11ch08

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Flexible Budgets, Variances,
and Management Control: II
Chapter 8
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8-1
Learning Objective 1
Explain in what ways the
planning of variable overhead
costs and fixed overhead
costs are similar and in
what ways they differ.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8-2
Planning of Variable and
Fixed Overhead Costs
Effective planning of variable overhead costs
involves undertaking only those variable
overhead activities that add value for
customers using the product or service.
The key challenge with planning fixed overhead
is choosing the appropriate level of capacity or
investment that will benefit the company over
an extended time period.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8-3
Learning Objective 2
Identify the features of
a standard-costing system.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8-4
Standard Costing
Direct Cost
Cost Object
Standard cost
per input unit
Standard input
allowed for
one output unit
×
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8-5
Developing Budgeted Variable
Overhead Allocation Rates
Step 1:
Choose the time period used to compute the budget.
Pasadena Co. uses a twelve-month budget period.
Step 2:
Select the cost-allocation base. Pasadena budgets
26,000 labor-hours for a budgeted output of
13,000 suits in year 2004.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8-6
Developing Budgeted Variable
Overhead Allocation Rates
Step 3:
Identify the variable overhead costs.
Pasadena’s budgeted variable
manufacturing costs for 2004 are $312,000.
Step 4:
Compute the rate per unit of
each cost-allocation base.
$312,000 ÷ 26,000 hours = $12/hour
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8-7
Developing Budgeted Variable
Overhead Allocation Rates
What is the budgeted variable overhead
cost rate per output unit (dress suit)?
2.00 hours allowed per output unit × $12
budgeted variable overhead cost rate per
input unit = $24 per suit (output unit)
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8-8
Learning Objective 3
Compute the variable overhead
efficiency variance and
the variable overhead
spending variance.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8-9
Variable Overhead
Cost Variances
The following data are for 2004 when
Pasadena produced and sold 10,000 suits:
Output units:
10,000
Labor-hours:
Actual results:
Flexible-budget amount:
21,500
20,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 10
Variable Overhead
Cost Variances
Labor-hours per output unit:
Actual results:
21,500 ÷ 10,000 = 2.15
Flexible-budget amount: 20,000 ÷ 10,000 = 2.00
Variable manufacturing overhead costs:
Actual results:
$244,775
Flexible-budget amount:
$240,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 11
Variable Overhead
Cost Variances
Variable manufacturing overhead
cost per labor-hour:
Actual results:
$244,775 ÷ 21,500 = $11.3849
Flexible-budget amount:
$240,000 ÷ 20,000 = $12.00
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 12
Variable Overhead
Cost Variances
Variable manufacturing overhead
cost per output unit:
Actual results:
$244,775 ÷ 10,000 = $24.4775
Flexible-budget amount:
$240,000 ÷ 10,000 = $24.00
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 13
Flexible-Budget Analysis
The variable overhead flexible-budget variance
measures the difference between the actual
variable overhead costs and the flexible-budget
variable overhead costs.
Actual results: $244,775
– Flexible-budget amount $240,000 = $4,775 U
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 14
Flexible-Budget Analysis
Actual
Costs Incurred
21,500 × $11.3849
= $244,775
Budgeted Inputs
Allowed for Actual
Outputs at Budgeted Rate
20,000 × $12.00
= $240,000
$4,775 U
Flexible-budget variance
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8 - 15
Flexible-Budget Analysis
Actual Quantity
of Inputs at
Budgeted Rate
21,500 × $12.00
= $258,000
Budgeted Inputs
Allowed for Actual
Outputs at Budgeted Rate
20,000 × $12.00
= $240,000
$18,000 U
Variable overhead efficiency variance
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 16
Flexible-Budget Analysis
Actual
Costs
Incurred
21,500 × $11.3849
= $244,775
Actual Quantity
of Inputs at
Budgeted Rate
21,500 × $12.00
= $258,000
$13,225 F
Variable overhead spending variance
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 17
Variable Overhead Variances
Flexible-budget variance
$4,775 U
Efficiency variance
$18,000 U
Spending variance
$13,225 F
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 18
Learning Objective 4
Explain how the efficiency variance
for a variable indirect-cost item
differs from the efficiency variance
for a direct-cost item.
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8 - 19
Efficiency Variance
In the Pasadena Co.’s example, the 21,500 actual
direct manufacturing labor-hours are 7.5% greater
than the flexible-budget amount of 20,000 direct
manufacturing labor-hours.
(21,500 – 20,000) ÷ 20,000 = 7.5%
Actual variable overhead costs of $244,775
are only 2% greater than the flexible-budget
amount of $240,000.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 20
Efficiency Variance
Because actual variable overhead costs increase
less than labor-hours, the actual variable
overhead cost per labor-hour ($11.3849) is
lower than the budgeted amount ($12.00).
The key cause for Pasadena’s unfavorable
efficiency variance is the higher-than-budgeted
labor-hours used.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 21
Learning Objective 5
Compute a budgeted
fixed overhead cost rate.
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8 - 22
Developing Budgeted Fixed
Overhead Allocation Rates
Step 1:
Choose the time period used to compute the budget.
The budget period is typically twelve months.
Step 2:
Select the cost-allocation base.
Pasadena budgets 26,000 labor-hours for a budgeted
output of 13,000 suits in year 2004.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 23
Developing Budgeted Fixed
Overhead Allocation Rates
Step 3:
Identify the fixed overhead costs. Pasadena’s fixed
manufacturing budget for 2004 is $286,000.
Step 4:
Compute the rate per unit of each
cost-allocation base. $286,000 ÷ 26,000 = $11
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 24
Developing Budgeted Fixed
Overhead Allocation Rates
What is the budgeted fixed overhead cost rate
per output unit (dress suit)?
2.00 hours allowed per output unit
×
$11 budgeted fixed overhead cost rate per input unit
=
$22 per suit (output unit)
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 25
Flexible-Budget Variance
Actual Costs
Incurred
$300,000
–
Flexible Budget:
Budgeted
Fixed Overhead
$286,000
$14,000 U
Fixed overhead spending variance
Fixed overhead flexible-budget variance
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 26
Production-Volume Variance
Flexible Budget:
Budgeted
Fixed Overhead
$286,000
–
Fixed Overhead Allocated Using
Budgeted Input Allowed for
Actual Output Units Produced
$220,000
$66,000 U
Production-volume variance
10,000 × 2.00 × $11 = $220,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 27
Fixed Overhead Variances
Fixed overhead variance
$80,000 U
Volume variance
$66,000 U
Spending variance
$14,000 U
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 28
Learning Objective 6
Explain two concerns
when interpreting the
production-volume variance
as a measure of the economic
cost of unused capacity.
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8 - 29
Interpreting the ProductionVolume Variance
Management may
have maintained some
extra capacity.
Production volume
variance focuses
only on costs.
This variance results from “unitizing” fixed costs.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 30
Interpreting the ProductionVolume Variance
Had Pasadena manufactured
13,000 suits instead of 10,000,
allocated fixed overhead
would have been = $286,000
(13,000 × 2.00 × $11).
No production-volume variance
would have occurred.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 31
Learning Objective 7
Show how the 4-variance
analysis approach reconciles
the actual overhead incurred
with the overhead amounts
allocated during the period.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 32
Integrated Analysis
A 4-variance analysis presents spending and
efficiency variances for variable overhead
costs and spending and production-volume
variances for fixed overhead costs.
Managers can reconcile the actual overhead
costs with the overhead amounts allocated
during the period.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 33
Integrated Analysis
Actual variable
overhead costs
incurred
$244,775
–
Flexible budget:
budgeted inputs
allowed × budgeted rate
$240,000
Flexible-budget variance
$4,775 U
Underallocated variable overhead
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 34
Integrated Analysis
Actual variable
overhead costs
incurred
$244,775
–
Actual inputs
×
budgeted rate
$258,000
Variable overhead
spending variance
$13,225 F
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 35
Integrated Analysis
Actual inputs
×
budgeted rate
$258,000
–
Flexible budget:
budgeted inputs
allowed × budgeted rate
$240,000
Variable overhead
efficiency variance
$18,000 U
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 36
Integrated Analysis
Actual fixed
overhead costs
incurred
$300,000
–
Budgeted fixed
overhead
costs
$286,000
Fixed overhead
spending variance
$14,000 U
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 37
Integrated Analysis
Budgeted fixed
overhead
costs
$286,000
–
Budgeted inputs allowed
×
budgeted rate
$220,000
Volume variance
$66,000 U
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 38
Integrated Analysis
Actual manufacturing overhead incurred:
Variable manufacturing overhead
Fixed manufacturing overhead
Total
Overhead allocated:
Variable manufacturing overhead
Fixed manufacturing overhead
Total
Amount underallocated
$244,775
300,000
$544,775
$240,000
220,000
$460,000
$ 84,775
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 39
Integrated Analysis
4-Variance Analysis:
Variable manufacturing overhead:
Spending variance
$13,225 F
Efficiency variance
18,000 U
Fixed manufacturing overhead:
Spending variance
14,000 U
Volume variance
66,000 U
Total
$84,775 U
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 40
Integrated Analysis
3-Variance Analysis
Variable and fixed manufacturing overhead:
Spending variance
$13,225 F + $14,000 U =
$ 775 U
Variable manufacturing overhead:
Efficiency variance
18,000 U
Fixed manufacturing overhead:
Volume variance
66,000 U
Total
$84,775 U
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 41
Integrated Analysis
2-Variance Analysis
Variable and fixed manufacturing overhead:
Spending variance
$ 775 U
Variable manufacturing overhead:
Efficiency variance
18,000 U
Flexible-budget variance:
$18,775 U
Fixed manufacturing overhead
Volume variance:
66,000 U
Total
$84,775 U
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 42
Different Purposes of
Overhead Cost Analysis
The greater the number of output units
manufactured, the higher the budgeted
total variable manufacturing overhead
costs and the higher the total variable
manufacturing overhead costs
allocated to output units.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 43
Different Purposes of
Overhead Cost Analysis
Every output unit that Pasadena manufactures
will increase the fixed overhead allocated
to products by $22.
Managers should not use this unitization of
fixed manufacturing overhead costs for
planning and control.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 44
Journal Entries for Overhead
Costs and Variances
What is the journal entry to record variable
manufacturing overhead?
Variable Manufacturing
Overhead Control
244,775
Accounts Payable
244,775
To record actual variable manufacturing overhead
costs incurred
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 45
Journal Entries for Overhead
Costs and Variances
What is the journal entry to allocate variable
manufacturing overhead?
Work in Process Control
240,000
Variable Manufacturing
Overhead Allocated
240,000
To record variable manufacturing overhead cost
allocated: (2.00 × 10,000 × $12)
What is the journal entry to isolate variances?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 46
Journal Entries for Overhead
Costs and Variances
Variable Manufacturing
Overhead Allocated
240,000
Variable Overhead
Efficiency Variance
18,000
Variable Manufacturing
Overhead Control
244,775
Variable Overhead
Spending Variance
13,225
To isolate variances for the accounting period
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 47
Journal Entries for Overhead
Costs and Variances
What is the journal entry to record fixed
manufacturing overhead?
Fixed Manufacturing
Overhead Control
300,000
Accumulated
Depreciation, etc.
300,000
To record actual fixed manufacturing
overhead costs incurred
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 48
Journal Entries for Overhead
Costs and Variances
What is the journal entry to allocate fixed
manufacturing overhead?
Work in Process Control
220,000
Fixed Manufacturing
Overhead Allocated
220,000
To record fixed manufacturing overhead cost
allocated: (2.00 × 10,000 × $11)
What is the journal entry to isolate variances?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 49
Journal Entries for Overhead
Costs and Variances
Fixed Manufacturing
Overhead Allocated
220,000
Fixed Overhead
Spending Variance
14,000
Fixed Overhead
Volume Variance
66,000
Fixed Manufacturing
Overhead Control
300,000
To isolate variances for the accounting period
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 50
Financial and Nonfinancial
Performance
Overhead variances are examples of financial
performance measures.
What are examples of nonfinancial measures?
Actual labor time, relative to budgeted time
Actual indirect materials usage per labor-hour,
relative to budgeted indirect materials usage
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 51
Activity-Based Costing and
Variance Analysis
ABC systems classify costs of various activities
into a cost hierarchy (output-unit level, batch
level, product sustaining, and facility sustaining).
The basic principles and concepts for variable
and fixed manufacturing overhead costs can
be extended to ABC systems.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
8 - 53
End of Chapter 8
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8 - 54
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