290 U
$500 U
$2,000 U
Combined budget variance
Two-way analysis
$121,790 actual overhead overhead applied to WIP:
117,000 = $4,790
Irwin/McGraw-Hill Ryerson
$2,790 U
$2,000 U
Underapplied
overhead
©McGraw-Hill Ryerson, 2001
17-45
17-46
Activity-Based Flexible Budget
Anactivity-based
activity-basedflexible
flexiblebudget
budgetmay
mayprovide
providemore
moreuseful
usefulcost
cost
An
managementinformation
informationthan
thanaaconventional
conventionalflexible
flexiblebudget
budget
management
The
Thetraditional
traditionalbudget
budget
Activity-based
Activity-basedflexible
flexiblebudget
budget
Costs
Costsare
arecategorized
categorized
as
asvariable
variablebased
basedon
on
volume
volumemeasures
measures
Costs
Costsare
arecategorized
categorized
as
asvariable
variablebased
basedon
on
several
severalcost
costdrivers
drivers
Machine
Machine
hours
hours
Irwin/McGraw-Hill Ryerson
Direct
Direct
labour
labour
hours
hours
Cost
Costthat
thatmay
mayseem
seemfixed
fixedwith
with
respect
respectto
toaasingle
singlevolume-based
volume-based
cost
costdriver
drivermay
maybe
bevariable
variablewith
with
respect
respectto
toother
othernon-volume
non-volumerelated
related
cost
drivers
cost drivers
©McGraw-Hill Ryerson, 2001
17-47
End of Chapter 17
I wish I
could figure
out how to
FLEX my
paycheque!
Irwin/McGraw-Hill Ryerson
©McGraw-Hill Ryerson, 2001