wk8_ch8n - Ch 8: Overhead Cost Variances...

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Ch 8: Overhead Cost Variances
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Lead-in example: Variances Webb Company makes and sells jackets. Webb’s original budget (plan) for 2010 was as follows: sales revenue $1,440,000: 12,000 units (jackets) × price $120 variable costs: direct materials $720,000 : 12,000 units × 2 sq. yds per unit × $30 per sq. yd. direct labor $192,000 : 12,000 units × 0.8 hrs per unit × $20 per hr var. OH $144,000: 12,000 units × $12 per unit fixed OH costs: $276,000 operating income: $108,000 Actual performance for 2010 was different: sales revenue $1,250,000: 10,000 units × price $125 variable costs: direct materials $621,600 : 10,000 units × 2.22 sq. yds per unit × $28 per sq. yd direct labor $198,000 : 10,000 units × 0.9 hrs per unit × $22 per hr var. OH $130,500: 10,000 units × $13.05 per unit fixed OH costs: $285,000 operating income: $14,900 Question: What went well (actual vs budget), what went wrong, who is to blame, and what can we learn? our focus today: overhead cost variances
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Additional data for Webb’s overhead  costs Variable Overhead: cost-allocation base = machine-hours (MHrs) actual and budgeted numbers for var. OH: Fixed Overhead: cost-allocation base = machine-hours (MHrs) budgeted fixed OH = $276,000, based on budgeted capacity of 4,800 MHrs budgeted fixed OH rate = $276,000/4,800MHrs = $57.50 per MHr actual fixed OH = $285,000, actual MHrs used = 0.45*10,000 = 4,500 actual budgeted MHrs per output unit (jacket) 0.45 0.40 var. OH rate (var. OH per MHr) $29.00 $30.00 var. OH per output unit (jacket) $13.05 $12
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Detour: planning OH costs Trickier than planning direct costs (DM/DL): the relationship between activities and costs is less transparent (especially for fixed OH) OH costs = a large number of different cost items, most of them
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wk8_ch8n - Ch 8: Overhead Cost Variances...

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