202 Ch 11 S08 S

202 Ch 11 S08 S - ACC 202 Intro to Management Accounting...

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Unformatted text preview: ACC 202 Intro to Management Accounting Chapter 11: Flexible Budgets and Overhead Analysis obj 1 Learning Objectives Prepare and understand a flexible budget Prepare a performance report for MOH using the flexible budget approach Understand various overhead variances. Static Budgets & Performance Reports Static budgets are prepared for a single, planned level of activity. Performance evaluation is difficult when actual activity differs from the planned level of activity. Hmm! Comparing static budgets with actual costs is like comparing apples and oranges. Flexible Budgets May be prepared for any activity level in the relevant range. Show costs that should have been incurred at the actual level of activity, enabling "apples to apples" cost comparisons. Reveal variances related to cost control. Improve performance evaluation. Let's look at CheeseCo. Static Budgets & Performance Reports CheeseCo Static Budget Machine hours Variable costs Indirect labor Indirect materials Power Fixed costs Depreciation Insurance Total overhead costs 10,000 $ 40,000 30,000 5,000 12,000 2,000 $ 89,000 Actual Results Variances Static Budgets & Performance Reports CheeseCo Static Budget Machine hours Variable costs Indirect labor Indirect materials Power Fixed costs Depreciation Insurance Total overhead costs 10,000 $ 40,000 30,000 5,000 12,000 2,000 $ 89,000 Actual Results 8,000 $ 34,000 25,500 3,800 12,000 2,050 $ 77,350 Variances Static Budgets & Performance Reports CheeseCo Static Budget Machine hours 10,000 Actual Results 8,000 Variances 2,000 U $6,000 F 4,500 F 1,200 F 0 50 U $11,650 F Variable costs U = Unfavorable variance Indirect labor $ 40,000 $ 34,000 CheeseCo was unable to achieve Indirect materials 30,000 25,500 level Power the budgeted 5,000 of activity. 3,800 Fixed costs Depreciation Insurance Total overhead costs 12,000 2,000 $ 89,000 12,000 2,050 $ 77,350 Static Budgets & Performance Reports CheeseCo Static Budget Machine hours Variable costs Indirect labor Indirect materials Power 10,000 $ 40,000 30,000 5,000 Actual Results 8,000 $ 34,000 25,500 3,800 Variances 2,000 U $6,000 F 4,500 F 1,200 F 0 50 U $11,650 F F = costs FixedFavorable variance that occurs when actual costs are less than budgeted costs. Depreciation 12,000 12,000 Insurance 2,000 2,050 Total overhead costs $ 89,000 $ 77,350 Static Budgets & Performance Reports CheeseCo Static Budget Machine hours Variable costs Indirect labor Indirect materials Power 10,000 $ 40,000 30,000 5,000 Actual Results 8,000 $ 34,000 25,500 3,800 Variances 2,000 U $6,000 F 4,500 F 1,200 F 0 50 U $11,650 F Since cost Fixed costs variances are favorable, have we done a good job controlling costs? Depreciation 12,000 12,000 Insurance 2,000 2,050 Total overhead costs $ 89,000 $ 77,350 Static Budgets & Performance Reports I can't answer the question using a static budget. Actual activity is below budgeted activity. So, shouldn't variable costs be lower if actual activity is lower? Static Budgets & Performance Reports The relevant question is . . . "How much of the favorable cost variance is due to lower activity, and how much is due to good cost control?" To answer the question, we must the budget to the actual level of activity. Preparing a Flexible Budget To a budget we need to know that: Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range. ble a ari V Fixed Preparing a Flexible Budget Let's prepare budgets for CheeseCo. Preparing a Flexible Budget CheeseCo Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 10,000 12,000 Variable costs are expressed as a constant amount per hour. $40,000 10,000 hours = $4.00 per hour. $ 12,000 2,000 $ Fixed costs are expressed as a total amount. Preparing a Flexible Budget CheeseCo Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 $ 32,000 24,000 4,000 $ 60,000 10,000 12,000 $ Fixed costs $4.00 Depreciation Insurance Total fixed cost Total overhead costs per hour 8,000 hours = $32,000 Preparing a Flexible Budget CheeseCo Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 $ 32,000 24,000 4,000 $ 60,000 $ 12,000 2,000 $ 14,000 $ 74,000 10,000 12,000 $ Preparing a Flexible Budget CheeseCo Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 4.00 $ 32,000 3.00 24,000 Total fixed costs 0.50 4,000 do not change in 7.50 $ 60,000 $ 12,000 2,000 $ 12,000 2,000 $ 14,000 $ 74,000 10,000 $ 40,000 30,000 5,000 $ 75,000 $ 12,000 2,000 $ 14,000 $ 89,000 12,000 $ the relevant range. ? Quick Check What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000. Flexible Budget Performance Report Let's prepare a budget performance report for CheeseCo. Flexible Budget Performance Rpt CheeseCo Flexible budget Cost is Formula prepared for the per Hour same activity level Machine hours (8,000 hours) as actually Variable costs achieved. Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budget 8,000 Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350 Variances 0 $ Quick Check What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F Flexible Budget Performance Rpt CheeseCo Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budget 8,000 $ 32,000 Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350 Variances 0 $ 2,000 U $ Quick Check What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F Flexible Budget Performance Report CheeseCo Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budget 8,000 $ 32,000 24,000 4,000 $ 60,000 $ 12,000 2,000 $ 14,000 $ 74,000 Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350 Variances 0 $ 2,000 U 1,500 U 200 F $ 3,300 U $ 0 50 U 50 U $ 3,350 U $ Flexible Budget Performance Rpt Remember the questi on: "How much of the to tal variance is due to lo wer activity and how muc h is due to cost control? " Static Budgets & Performance How much of the $11,650 favorable variance is due to lower activity and how much is due to cost control? Static Budget Machine hours Variable costs Indirect labor Indirect materials Power Fixed costs Depreciation Insurance Total overhead costs 10,000 $ 40,000 30,000 5,000 12,000 2,000 $ 89,000 Actual Results 8,000 $ 34,000 25,500 3,800 12,000 2,050 $ 77,350 Variances 2,000 U $6,000 F 4,500 F 1,200 F 0 50 U $11,650 F Flexible Budget Performance Report Overhead Variance Analysis Static Overhead Budget at 10,000 Hours $ 89,000 Let's place the flexible budget for 8,000 hours here. Actual Overhead at 8,000 Hours $ 77,350 Difference between original static budget and actual overhead = $11,650 F. Flexible Budget Performance Report Overhead Variance Analysis Static Overhead Budget at 10,000 Hours $ 89,000 Flexible Overhead Budget at 8,000 Hours $ 74,000 Actual Overhead at 8,000 Hours $ 77,350 Activity This $15,000F variance is due to lower activity. Cost control This $3,350U variance is due to poor cost control. The Measure of Activity A Critical Choice Three important factors in selecting an activity base for an overhead flexible budget Activity base and variable overhead should be causally related. Activity base should not be expressed in dollars or other currency. Activity base should be simple and easily understood. Class Practice Part 1 Normal versus Standard Cost Systems In a normal cost system, overhead is applied to work in process based on the actual number of hours worked in the period. In a standard cost system, overhead is applied to work in process based on the standard hours allowed for the output of the period. Overhead Rates and Overhead Analysis Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR): Assigned Overhead = POHR Standard Activity Overhead from the flexible budget for the denominator level of activity POHR = Denominator level of activity Overhead Rates and Overhead Analysis The predetermined overhead rate can be broken down into fixed and variable components. The variable component is useful for preparing and analyzing variable overhead variances. The fixed component is useful for preparing and analyzing fixed overhead variances. Variable Overhead Variances A Closer Look If flexible budget is based on actual CD hours If flexible budget is based on standard CD hours Only a spending variance can be computed. Both spending and efficiency variances can be computed. Variable Overhead Variances Example ColaCo's actual production for the period required 3,200 standard machine hours. Actual variable overhead incurred for the period was $6,740. Actual machine hours worked were 3,300. The standard variable overhead cost per machine hour is $2.00. Compute the variable overhead spending variance using actual hours. Use standard hours allowed to calculate the variable overhead efficiency variance. Variable Overhead Variances Actual Variable Overhead Incurred AH AR Flexible Budget for Variable Overhead at Actual Hours AH SR AH = Actual hours AR = Actual variable overhead rate SR = Standard variable overhead rate Spending Variance Spending variance = AH(AR SR) Variable Overhead Variances Example Actual Variable Overhead Incurred Flexible Budget for Variable Overhead at Actual Hours 3,300 hours $2.00 per hour = $6,600 $6,740 Spending Variance = $140 unfavorable Variable Overhead Variances A Closer Look Spending Variance Results from paying more or less than expected for overhead items and from excessive usage of overhead items. Now, use the standard hours allowed, along with the actual hours, to compute the efficiency variance. Variable Overhead Variances Actual Variable Overhead Incurred AH AR Flexible Budget for Variable Overhead at Actual Hours AH SR Flexible Budget for Variable Overhead at Standard Hours SH SR Spending Variance Efficiency Variance Spending variance = AH(AR - SR) Efficiency variance = SR(AH - SH) Variable Overhead Variances Example Actual Variable Overhead Incurred Flexible Budget for Variable Overhead at Actual Hours 3,300 hours $2.00 per hour $6,600 Flexible Budget for Variable Overhead at Standard Hours 3,200 hours $2.00 per hour $6,400 Efficiency variance $200 unfavorable $6,740 Spending variance $140 unfavorable $340 unfavorable flexible budget total variance Variable Overhead Variances A Closer Look Efficiency Variance Controlled by managing the overhead cost driver. Fixed Overhead Variances Actual Fixed Overhead Incurred Fixed Overhead Budget DH FR Fixed Overhead Applied SH FR Budget Variance Volume Variance FR = Standard Fixed Overhead Rate SH = Standard Hours Allowed DH = Denominator Hours Overhead Rates and Overhead Analysis Example ColaCo prepared this budget for overhead: Machine Hours 3,000 4,000 Total Variable Overhead $ 6,000 8,000 Variable Overhead Rate ? ? Total Fixed Overhead $ 9,000 9,000 Fixed Overhead Rate ? ? Let's calculate overhead rates. ColaCo applies overhead based on machine-hour activity. Overhead Rates and Overhead Analysis Example ColaCo prepared this budget for overhead: Machine Hours 3,000 4,000 Total Variable Overhead $ 6,000 8,000 Variable Overhead Rate $ 2.00 2.00 Total Fixed Overhead $ 9,000 9,000 Fixed Overhead Rate ? ? Rate = Total Variable Overhead Machine Hours This rate is constant at all levels of activity. Overhead Rates and Overhead Analysis Example ColaCo prepared this budget for overhead: Machine Hours 3,000 4,000 Total Variable Overhead $ 6,000 8,000 Variable Overhead Rate $ 2.00 2.00 Total Fixed Overhead $ 9,000 9,000 Fixed Overhead Rate $ 3.00 2.25 Rate = Total Fixed Overhead Machine Hours This rate decreases when activity increases. Overhead Rates and Overhead Analysis Example ColaCo prepared this budget for overhead: Machine Hours 3,000 4,000 Total Variable Overhead $ 6,000 8,000 Variable Overhead Rate $ 2.00 2.00 Total Fixed Overhead $ 9,000 9,000 Fixed Overhead Rate $ 3.00 2.25 The total POHR is the sum of the fixed and variable rates for a given activity level. Fixed Overhead Variances Example ColaCo's actual production required 3,200 standard machine hours. Actual fixed overhead was $8,450. The predetermined overhead rate is based on 3,000 machine hours. Fixed Overhead Variances A Closer Look Budget Variance Results from spending more or less than expected for fixed overhead items. Use the standard hours allowed to compute the fixed overhead volume variance. Fixed Overhead Variances Example Actual Fixed Overhead Incurred Fixed Overhead Budget Fixed Overhead Applied SH FR 3,200 hours $3.00 per hour $9,600 $8,450 $9,000 Budget variance $550 favorable Volume variance $600 favorable Variable MOH Variance Summary VMOH variances are tied to cost driver measures because variable costs vary with the level of cost driver activity. VMOH Spending Variance includes both price & quantity differences Example: electricity did we use more kilowatts or did each kilowatt cost more? indicates how efficiently we used our cost driver compares expected cost driver usage with actual cost driver usage for the actual number of units produced VMOH Efficiency Variance Fixed MOH Variance Summary FMOH variances relate to capacity costs that don't change as the level of activity changes. FMOH Budget Variance FMOH Volume Variance Compares actual & budgeted FMOH costs Compares budgeted & applied FMOH Applied FMOH is greater when the level of activity is more than expected & indicates you made better use of your facilities (produced higher volume). Volume Variance A Closer Look Volume Variance Results when standard hours allowed for actual output differs from the denominator activity. Unfavorable when standard hours < denominator hours Favorable when standard hours > denominator hours Volume Variance A Closer Look Volume Variance Does not measure overor under spending Results when standard hours Itallowed for actual output differs results from treating fixed from the denominator activity. overhead as if it were a variable cost. Unfavorable when standard hours < denominator hours Favorable when standard hours > denominator hours Overhead Variances and Underor Overapplied Overhead Cost In a standard cost system: Unfavorable variances are equivalent to underapplied overhead. Favorable variances are equivalent to overapplied overhead. The sum of the overhead variances equals the under- or overapplied overhead cost for a period. Class Practice Part 2 ...
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