Chapter Eight
Flexible Budgets/Variances
II
Developing Budgeted Variable
Overhead Allocation Rates
Step 1:
Choose the time period used to compute the budget..
Webb Co. uses a twelve-month budget period.
Step 2:
Select the cost-allocation base.
Webb budgets 57,600 machine-hours for a
budgeted output of 144,000 jackets in year 2008,
or 0.40 MH per jacket.
Developing Budgeted Variable
Overhead Allocation Rates
Step 3:
Determine the variable overhead costs..
Webb’s budgeted variable
manufacturing costs for 2008 are $1,728,000.
Step 4:
Compute the spending rate per unit of
the allocation base.
$1,728,0000 ÷ 57,600 MH = $30/MH
Developing Budgeted Variable
Overhead Allocation Rates
What is the budgeted variable overhead
cost rate per output unit (jacket)?
0.40 MH allowed per output unit × $30
budgeted variable overhead cost rate per MH
(input) = $12 per jacket (output)
Variable Overhead Data For April 2008
Cost Item/Allocation Base
1. Output units (jackets)
2. Machine-hours
3. Machine-hours per output unit
4. Variable manufacturing
overhead costs
5. Variable manufacturing
overhead costs per machine-hour
6. Variable manufacturing
overhead costs per output unit
Actual
Result
FlexibleBudget Amount
10,000
10,000
4,500
4,000
0.45
0.40
$130,500
$120,000
$29.00
$30.00
$13.05
$12.00
Variable Overhead Variance Analysis
Journal Entries For Variable Overhead
1. Variable Overhead Control
130,500
Accounts Payable and various other accounts
130,500
To record actual variable overhead costs incurred.
2. Work-in-Process Control
Variable Overhead Allocated
To record variable overhead cost allocated
120,000
120,000
Journal Entries For Variable Overhead (cont.)
3. Variable Overhead Allocated
Variable Overhead Efficiency Variance
Variable Overhead Control
Variable Overhead Spending Variance
120,000
15,000
130,500
4,500
To record variances for the accounting period.
Cost of Goods Sold
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
10,500
4,500
15,000
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.
Webb budgets 57,600 machine-hours for a budgeted
output of 144,000 jackets in year 2008, or 0.40MH
per jacket.
Developing Budgeted Fixed
Overhead Allocation Rates
Step 3:
Determine the fixed overhead costs.
Webb’s manufacturing budget for 2008 is
$3,312,000, or $276,000 per month
Step 4:
Compute the rate per unit of the allocation base.
$3,312,000 ÷ 57,600 = $57.50 per machine hour
Developing Budgeted Fixed
Overhead Allocation Rates
What is the budgeted fixed overhead cost rate
per output unit (jacket)?
0.40 hours allowed per output unit
×
$57.50 budgeted fixed overhead cost rate/machine hour
=
$23 per jacket (output unit)
Fixed Overhead Variance Analysis
Journal Entries For Fixed Overhead
1. Fixed Overhead Control
Salaries Payable, Accumulated Depreciation
and various other accounts
285,000
285,000
To record actual fixed overhead costs incurred.
2. Work-in-Process Control
Fixed Overhead Allocated
To record fixed overhead costs allocated,
230,000
230,000
Journal Entries For Fixed Overhead (cont.)
3. Fixed Overhead Allocated
Fixed Overhead Spending Variance
Fixed Overhead Production-Volume Variance
230,000
9,000
46,000
Fixed Overhead Control
285,000
To record variances for the accounting period.
Cost of Goods Sold
9,000
Fixed Overhead Spending Variance
Cost of Goods Sold
Fixed Overhead Production Volume Variance
9,000
46,000
46,000
Static/Flexible Budgets in Standard Cost Format
Units Sold
Sales @ $120 each
Flexible
Budget
Volume
Variances
Static
Budget
10,000
2,000 U
12,000
$1,200,000 $240,000 U $1,440,000
Standard Cost of Sales
Direct Material @ $60
-600,000
120,000 F
-720,000
Direct Labor @ $16
-160,000
32,000 F
-192,000
Variable Manufacturing Overhead @ $12
-120,000
24,000 F
-144,000
Fixed Manufacturing Overhead @ $23
-230,000
46,000 F
-276,000
-1,110,000
222,000 F
-1,332,000
Gross Margin
90,000
18,000 U
$108,000
Production Volume Variance
-46,000
46,000 U
Operating Income
$44,000
64,000 U
Total Standard Cost @ $111
$108,000
Sales Volume Variance Analyzed
Level 2
Level 3
Sales-volume variance
$64,000 U
Production-volume
variance
$46,000 U
Operating-income
volume variance
$18,000
Actual Results/Flexible Budgets in Standard Cost Format
Actual
Results
Units Sold
Sales @ $125/$120 each
Variances
10,000
$1,250,000
Flexible
Budget
10,000
$50,000
$1,200,000
Standard Cost of Sales
Direct Material @ $60
-600,000
-600,000
Direct Labor @ $16
-160,000
-160,000
Variable Manufacturing Overhead @ $12
-120,000
-120,000
Fixed Manufacturing Overhead @ $23
-230,000
-230,000
-1,110,000
-1,110,000
Total Standard Cost @ $111
Gross Margin
140,000
50,000
Production Volume Variance
-46,000
Other Variances
-79,100
-79,100
Operating Income
$14,900
-29,100
90,000
-46,000
$44,000