CPAPrepChapter8 - CHAPTER 8 FLEXIBLE BUDGETS, OVERHEAD COST...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 8 FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL 8-1 Effective planning of variable overhead costs involves: 1. Planning to undertake only those variable overhead activities that add value for customers using the product or service, and 2. Planning to use the drivers of costs in those activities in the most efficient way. 8-10 For planning and control purposes, fixed overhead costs are a lump sum amount that is not controlled on a per-unit basis. In contrast, for inventory costing purposes, fixed overhead costs are allocated to products on a per-unit basis. 8-11 An important caveat is what change in selling price might have been necessary to attain the level of sales assumed in the denominator of the fixed manufacturing overhead rate. For example, the entry of a new low-price competitor may have reduced demand below the denominator level if the budgeted selling price was maintained. An unfavorable production- volume variance may be small relative to the selling-price variance had prices been dropped to attain the denominator level of unit sales. 8-12 A strong case can be made for writing off an unfavorable production-volume variance to cost of goods sold. The alternative is prorating it among inventories and cost of goods sold, but this would “penalize” the units produced (and in inventory) for the cost of unused capacity, i.e., for the units not produced. But, if we take the view that the denominator level is a “soft” number —i.e., it is only an estimate, and it is never expected to be reached exactly, then it makes more sense to prorate the production volume variance—whether favorable or not—among the inventory stock and cost of goods sold. Prorating a favorable variance is also more conservative: it results in a lower operating income than if the favorable variance had all been written off to cost of goods sold. Finally, prorating also dampens the efficacy of any steps taken by company management to manage operating income through manipulation of the production volume variance. In sum, a production-volume variance need not always be written off to cost of goods sold. 8-14 Interdependencies among the variances could arise for the spending and efficiency variances. For example, if the chosen allocation base for the variable overhead efficiency variance is only one of several cost drivers, the variable overhead spending variance will include the effect of the other cost drivers. As a second example, interdependencies can be induced when there are misclassifications of costs as fixed when they are variable, and vice versa. 8-1 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8-20 (30–40 min.) Manufacturing overhead, variance analysis. 1. The summary information is: The Solutions Corporation (June 2009) Actual Flexible Budget Static Budget Outputs units (number of assembled units) 216 216 200 Hours of assembly time 411 432 c 400 a Assembly hours per unit 1.90 b 2.00 2.00 Variable mfg. overhead cost per hour of assembly time $ 30.20 d $ 30.00 $ 30.00 Variable mfg. overhead costs
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 11

CPAPrepChapter8 - CHAPTER 8 FLEXIBLE BUDGETS, OVERHEAD COST...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online