Overhead Variances
and Management Control: II
Chapter 8
2009 Foster School of Business
Cost Accounting
L.DuCharme
1
Overview: Overhead Variances
• VOH vs. FOH
• Features of a standard-cost system
• Calculation of VOH variances
– VOH Efficiency variance
• Calculate FOH variances
– Production-volume variance—meaning
• 4, 3, 2, 1 OH variance analysis
• J.E.s for MOH variances—which are favorable?
• Balanced Scorecard
2009 Foster School of Business
Cost Accounting
L.DuCharme
2
Standard Cost System
• Simple recording system
– Cost to run system is relatively low.
All output units are costed at standard—no need
to keep track of the actual costs/unit or the use
of allocation bases.
2009 Foster School of Business
Cost Accounting
L.DuCharme
3
VOH Variances:
useful approach to
calculate
Actual
Actual
$VOH
“no name”
AQ Alloc.base used
X
BR/unit Alloc.base
Flexible
Budget
For actual output:
BQ Alloc.base
X
BR/unit Alloc.base
For budget output:
BQ Alloc.base
X
BR/unit Alloc.base
|----------------------------SBV--------------------------------------|
|----------------FBV------------------------|----------SVV---------|
|----Spending V-----|------Efficiency V------|
2009 Foster School of Business
Cost Accounting
L.DuCharme
4
Variable Overhead
Cost Variances: in-class example
Larry’s Machine Shop uses machine hours as the
base to allocate VMOH. Larry budgeted output of
10,000 units using 7,500 machine hours. Budgeted
VMOH cost per unit of output is $15.
Actual output was 12,000 units, actual machine hours
used were 11,000 hours, and actual VOH rate was
$16 per unit of output.
Calculate the: Static Budget, Sales-volume, Flex., Spending
(price), and Efficiency (usage) variances.
2009 Foster School of Business
Cost Accounting
L.DuCharme
5
VOH Efficiency Variance
The efficiency variance that we calculated for
direct inputs relates to how efficient we used
the direct input (materials, labor).
The VOH efficiency variance addresses how
efficient the cost allocation base was used.
If you want to calculate the spending or usage variance of
any specific item in the cost pool, then you have to take it
out of the OH pool and trace it directly.
2009 Foster School of Business
Cost Accounting
L.DuCharme
6
FOH Variances: calculation
Actual
Budget
Allocated*
Actual
$FOH
Lump sum
For actual output:
BQ of Alloc.base
X
BR / unit Alloc.base
|-------- Spending -------|-------- Production Volume -------|
|------------- Over or under-allocated FMOH -------------|
* Standard costing is assumed.
2009 Foster School of Business
Cost Accounting
L.DuCharme
7
Fixed Overhead Variances
• There is no:
– “flexing” of FMOH.
– sales-volume variance
– efficiency variance
• The spending variance is also called:
– Static-budget variance
– Flexible-budget variance
2009 Foster School of Business
Cost Accounting
L.DuCharme
8
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)
2009 Foster School of Business
Cost Accounting
L.DuCharme
9
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
2009 Foster School of Business
Cost Accounting
L.DuCharme
10
Fixed Overhead Variances
Fixed overhead variance
$80,000 U*
P. Volume variance
$66,000 U
Spending variance
$14,000 U
* FOH was under-allocated by $80,000
2009 Foster School of Business
Cost Accounting
L.DuCharme
11
Production-Volume Variance:
Interpretation
Management may
have maintained some
extra capacity.
Production volume
variance focuses
only on costs.
This variance results from “unitizing” fixed costs.
** Not much economic meaning to the production-volume variance.**
2009 Foster School of Business
Cost Accounting
L.DuCharme
12
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.
2009 Foster School of Business
Cost Accounting
L.DuCharme
13
4-, 3-, 2-, and 1-MOH variance
analysis.
It is an issue of the level of aggregation desired.
Most organizations use 3- or 2-variance analysis
for MOH.
2009 Foster School of Business
Cost Accounting
L.DuCharme
14
Integrated OH Analysis
Variances:
Spending
Efficiency
Production-volume
4-variance analysis presents the most detail:
VMOH
$4,300 U
$220 F
FMOH
$1,340 F
Never
Never
$700 F
3-variance analysis:
Total MOH
$2,960 U
$700 F
$220 F
2-variance analysis:
Total MOH
Flexible-budget
Production-volume
$2,740 U
$700 F
1-variance analysis:
Total MOH
2009 Foster School of Business
Cost Accounting
Total OH Variance
$2,040 U
L.DuCharme
15
Journal Entries for Overhead
Costs and Variances
VMOH-allocated
$240,000
VMOH-efficiency Var.
18,000
VMOH-control
$244,775
VMOH-spending Var.
13,225
(To isolate variances for the accounting period)
Which are favorable (debit or credit entries)?
2009 Foster School of Business
Cost Accounting
L.DuCharme
16
Financial and Nonfinancial
Performance—Balanced Score Card
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
2009 Foster School of Business
Cost Accounting
L.DuCharme
17