ch08IM11e - CHAPTER 8 FLEXIBLE BUDGETS, VARIANCES, AND...

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CHAPTER 8 FLEXIBLE BUDGETS, VARIANCES, AND MANAGEMENT CONTROL: II LEARNING OBJECTIVES 1. Explain in what ways the planning of variable overhead costs and fixed overhead costs are similar and in what ways they differ 2. Identify the features of a standard-costing system 3. Compute the variable overhead efficiency variance and the variable overhead spending variance 4. Explain how the efficiency variance for a variable indirect-cost item differs from the efficiency variance for a direct-cost item 5. Compute the budgeted fixed overhead cost rate 6. Explain two concerns when interpreting the production-volume variance as a measure of the economic cost of unused capacity 7. Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period 8. Illustrate how the flexible-budget variance approach can be used in activity-based costing CHAPTER OVERVIEW Chapter 8 extends the budgeting process to the indirect manufacturing costs, both variable and fixed. The planning for these costs focuses on undertaking only essential activities and then being efficient in that undertaking with emphasis on satisfying customers. The control aspect of the budgeting process is described and illustrated through the use of standard costing and variance analysis. Variance analysis for indirect costs demands careful interpretation of the variances primarily because of the manner in which the costs are assigned to the cost object. Indirect costs are allocated on the basis of a cost driver or cost-allocation base. In calculating the efficiency variance for variable overhead costs one is actually calculating the difference in the use of the cost-allocation base not the use of the overhead items. For direct variable costs, a price variance could be calculated but not for indirect variable costs. The difference in price from actual to budgeted is a part of the difference in quantity of variable overhead items used and is labeled as a spending variance to incorporate both differences. Fixed overhead variances add another dimension to variance analysis because of the use of a cost- allocation base: behavior of the cost in relation to changes in level of activity. Fixed costs are budgeted as a total cost or lump sum. However, when fixed costs are used in a standard costing system and allocated on a per unit basis, they take on the “look” of a variable cost. The resulting production-volume variance, calculated as a difference between a lump sum amount and an allocation of a per unit cost, must be carefully examined for meaning.
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CHAPTER OUTLINE I. Budgeting indirect manufacturing cost categories [Refer to Chapter 7 for emphasis on direct manufacturing cost categories] A. Overhead costs as big part of costs of many companies 1. Flexible-budget/variance-analysis approach helps managers plan and control overhead costs 2. Careful interpretation of overhead variances developed primarily for financial reporting purposes Learning Objective 1:
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ch08IM11e - CHAPTER 8 FLEXIBLE BUDGETS, VARIANCES, AND...

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