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Ch. 8 Notes - Copyright Rowland Atiase Chapter 8 Day 1 HO...

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Unformatted text preview: Copyright; Rowland Atiase, October 11, 2009 Chapter 8 Day 1 HO FLEXIBLE BUDGETS AND STANDARD COSTS Part 11: Variable & Fixed, Overhead Copyright Rowland Atiase, October 1 1, 2009 Chapter 8 FLEXIBLE BUDGETS AND STANDARD COSTS Part 11: Variable & Fixed Overhead I. Introduction 11. Absorption Costing (Actual, Normal, Std) HI. Activity Bases & Measurement of Output IV. OH Control & Variances A. VOH B. FOH V. Combined OH Rate & 2 Way V 3 Way Analysis VI. Summary Notes ix.) Copyright Rowland Atiase, October 11, 2009 Chapter 8 FLEXIBLE BUDGETS AND STANDARD COSTS Part1}: Variable & Fixed Overhead 1. Introduction This chapter is very important because it integrates, contrasts and compares to controi and product costing purposes of management accounting. Two Major Frames of Reference: (1) Flexible budgets for control, and (2) The use of Predetermined OH Rates for product costing. The chapter also continues Level—3 Analysis, i.e., the Breakdown of Budget Variance into Price and Efficiency Components. A Third variance —- The Production Volume Variance (PVV) or Denominator Variance (DV) is also introduced and analyzed. Copyright Rowland Atiase, October} 1, 2009 ' II. Absorption Costing {Actdaig Normal2 Std) Chapter 2: Actual Costing = AM (91% + D; ,L OH) Chapter 4: Normal Costing = AM (PM + 0L) «r Ami-”46¢ OH I Wk” Applied OH “—2 A aft/«Q (a pwf’s >< POHR Chapters 7 & 8: Std Costing m 5177(( PM + Di.) 4L AWL-ea? 0}]! WM“? Applied OH = Se? Hum—5 Meow? x Po H 12 ' Thus Std Absorption Costing = 3+2»? ( PM + or. +— 0H) General - Ledger — OK Note that the general ledger entries in this chapter sharply distinguish WOH. This is more effective because it emphasizes the basic differences in cost behavior of the two kinds of OH. The main change in General Ledger procedure between chapter 8 and . chapter 4 is the replacement of a single Factory Department OH Control A/C with two new A/Cs: (i) Fevtwv 9‘? MW 534 “W“ ”V“: 2 ““4 (ii) Fat/17M WWW Egg <10le A[C. Also, there will be two Applied OH A/Cs instead of the single Applied OH A/C in chapters 4. (i) Voe—l Apfb’wp ave/a. , Mag (ii) FOH A’Opfr' (a? A/c Copyright Rowland Atiase, October 11, 2009 Factory Dept VOH Contra! VOH Applied 1 ActuaiVOl—i xxx 2 Aggfied VOH xxx f Under (over) Appiied VOH =é;;Ef VOH Variances MSC Accounts WIP Control 1 xxx 2 AppEEed VOH xxx 3 xxx 4 Appiied FOH xxx Factory Dept FOH Control - FOH Appiied 3 ActuaIFOH xxx I 4 Apglied FOH xxx [ Under (over) Appiied FOH *—=(;;)9f FOH Variances Copyright Rowland Atiase, October 11, 2009 III.Activi§y Bases & Measurement of Gutput Ideally, separate criteria should be used in selecting a base for VOH Rate, as opposed to selecting a base for §OH Rate. The VOH Rate would be related to the activity base that is most logically linked to fluctuations in VOH costs, i.e., Cost Behavior. On the other hand (over the relevant range), F OH. does not vary in relation to any base. FOH tends to be more related to the capacity to produce goods in general rather than the production of specific units. We. Are M4 eflWeeQ bar—e ,' F r f; W W Artist agar-{saw & grwww raga/Al'fz’h'ef of mfi[&i One of the purposes of FOH application is to obtain some measure of capacity utilization. Where there are a variety of products, the capacity measure is often fundamentally expressed in DL hours or machine hours (i.e., common to all products-—COMMONALITY) Copyright Rowland Atlases, October I E, 2009 %/ Measurement of Out ut ' % (K. Rowland Atiase) There are two ways of measuring output: (1) In. terms of output itself, i.e., actual units of output produced (V2), or (ii) In terms ot‘standard in uts allowed for (actual) output achieved [((Vp) or in short, We (e.g., Std DL Hrs). Thus, while there is a difference between actual inputs and Stamlard inputs, actual output and standard output are the same (Le. Vp). Example Actual input 3 23,000 DL Hrs. Std input per unit of output W 2 DL Hrs. Actual Output (VP) = 10,000 units Std input alloWed for (Actual) Output Achieved Vp m 10,000 units x 2 DL Hrs. = 20,000 DL Hrs. D I 12,000 units of output 0R 24,000 DL Hrs. Std VOH Rate W $8/unit of Output 0R $4/DL HR Std FOH Rate (F) = SSS/unit of Output OR @2.50/DL HR INPUT MEASURE OUTPUT MEASURE Actual Input x Std Rate Std Input 2; Std Rate VOH (i) 10,000 units x $8 3 $80,000 23,000 Hrs. X $4 = $92,000 OR (ii) 20,000 Hrs. X $4 “—3 $80,000 Copyright Rowiand Atiase, October 1.1, 2009 IV. OH Control & Variance (Cost Benefit Approach) Total Factory OH (VOH & FOH) cost is usuaily a major part of total manufacturing costs. Yet the individual 0H items (particularly for VOH) are generally not large in comparison with DM and DL. Thus, although the ideas underlying the control of 0H are basically the same as those for DM and DL? the control techniques differ as the size of the individual OH costs do not justify costly control system that routinely produce exhaustive analyses of variance of the individual items. . (load/Me A} : [$5146 Comgonente TOH (VOH &FOH) Indirect Labor Supplies The Control-ideas for OH is the same as those for DM &- DL but the Control techniques differ. Item Control Technigue DM & 13L 54-06 C098 Factory OH 099mm BMW’s Copyright Rowland Atlase, October I i, 2009 IVA, VOH Variances VOH. Budget Variance m Spending Variance + Efficiency Variance Assuming that VOH fluctuates in direct proportion to some measure of DL (eg. DL Hrs.) then, VOH Eff V = Std VOH Rate (Act DL Hrs. — Std DL Hrs). 6044‘ an U. I But Recall - F or M we» I DL EffV m Std DL Rate (Act DL Hrs. - Std DL Hrs.) W Therefore, the Efficiency Variance for VOH is essentially a measure of the extra VOH (or savings) that would be expected solely because the actual DL usage exceeds (or is less than) the Std DL Hrs. allowed for output achieved. VOH Spending V = VOH (Budget V — EffV) = Act von - (Std vou Rate)(Actual DL Hrs.) Although the VOH spending variance is similar to the price variances of DM and DL, its causal factors encompass more than. price changes alone. In sum, VOH spending variance is the amount of the Budget Variance that is unexplained by the Efficiency Variance. It could arise from a unit price change, e.g., for cutting tools. But it could also arise simply from general waste and inefficient use of materials. Thus, VOH spending variance Comf‘Q 5i QMh'Jfif 0r sir/fig Wat/ea: imcmfcft’mc ww 754—0“ f-r’ f5 Swggogggé i; Kat/Loft: a gwc'ce Mum‘flge, Copyright Rowland Atiase, October I l, 2009 Thus, although the equations for computing VOH and DL variances are similar, from the point of Responsibility Accounting, it is harder to pinpoint responsibility for VOH variances. DM, DL, and VOH e11 baggy. 4: mafia. “’53 Therefore their Std Rates are fixed and not dependent on any activity level (including D). Thus, for these ‘ VC items, e. g., VOH, the Flexible Budget Std input varies directly with activity level and hence is aivvays equal to the VOH Applied. Therefore there is never a Production Volume Variance for VOH. Thus the VOH Bud et Variance is always equal to the under (over) Applied VIOH. V OH 35 VOH Flexible Budgetj 4 ......................................................... Slope e Std VOi—I Rate Activity Level 'FOH $ FOH Applied E F "" V2 ........ WV 2 FD — pr a M) ............ FOH Budget =' F "’2 Activity Level (Vp) 10 Copyright Rowland Atiase, October 11, 2009 FRAMEWORK FOR VARIANCE ANALYSIS (K. Rowland Atiase) (1) I (2) (3) (4) ACTUAL COSTS F/BUD, ACTUAL FLEX/BUD, STD APPLIED Actual Inputs Actual Inputs Std Inputs allowed Std Inputs x Actua} Price X Std Rate x Std Rate x Std Rate Direct . _ (3) m (4) Labor 1 Rate Variance I Efficiency Variance I PVV m 0 I F Budget Variance I ' PVV = 0 Variable Overhead Actual Actual Inputs Std Inputs (or Vp) Std Inputs (or Vp) VOH . * Std VOHR "‘ Std VOHR * Std VOHR = ( I Spending T Efficiency - T PVV = 0 Variance Variance , . I Budget 3 ' Variance 7A, - I - PVV 2 0 l I Under (Over) ABE lied VOHd’ } 14’ Bagegxzfi Van/rims: 1' Limiter COM) Anetta? voH doom Fixed Overhead _ Actual Applied = FOH FOHB fl F*D FOHB = F*D WW» I % (2) m (3) 1 I Spending Varience Efficiency Varience PVV = F(D~Vp) Budget Variance M PVV 1 Under (Over) Applied F OH [ 2‘? EFF.VM “(WW5 "” 0 K1? 59M»; m. r. may?» m, «fig! 11 ...¢? A Copyright Rowland Atiase, October 'E i, 2009 EVE. FOH Variances . The major difficulty in analyzing FO'H variances arises from the fiindamental behavior of FOH costs in relation to the dual purposes of Control and Product Costing. For control purposes, Actual FOH is compared with the FOH Budget. The deviation from the Budget is know as the Flexible Budget Variance. Since the FOH Budget is constant regardless of the level of activity, there is never an efficiency variance forFOH, and the FOE Budget Variance is always equal to the FOH Spending Variance. (1) Fred FOH Rate In F = FOHB/D Therefore FOHB W F x D (ii) Applied FGH = F x Std Hrs. Allowed for Actual Output Achieved, (VP) =F x Vp (iii) Hence there may result a Production Volume Variance (PVV) or Denominator Variance (DV) +0 #4 «W M V? 661%,: 7515' a D‘ ie. Pam/aw:- :21ng . (iv) Production Volume Variance (PVW—is it” Meggwf 4/ m 605-} of 6%}; da/vw 0K 135 Mgflv'j; of gen/Jig} an.“ 4&4 9444.: m .u, ' - t a, D) (v) Under (Over) applied FOH = Actual FOH - Applied FOH e F OH Budget Variance + PVV = FOH Spending Variance + PVV (vi) Production Volume Variance fl Denominator Variance m Capacity Variance = Idle Capacity Variance m Activity Variance = Non Controllable OH Variance 1’2. Copyright Rowland Atiase, October 1 i, 2009 33 Question: Answer: Question: Answer: Question: Answer: Question: Answer: XIX/d True or False? Whiie there is never an Efficiency Variance for VOH, there is never a Production Volume Variance for F OH. What is Total OH Efficiency Variance? voH EEG aw chr‘ What is total OH Production Volume Variance? {=0 H D Vow; What is Total OH Budget Variance? ”“493 (VOH ”f POM) 3'4ng Wanna/ace “.3 -_. . _ _ Vii-3i :51..r;;i:‘ i‘ (“OH SE;'I|(§4"'5*::‘.5‘R""_J my“ .- _ ‘ , 1‘ u / : - V: T“? 0”” 3W Vwaé W‘m) WW? 0+! Copyright Rowiand Atiase, October ‘11, 2009 V. Combine 011 Rate & 2—Way v. 3~Way Analysis Many companies, while separating VOH and FOH for control purposes, combine them for product costing purposes by using a single predetermined OH Rate. i.e., VOH Rate + FOH Ratem Totai OH Rate 2—Way Variance Analysis Total Under (Over) Applied OH = Budget Variance + Production Volume Variance (PVV) 3-Way Variance Anaiysis Total Under (Over) Applied OH = Spending V + Efficiency V +‘PVV. 1-4 Copyright Rowland Atlase, October 11, 2009 VI. Summary Notes on Overhead Flexible Budgets and Variances (K. Rowland Atlase) Over the Relevant Range: A. Fixed Manufacturing Overhead (FOR): 1. FEE B)udget (FOHB) is always constant (irrespective of Activity Level [D] c osen . FEH Application Rate (F) varies with the Denominator Activity Level (D) c osen. . Howeverixgéyen D, the FOH Rate (F) is constant (i.e., F = (FOHB)/D and FOHB = Hence, there mayresnlt a Production Volume Variance (PVV; i.e., Denominator Variance [)Dng) to the extent that the standard inputs allowed 1 e for output achieved (Vp d' r from D (in, the difference between $11.? eted FOH [FD] and Applied FOH FVp]. Therefore PVV = F[D ~ p . From A1, a. there is never an Efficiency Variance for F OH, and b. FOH Budget Variance is always equal to FOH Spending Variance. B. Variable Manufacturing Overhead (V011): ‘ 1. VOH Application Rate is constant (i.e., fixed), regardless of activity level (including D). Thus VOH Budget varies directly with activity level. Hence, VOH Ap lied is always e ual to VOH Flexible Budget based on standard inputs a lowed. for (actua ) output achieved. Therefore, there is never a Production Volume Variance for VOI—I, and . VOH (Flexible Bud et Variance is always e ual to the Under (Dyer) Applied VOH =VO Spending Variance + OH Efficiency Variance). C. General Comments: 1. 15 The Budget Variance (also called Controllable Variancegiis generally cons1dered to be controllable (at least to some degree). . owever, the Production Volume (or Denominator) Variance is generally cons1dered to be uncontrollable. ...
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