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©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-1
Flexible Budgets, OverheadCost Management and
Activity-Based Budgeting
Student Tutorial
17
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-2
What Are Flexible OverheadBudgets?
A flexible budget is valid for a range of activity
A flexible budget is valid for a range of activity
A static budget is based on a
particular planned level of activity
A static budget is based on a
particular planned level of activity
This range of activity isthe relevant range
This range of activity isthe relevant range
A flexible overhead budget is defined as a detailed plan for controlling overhead cost
valid in the firm’s relevant range of activity
A flexible overhead budget is defined as a detailed plan for controlling overhead cost
valid in the firm’s relevant range of activity
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17-3
What Are Flexible OverheadBudgets?
A flexible budget is valid for a range of activity
A flexible budget is valid for a range of activity
A static budget is based on a
particular planned level of activity
A static budget is based on a
particular planned level of activity
This range of activity isthe relevant range
This range of activity isthe relevant range
A flexible overhead budget is defined as a detailed plan for controlling overhead cost
valid in the firm’s relevant range of activity
A flexible overhead budget is defined as a detailed plan for controlling overhead cost
valid in the firm’s relevant range of activity
Let’s look at theKoala Camp Gearexample from the
text.
Let’s look at theKoala Camp Gearexample from the
text.
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17-4
Flexible budgetActivity (machine hours) 4,500 6,000 7,500Budgeted electricity cost $900 $1,200 $1,500
Static Budget Versus FlexibleBudget
Static budget
Activity (machine hours) 6,000Budgeted electricity cost $1,200
Based on planned Juneproduction of4,00 tents, at1.5 machine
hours per tent
Based ononly one
anticipatedactivity
level
Includes several possible activity levels
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17-5
Static budget
Activity (direct labour hours) 10,000Budgeted indirect labour cost $20,000
Static Budget Versus FlexibleBudget
Convert the following static budget to a flexible budget
Based on planned
production of10,000 directlabour hours
× $2
Flexible budgetActivity (direct labour hours)
9,000 10,000 11,000
Budgeted indirect labour cost
? ? ?
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17-6
Flexible budgetActivity (direct labour hours)
9,000 10,000 11,000
Budgeted indirect labour cost
$18,000 $20,000 $22,000
Static Budget Versus FlexibleBudget
Static budget
Activity (direct labour hours) 10,000Budgeted indirect labour cost $20,000
Convert the following static budget to a flexible budget
Based on planned
production of10,000 directlabour hours
× $2
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17-7
Advantages Of Flexible Budgets
ActualElectricity Cost
ActualElectricity Cost
BudgetedElectricity Cost(static budget)
BudgetedElectricity Cost(static budget)
Cost VarianceCost Variance
$1,050 $1,200 $150 Favourable
The manager is comparing the electricity cost incurred at the ACTUAL activity level, 3,000 tents with the
budgeted electricity cost at the PLANNEDactivity level, 4000 tents
The manager is comparing the electricity cost incurred at the ACTUAL activity level, 3,000 tents with the
budgeted electricity cost at the PLANNEDactivity level, 4000 tents
These activity levels are different, therefore we wouldexpect the electricity cost to be different
These activity levels are different, therefore we wouldexpect the electricity cost to be different
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17-8
Advantages Of Flexible BudgetsBudgeted
Electricity Cost(flexible budget)
BudgetedElectricity Cost(flexible budget)
Cost VarianceCost Variance
$1,050 $900 $150 Unfavourable
The manager is comparing the electricity cost incurred at the ACTUAL activity level, 3,000 tents with the
budgeted electricity cost at the ACTUAL activity level, (3,000 tents x 1.5 machine hours) = 4,500 machine hours
The manager is comparing the electricity cost incurred at the ACTUAL activity level, 3,000 tents with the
budgeted electricity cost at the ACTUAL activity level, (3,000 tents x 1.5 machine hours) = 4,500 machine hours
Electrical cost was greater than it should have been, given theactual level of output
Electrical cost was greater than it should have been, given theactual level of output
ActualElectricity Cost
ActualElectricity Cost
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17-9
The Activity Measure: Based OnInput Or Output
Why are the activity levels in the flexible budget based onmachine hours, an input measure, instead of number of
tents produced, an output measure?
Why are the activity levels in the flexible budget based onmachine hours, an input measure, instead of number of
tents produced, an output measure?
ProductUnits Produced
Standard Machine Hours Per Unit
Total Standard Allowed Machine Hours
Tree Line Model 1,200 1.5 1,800River's Edge Model 900 1.8 1,620Valley Model 700 2 1,400
Total 2,800 4,820
Output measures requiredifferent inputs
Output measurescan be used if
you onlymanufactureone product
Flexible budgetmust be based on outputs that can
be compared
Flexible budgetfor electrical cost
4,820 x .20 = $964
Flexible budgetfor electrical cost
4,820 x .20 = $964
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-10Flexible Budgets: Inputs VersusOutputs
1.5 standardallowed
machine hours per
tent
1.5 standardallowed
machine hours per
tent
Flexible budget (based on input)
Activity: Standard allowed machine hours 4,500 6,000 7,500
Budgeted electricity costs$900 $1,200 $1,500
Flexible budget (based on output)Activity: tents manufactured 3,000 4,000 5,000Budgeted electricity costs $900 $1,200 $1,500
Usually not a meaningful measure in a multi-product firm because it would require us to add
numbers of unlike products
Output is measuredin terms of of thestandard allowedinput, given actual
output
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17-11
Formula Flexible Budget
If you recall, thisis similar to thePredetermined
Cost-Driver Ratediscussed in
Chapter 6.
If you recall, thisis similar to thePredetermined
Cost-Driver Ratediscussed in
Chapter 6.
.
Assume that the company needsflexible budget numbers for threeactivity levels: 4,500 hours, 6,000
hours, and 7,500 hours.Also, assume that the Predetermined
Budgeted Variable-Overhead Costper Activity Unit is $6 per hour.
Budgeted Fixed-Overhead Cost forthe month is $30,000.
Total Budgeted Monthly
Overhead Cost =
Budgeted Variable-
Overhead Cost per Activity Unit
×Total
Activity Units
+Budgeted Fixed-Overhead Cost
per Month
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17-12
Formula Flexible Budget
Total Budgeted Monthly
Overhead Cost =
Budgeted Variable-
Overhead Cost per Activity Unit
×Total
Activity Units
+Budgeted Fixed-Overhead Cost
per Month
$57,000 $66,000 $75,000
= $6 ×4,500 6,000 7,500
+ $30,000
The flexed total budgeted monthlyoverhead for each activity level cannow be used effectively in planning
and variance analysis.
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17-13
Overhead Application
Normal Costing
Manufacturing Overhead Work-in-Process Inventory
Actualoverhead
Appliedoverhead
Actualhours
Predeterminedoverhead
rate
×
Appliedoverhead
Actualhours
Predeterminedoverhead
rate
×
The Differencebetween Normal
Costing andStandard
Costing lies inthe quantity of
hours used
The Differencebetween Normal
Costing andStandard
Costing lies inthe quantity of
hours used
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17-14
Standard Costing
Manufacturing Overhead Work-in-Process Inventory
Actualoverhead
Appliedoverhead
Standardallowedhours
Predeterminedor standardoverhead
rate
×
Appliedoverhead
Standardallowedhours
Predeterminedor standardoverhead
rate
×
The Differencebetween Normal
Costing andStandard
Costing lies inthe quantity of
hours used
The Differencebetween Normal
Costing andStandard
Costing lies inthe quantity of
hours used
Overhead Application
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17-15
Predetermined Overhead Rates
Budgeted Overhead
Planned Monthly Activity
Predetermined Overhead Rate
Variable $100,000 ? ?Fixed $500,000 ? ?
Total $600,000 ? ?
Sparta Company’s expected annual fixed overhead is $500,000and its expected variable overhead is $100,000. The companyhas a relevant range of 75,000 to 125,000 machine hours. Sparta estimates the activity level to be 100,000 machine hours.Compute the predetermined overhead rate.
Sparta Company’s expected annual fixed overhead is $500,000and its expected variable overhead is $100,000. The companyhas a relevant range of 75,000 to 125,000 machine hours. Sparta estimates the activity level to be 100,000 machine hours.Compute the predetermined overhead rate.
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17-16
Predetermined Overhead Rates
Budgeted Overhead
Planned Monthly Activity
Predetermined Overhead Rate
Variable $100,000 100,000 machine hrs. $1.00Fixed $500,000 100,000 machine hrs. $5.00
Total $600,000 100,000 machine hrs. $6.00
Sparta Company’s expected annual fixed overhead is $500,000and its expected variable overhead is $100,000. The companyhas a relevant range of 75,000 to 125,000 machine hours. Sparta estimates the activity level to be 100,000 machine hours.Compute the predetermined overhead rate.
Sparta Company’s expected annual fixed overhead is $500,000and its expected variable overhead is $100,000. The companyhas a relevant range of 75,000 to 125,000 machine hours. Sparta estimates the activity level to be 100,000 machine hours.Compute the predetermined overhead rate.
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17-17
Predetermined Overhead Rates
Both normal-costing and standard-costing systemsuse an overhead rate computed at the beginning of
the accounting period (predetermined overhead rate)
Both normal-costing and standard-costing systemsuse an overhead rate computed at the beginning of
the accounting period (predetermined overhead rate)
Budgeted Overhead
Planned Monthly Activity
Predetermined Overhead Rate
Variable $36,000 6,000 machine hours $6.00Fixed $30,000 6,000 machine hours $5.00
Total $66,000 6,000 machine hours $11.00
Computed annually
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17-18
Choice Of Activity Measure
How should the cost manager select the activity measure for theflexible budget?
How should the cost manager select the activity measure for theflexible budget?
The variable overhead cost
and the activity measure
should move together
The variable overhead cost
and the activity measure
should move together
Direct labour time hastraditionally been the most
popular activity measure inmanufacturing firms
Direct labour time hastraditionally been the most
popular activity measure inmanufacturing firms
As automation increases, more
firms are switching to machinehours or process time
As automation increases, more
firms are switching to machinehours or process time
Dollar measures, such as
direct-labour or material costs
can be misleading because
they are subject to price-level
changes and other fluctuations
Dollar measures, such as
direct-labour or material costs
can be misleading because
they are subject to price-level
changes and other fluctuations
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-19Overhead Cost VariancesKoala manufactured 3,000 tree line tents X 1.5 machine hours per tent
= standard allowed 4,500 machine hoursKoala manufactured 3,000 tree line tents X 1.5 machine hours per tent
= standard allowed 4,500 machine hours
For standard allowed 4,500 machine hours the budget overhead (from Exhibit 17-3 in the text) for June =
Variable overhead $27,000Fixed overhead $30,000
For standard allowed 4,500 machine hours the budget overhead (from Exhibit 17-3 in the text) for June =
Variable overhead $27,000Fixed overhead $30,000
From the cost accounting records, the actual overhead for June =Variable overhead $30,480Fixed overhead $32,500
$62,980
From the cost accounting records, the actual overhead for June =Variable overhead $30,480Fixed overhead $32,500
$62,980
Actual machinehours
for June = 4,800
Actual machinehours
for June = 4,800
The total variable overhead variance for June =
Actual variable overhead $30,480Budget variable overhead $27,000
$ 3,480 U
The total variable overhead variance for June =
Actual variable overhead $30,480Budget variable overhead $27,000
$ 3,480 U
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-20
The Nashville Toy Company makes toy airplanes at .5machine hours per airplane. During the fiscal period
they manufactured 2,000 airplanes. Standard Allowed Machine Hrs = 1,000 machine hrs
For 1,000 standard allowed machine hrs, the budgetedoverhead for the fiscal period =Variable overhead $50,000
Fixed overhead $100,000From the cost accounting records, the actual overhead
for June =Variable overhead $ 51,500Fixed overhead $105,000
$156,500Compute the total variable
overhead variance
The Nashville Toy Company makes toy airplanes at .5machine hours per airplane. During the fiscal period
they manufactured 2,000 airplanes. Standard Allowed Machine Hrs = 1,000 machine hrs
For 1,000 standard allowed machine hrs, the budgetedoverhead for the fiscal period =Variable overhead $50,000
Fixed overhead $100,000From the cost accounting records, the actual overhead
for June =Variable overhead $ 51,500Fixed overhead $105,000
$156,500Compute the total variable
overhead variance
Overhead Cost Variances
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17-21Overhead Cost Variances
Total Variable Overhead VarianceActual machine hours
for June = 1,050
Total Variable Overhead VarianceActual machine hours
for June = 1,050
Actual Machine Hours Overhead
Actual Variable Overhead 1,050 $51,500
Budget Variable Overhead 1,050 $50,000
Variable Overhead Variance -$1,500 U
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17-22
Variable Overhead VariancesThe VARIABLE-OVERHEAD SPENDING VARIANCE is the difference between
the actual variable overhead cost and the product of the standardvariable -overhead rate and the actual hours of an activity base
(or cost driver)
The VARIABLE-OVERHEAD SPENDING VARIANCE is the difference betweenthe actual variable overhead cost and the product of the standardvariable -overhead rate and the actual hours of an activity base
(or cost driver)
Actual variable overheadActual variable overhead
Actual machine hours (AH)
Actual machine hours (AH)
Actual rate (AVR)
Actual rate (AVR)
Actual machine hours (AH)
Actual machine hours (AH)
Standard rate (SVR)
Standard rate (SVR)
4,800 machinehours
4,800 machinehours
$6.35 permachine hour
$6.35 permachine hour
4,800 machine hours
4,800 machine hours
$6.00 per machine hour
$6.00 per machine hour
$30,480$30,480 $28,800$28,800
Actual machine hours timesthe standard rate
Actual machine hours timesthe standard rate
$1,680 UnfavourableVariable-overheadspending variance
$1,680 UnfavourableVariable-overheadspending variance
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17-23
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead spending variance is:A. $500 UB. $290 UC. $790 UD. $290 F
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead spending variance is:A. $500 UB. $290 UC. $790 UD. $290 F
Variable Overhead Variances
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17-24
Variable Overhead VariancesStandards:
Machine hours per unit = 2Variable overhead standard rate = $5 per hour
Budgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead spending variance is:A. $500 UB. $290 UC. $790 UD. $290 F
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead spending variance is:A. $500 UB. $290 UC. $790 UD. $290 F
Try again. You want the differencebetween actual overhead and budgeted
overhead for actual hours.
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-25
Variable Overhead VariancesStandards:
Machine hours per unit = 2Variable overhead standard rate = $5 per hour
Budgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead spending variance is:A. $500 UB. $290 UC. $790 UD. $290 F
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead spending variance is:A. $500 UB. $290 UC. $790 UD. $290 F
Try again. You want the differencebetween actual overhead and budgeted
overhead for actual hours.
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-26
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead spending variance is:A. $500 UB. $290 UC. $790 UD. $290 F
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead spending variance is:A. $500 UB. $290 UC. $790 UD. $290 F
Variable Overhead Variances
40,290 - ( 7,900 × 5 ) = 790
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-27
Variable Overhead VariancesStandards:
Machine hours per unit = 2Variable overhead standard rate = $5 per hour
Budgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead spending variance is:A. $500 UB. $290 UC. $790 UD. $290 F
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead spending variance is:A. $500 UB. $290 UC. $790 UD. $290 F
Try again. You want the differencebetween actual overhead and budgeted
overhead for actual hours.
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-28
Variable Overhead Variances
The VARIABLE-OVERHEAD EFFICIENCY VARIANCE is the difference betweenthe actual and the standard hours of an activity base (or cost driver)
multiplied by the standard variable overhead rate
The VARIABLE-OVERHEAD EFFICIENCY VARIANCE is the difference betweenthe actual and the standard hours of an activity base (or cost driver)
multiplied by the standard variable overhead rate
Flexible budget:variable overheadFlexible budget:
variable overhead
Standard allowed machine hours (SH)Standard allowed
machine hours (SH)
Standard rate (SVR)
Standard rate (SVR)
Actual machine hours (AH)
Actual machine hours (AH)
Standard rate (SVR)
Standard rate (SVR)
4,500 machinehours
4,500 machinehours
$6.00 permachine hour
$6.00 permachine hour
4,800 machine hours
4,800 machine hours
$6.00 per machine hour
$6.00 per machine hour
$27,000$27,000$28,800$28,800
Actual machine hours timesthe standard rate
Actual machine hours timesthe standard rate
$1,800 UnfavourableVariable-overheadefficiency variance
$1,800 UnfavourableVariable-overheadefficiency variance
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17-29
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead efficiency variance isA. $500 UB. $500 FC. $1,000 UD. $1,000 F
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead efficiency variance isA. $500 UB. $500 FC. $1,000 UD. $1,000 F
Variable Overhead Variances
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-30
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead efficiency variance isA. $500 UB. $500 FC. $1,000 UD. $1,000 F
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead efficiency variance isA. $500 UB. $500 FC. $1,000 UD. $1,000 F
Variable Overhead Variances
( 7,800 × 5 ) - ( 7,900 × 5 ) = 500
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17-31
Variable Overhead VariancesStandards:
Machine hours per unit = 2Variable overhead standard rate = $5 per hour
Budgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead efficiency variance isA. $500 UB. $500 FC. $1,000 UD. $1,000 F
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead efficiency variance isA. $500 UB. $500 FC. $1,000 UD. $1,000 F
Try again. You want the differencebetween actual hours @ standard price
and flexible budget overhead.
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-32
Variable Overhead VariancesStandards:
Machine hours per unit = 2Variable overhead standard rate = $5 per hour
Budgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead efficiency variance isA. $500 UB. $500 FC. $1,000 UD. $1,000 F
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead efficiency variance isA. $500 UB. $500 FC. $1,000 UD. $1,000 F
Try again. You want the differencebetween actual hours @ standard price
and flexible budget overhead.
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-33
Variable Overhead VariancesStandards:
Machine hours per unit = 2Variable overhead standard rate = $5 per hour
Budgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead efficiency variance isA. $500 UB. $500 FC. $1,000 UD. $1,000 F
Standards:Machine hours per unit = 2
Variable overhead standard rate = $5 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Variable Overhead = $40,290
The variable overhead efficiency variance isA. $500 UB. $500 FC. $1,000 UD. $1,000 F
Try again. You want the differencebetween actual hours @ standard price
and flexible budget overhead.
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-34Variable Overhead Variances
The flexible budget amount for variable overhead $27,000is the amount that will be applied to Work-in-Process for
product-costing purposes
The flexible budget amount for variable overhead $27,000is the amount that will be applied to Work-in-Process for
product-costing purposes
Flexible budget:variable overheadFlexible budget:
variable overhead
Standard allowed machine hours (SH)Standard allowed
machine hours (SH)
Standard rate (SVR)
Standard rate (SVR)
4,500 machinehours
4,500 machinehours
$6.00 permachine hour
$6.00 permachine hour
$27,000$27,000
Variable overhead appliedto work in process
Variable overhead appliedto work in process
No differenceNo difference
Standard allowed machine hours (SH)Standard allowed
machine hours (SH)
Standard rate (SVR)
Standard rate (SVR)
4,500 machinehours
4,500 machinehours
$6.00 permachine hour
$6.00 permachine hour
$27,000$27,000
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-35
The unfavourable variance resulting from using more
machine hours than the standard quantity, given actual output
The unfavourable variance resulting from using more
machine hours than the standard quantity, given actual output
Efficiency varianceEfficiency variance
The variable overhead efficiency variance has
nothing to do with efficient or inefficient use of
variable overhead items
The variable overhead efficiency variance has
nothing to do with efficient or inefficient use of
variable overhead items
The actual variable overheadrate per hour differs from the
standard rate
The actual variable overheadrate per hour differs from the
standard rate
Spending varianceSpending variance
An unfavourable variance meansthat the total actual variable
overhead > than expected, afteradjusting for the actual quantity
of machine hours used
An unfavourable variance meansthat the total actual variable
overhead > than expected, afteradjusting for the actual quantity
of machine hours used
The spending variance is thereal control variance for variable
overhead
The spending variance is thereal control variance for variable
overhead
How To Interpret The VariableOverhead Variances
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17-36
Fixed Overhead VariancesThe FIXED-OVERHEAD BUDGET VARIANCE is the difference between actual fixed overhead and budgeted fixed overheadThe FIXED-OVERHEAD BUDGET VARIANCE is the difference between actual fixed overhead and budgeted fixed overhead
Fixed-overheadbudget varianceFixed-overheadbudget variance
Actual Fixedoverhead
Actual Fixedoverhead
Budgeted fixedoverhead
Budgeted fixedoverhead
== --
Fixed-overheadbudget varianceFixed-overheadbudget variance
Actual Fixedoverhead =
$32,500
Actual Fixedoverhead =
$32,500
Budgeted fixedoverhead =
$30,000
Budgeted fixedoverhead =
$30,000
== --
Unfavourable variance of $2,500, because we spent
more than budgeted
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17-37
Fixed Overhead VariancesThe FIXED-OVERHEAD VOLUME VARIANCE is the difference between budgeted fixed overhead and actual fixed overheadThe FIXED-OVERHEAD VOLUME VARIANCE is the difference between budgeted fixed overhead and actual fixed overhead
Budgeted fixedoverhead
Budgeted fixedoverhead
Applied fixedoverhead
Applied fixedoverhead
== --
Applied fixedoverhead =
$22,500
Applied fixedoverhead =
$22,500
Fixed-overheadvolume varianceFixed-overheadvolume variance
Budgeted fixed overhead =
$30,000
Budgeted fixed overhead =
$30,000
==--
Unfavourable variance of $7,500, becausewe produced less than budgeted.
Predeterminedfixed overhead
rate = $5.00 per MH
Predeterminedfixed overhead
rate = $5.00 per MH
Standard allowedhours = 4,500
machine hours
Standard allowedhours = 4,500
machine hours
--
Fixed-overheadvolume varianceFixed-overheadvolume variance
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17-38
Managerial Interpretation Of Fixed-Overhead Variances
Budget VarianceBudget VarianceVolume VarianceVolume Variance
The real control variance for
fixed overhead because it
compares actualexpenditures withbudgeted fixed overhead costs
The real control variance for
fixed overhead because it
compares actualexpenditures withbudgeted fixed overhead costs
Reconciles the two different purposes of the cost accounting system
Reconciles the two different purposes of the cost accounting system
For cost-managementpurposes, the cost-accounting system
recognizes that fixedoverhead does not
change as production activity varies
For cost-managementpurposes, the cost-accounting system
recognizes that fixedoverhead does not
change as production activity varies
For product-costingpurposes, budgeted
fixed overheadis divided by planned
activity to obtain aor standard fixed-
overhead rate
For product-costingpurposes, budgeted
fixed overheadis divided by planned
activity to obtain aor standard fixed-
overhead rate
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-39Fixed Overhead Budget AndVolume Variances
(1)Actualfixed
overhead
(1)Actualfixed
overhead
(2)Budgeted
fixedoverhead
(2)Budgeted
fixedoverhead
(3)Fixed overhead applied
to work in process
(3)Fixed overhead applied
to work in process
Standardallowedmachine
hours
Standardallowedmachine
hours
Standardfixed
overheadrate
Standardfixed
overheadrateXX
4,500machine
hours
4,500machine
hours
$5.00 permachine
hour
$5.00 permachine
hourXX
$22,500$22,500$30,000$30,000$32,500$32,500
$7,500 U$7,500 U$2,500 U$2,500 U
Fixed-overheadbudget varianceFixed-overheadbudget variance
Fixed-overheadvolume varianceFixed-overheadvolume variance
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-40
Budgeted Versus Applied FixedOverhead
Fixed overhead
$30,000
$22,500
0
Applied fixedoverhead ($5.00
per standardallowed machine
hour)
Budgeted fixedoverhead
Machinehours
Volume variance$7,500
4,500 Standardallowed hours,
given actualoutput
6,000Plannedmonthlyactivity
Appliedfixed
overheadin June
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-41Four-, Three- And Two-wayVariance Analysis
Four-way analysis
Three-way analysis
Two-way analysis
Variable-overheadspendingvariance
Fixed-overheadbudget
variance
Variable-overheadefficiencyvariance
Fixed-overheadvolumevariance
$1,680 U $2,500 U $1,800 U $7,500 U
Combined spending variance
$4,180 U $1,800 U $7,500 U
Combined budget variance
Underappliedoverhead
$5,980 U $7,500 U
$62,980 actual overhead -overhead applied to WIP, 49,500 =
$13,480
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-42
Fixed Overhead VariancesThe FIXED-OVERHEAD BUDGET VARIANCE is the difference between actual fixed overhead and budgeted fixed overheadThe FIXED-OVERHEAD BUDGET VARIANCE is the difference between actual fixed overhead and budgeted fixed overhead
Fixed-overheadbudget varianceFixed-overheadbudget variance
Actual Fixedoverhead
Actual Fixedoverhead
Budgeted fixedoverhead
Budgeted fixedoverhead
== --
Fixed-overheadbudget varianceFixed-overheadbudget variance
Actual Fixedoverhead =
$81,500
Actual Fixedoverhead =
$81,500
Budgeted fixedoverhead =
$80,000
Budgeted fixedoverhead =
$80,000
== --
Unfavourable variance of $1,500, because we spent
more than budgeted
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-43
Fixed Overhead Variances
Standards:Machine hours per unit = 2
Fixed overhead standard rate = $10 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Fixed Overhead = $81,500What is the fixed overhead volume variance?
Standards:Machine hours per unit = 2
Fixed overhead standard rate = $10 per hourBudgeted level of production 4,000 units
Actual:Machine hours = 7,900Production 3,900 units
Fixed Overhead = $81,500What is the fixed overhead volume variance?
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-44
Fixed Overhead VariancesThe FIXED-OVERHEAD VOLUME VARIANCE is the difference between budgeted fixed overhead and actual fixed overheadThe FIXED-OVERHEAD VOLUME VARIANCE is the difference between budgeted fixed overhead and actual fixed overhead
Fixed-overheadvolume varianceFixed-overheadvolume variance
Budgeted fixedoverhead
Budgeted fixedoverhead
Applied fixedoverhead
Applied fixedoverhead
== --
Applied fixedoverhead =
$78,000
Applied fixedoverhead =
$78,000
Fixed-overheadvolume varianceFixed-overheadvolume variance
Budgeted fixed overhead =
$80,000
Budgeted fixed overhead =
$80,000
==--
Unfavourable variance of $2,000, becausewe produced less than budgeted.
Predeterminedfixed overhead
rate = $10.00 per MH
Predeterminedfixed overhead
rate = $10.00 per MH
Standard allowedhours = 7,800
machine hours
Standard allowedhours = 7,800
machine hours
--
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-45Four-, Three- And Two-wayVariance Analysis
Four-way analysis
Three-way analysis
Two-way analysis
Variable-overheadspendingvariance
Fixed-overheadbudget
variance
Variable-overheadefficiencyvariance
Fixed-overheadvolumevariance
$790 U $1,500 U $500 U $2,000 U
Combined spending variance
$2,290 U $500 U $2,000 U
Combined budget variance
Underappliedoverhead
$2,790 U $2,000 U
$121,790 actual overhead -overhead applied to WIP:
117,000 = $4,790
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-46
Activity-Based Flexible Budget
An activity-based flexible budget may provide more useful cost management information than a conventional flexible budget
An activity-based flexible budget may provide more useful cost management information than a conventional flexible budget
The traditional budgetThe traditional budget Activity-based flexible budgetActivity-based flexible budget
Costs are categorizedas variable based on
volume measures
Costs are categorizedas variable based on
volume measures
Machinehours
Machinehours
Directlabourhours
Directlabourhours
Costs are categorizedas variable based onseveral cost drivers
Costs are categorizedas variable based onseveral cost drivers
Cost that may seem fixed withrespect to a single volume-based cost driver may be variable with
respect to other non-volume related cost drivers
Cost that may seem fixed withrespect to a single volume-based cost driver may be variable with
respect to other non-volume related cost drivers
©McGraw-Hill Ryerson, 2001Irwin/McGraw-Hill Ryerson
17-47
End of Chapter 17
I wish Icould figureout how toFLEX my
paycheque!