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8 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible Budgets, Variances,and Management Control: IIFlexible Budgets, Variances,and Management Control: II
Chapter 8
8 - 2©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 1
Explain in what ways theplanning of variable overhead
costs and fixed overheadcosts are similar and inwhat ways they differ.
8 - 3©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Planning of Variable andFixed Overhead Costs
Planning of Variable andFixed Overhead Costs
Effective planning of variable overhead costsinvolves undertaking only those variable
overhead activities that add value forcustomers using the product or service.
The key challenge with planning fixed overheadis choosing the appropriate level of capacity orinvestment that will benefit the company over
an extended time period.
8 - 4©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 2
Identify the features ofa standard-costing system.
8 - 5©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Standard CostingStandard Costing
Standard inputallowed for
one output unit
Standard costper input unit ×
Cost ObjectDirect Cost
8 - 6©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Developing Budgeted VariableOverhead Allocation Rates
Developing Budgeted VariableOverhead Allocation Rates
Step 1:Choose the time period used to compute the budget.Pasadena Co. uses a twelve-month budget period.
Step 2:Select the cost-allocation base. Pasadena budgets
26,000 labor-hours for a budgeted output of13,000 suits in year 2004.
8 - 7©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Developing Budgeted VariableOverhead Allocation Rates
Developing Budgeted VariableOverhead Allocation Rates
Step 3:Identify the variable overhead costs.
Pasadena’s budgeted variablemanufacturing costs for 2004 are $312,000.
Step 4:Compute the rate per unit ofeach cost-allocation base.
$312,000 ÷ 26,000 hours = $12/hour
8 - 8©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Developing Budgeted VariableOverhead Allocation Rates
Developing Budgeted VariableOverhead Allocation Rates
What is the budgeted variable overheadcost rate per output unit (dress suit)?
2.00 hours allowed per output unit × $12budgeted variable overhead cost rate per
input unit = $24 per suit (output unit)
8 - 9©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 3
Compute the variable overheadefficiency variance andthe variable overhead
spending variance.
8 - 10©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Variable OverheadCost Variances
Variable OverheadCost Variances
The following data are for 2004 whenPasadena produced and sold 10,000 suits:
Output units: 10,000
Labor-hours:Actual results: 21,500Flexible-budget amount: 20,000
8 - 11©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Variable OverheadCost Variances
Variable OverheadCost Variances
Labor-hours per output unit:Actual results: 21,500 ÷ 10,000 = 2.15Flexible-budget amount: 20,000 ÷ 10,000 = 2.00
Variable manufacturing overhead costs:Actual results: $244,775Flexible-budget amount: $240,000
8 - 12©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Variable OverheadCost Variances
Variable OverheadCost Variances
Variable manufacturing overheadcost per labor-hour:
Actual results:$244,775 ÷ 21,500 = $11.3849
Flexible-budget amount:$240,000 ÷ 20,000 = $12.00
8 - 13©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Variable OverheadCost Variances
Variable OverheadCost Variances
Variable manufacturing overheadcost per output unit:
Actual results:$244,775 ÷ 10,000 = $24.4775
Flexible-budget amount:$240,000 ÷ 10,000 = $24.00
8 - 14©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget AnalysisFlexible-Budget Analysis
The variable overhead flexible-budget variancemeasures the difference between the actual
variable overhead costs and the flexible-budgetvariable overhead costs.
Actual results: $244,775– Flexible-budget amount $240,000 = $4,775 U
8 - 15©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget AnalysisFlexible-Budget Analysis
ActualCosts Incurred
21,500 × $11.3849= $244,775
Budgeted InputsAllowed for Actual
Outputs at Budgeted Rate20,000 × $12.00
= $240,000
$4,775 UFlexible-budget variance
8 - 16©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget AnalysisFlexible-Budget Analysis
Actual Quantityof Inputs at
Budgeted Rate21,500 × $12.00
= $258,000
Budgeted InputsAllowed for Actual
Outputs at Budgeted Rate20,000 × $12.00
= $240,000
$18,000 UVariable overhead efficiency variance
8 - 17©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget AnalysisFlexible-Budget Analysis
ActualCosts
Incurred21,500 × $11.3849
= $244,775
Actual Quantityof Inputs at
Budgeted Rate21,500 × $12.00
= $258,000
$13,225 FVariable overhead spending variance
8 - 18©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Variable Overhead VariancesVariable Overhead Variances
Flexible-budget variance$4,775 U
Efficiency variance$18,000 U
Spending variance$13,225 F
8 - 19©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 4
Explain how the efficiency variancefor a variable indirect-cost item
differs from the efficiency variancefor a direct-cost item.
8 - 20©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Efficiency VarianceEfficiency Variance
In the Pasadena Co.’s example, the 21,500 actualdirect manufacturing labor-hours are 7.5% greaterthan the flexible-budget amount of 20,000 direct
manufacturing labor-hours.
(21,500 – 20,000) ÷ 20,000 = 7.5%
Actual variable overhead costs of $244,775are only 2% greater than the flexible-budget
amount of $240,000.
8 - 21©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Efficiency VarianceEfficiency Variance
Because actual variable overhead costs increaseless than labor-hours, the actual variable
overhead cost per labor-hour ($11.3849) islower than the budgeted amount ($12.00).
The key cause for Pasadena’s unfavorableefficiency variance is the higher-than-budgeted
labor-hours used.
8 - 22©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 5
Compute a budgetedfixed overhead cost rate.
8 - 23©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Developing Budgeted FixedOverhead Allocation RatesDeveloping Budgeted FixedOverhead Allocation Rates
Step 1:Choose the time period used to compute the budget.
The budget period is typically twelve months.
Step 2:Select the cost-allocation base.
Pasadena budgets 26,000 labor-hours for a budgetedoutput of 13,000 suits in year 2004.
8 - 24©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Developing Budgeted FixedOverhead Allocation RatesDeveloping Budgeted FixedOverhead Allocation Rates
Step 3:Identify the fixed overhead costs. Pasadena’s fixed
manufacturing budget for 2004 is $286,000.
Step 4:Compute the rate per unit of each
cost-allocation base. $286,000 ÷ 26,000 = $11
8 - 25©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Developing Budgeted FixedOverhead Allocation RatesDeveloping Budgeted FixedOverhead Allocation Rates
What is the budgeted fixed overhead cost rateper output unit (dress suit)?
2.00 hours allowed per output unit
$11 budgeted fixed overhead cost rate per input unit
$22 per suit (output unit)
×
=
8 - 26©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget VarianceFlexible-Budget Variance
Actual CostsIncurred$300,000
Flexible Budget:Budgeted
Fixed Overhead$286,000
$14,000 UFixed overhead spending variance
Fixed overhead flexible-budget variance
––
8 - 27©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Production-Volume VarianceProduction-Volume Variance
Flexible Budget:Budgeted
Fixed Overhead$286,000
Fixed Overhead Allocated UsingBudgeted Input Allowed for
Actual Output Units Produced$220,000
$66,000 UProduction-volume variance
10,000 × 2.00 × $11 = $220,000
––
8 - 28©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Fixed Overhead VariancesFixed Overhead Variances
Fixed overhead variance$80,000 U
Volume variance$66,000 U
Spending variance$14,000 U
8 - 29©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 6
Explain two concerns when interpreting the
production-volume varianceas a measure of the economic
cost of unused capacity.
8 - 30©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Interpreting the Production-Volume Variance
Interpreting the Production-Volume Variance
Management mayhave maintained some
extra capacity.
Management mayhave maintained some
extra capacity.
Production volumevariance focuses
only on costs.
Production volumevariance focuses
only on costs.
This variance results from “unitizing” fixed costs.This variance results from “unitizing” fixed costs.
8 - 31©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Interpreting the Production-Volume Variance
Interpreting the Production-Volume Variance
Had Pasadena manufactured13,000 suits instead of 10,000,
allocated fixed overheadwould have been = $286,000
(13,000 × 2.00 × $11).
Had Pasadena manufactured13,000 suits instead of 10,000,
allocated fixed overheadwould have been = $286,000
(13,000 × 2.00 × $11).
No production-volume variancewould have occurred.
No production-volume variancewould have occurred.
8 - 32©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 7
Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period.
8 - 33©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Integrated AnalysisIntegrated Analysis
A 4-variance analysis presents spending andefficiency variances for variable overheadcosts and spending and production-volume
variances for fixed overhead costs.
Managers can reconcile the actual overheadcosts with the overhead amounts allocated
during the period.
8 - 34©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Integrated AnalysisIntegrated Analysis
Actual variableoverhead costs
incurred$244,775
Flexible budget:budgeted inputs
allowed × budgeted rate$240,000
Flexible-budget variance$4,775 U
Underallocated variable overhead
––
8 - 35©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Integrated AnalysisIntegrated Analysis
Actual variableoverhead costs
incurred$244,775
Actual inputs×
budgeted rate$258,000
Variable overheadspending variance
$13,225 F
––
8 - 36©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Integrated AnalysisIntegrated Analysis
Actual inputs×
budgeted rate$258,000
Flexible budget:budgeted inputs
allowed × budgeted rate$240,000
Variable overheadefficiency variance
$18,000 U
––
8 - 37©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Integrated AnalysisIntegrated Analysis
Actual fixedoverhead costs
incurred$300,000
Budgeted fixedoverhead
costs$286,000
Fixed overheadspending variance
$14,000 U
––
8 - 38©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Integrated AnalysisIntegrated Analysis
Budgeted fixedoverhead
costs$286,000
Budgeted inputs allowed×
budgeted rate$220,000
Volume variance$66,000 U
––
8 - 39©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Integrated AnalysisIntegrated Analysis
Actual manufacturing overhead incurred:Variable manufacturing overhead $244,775Fixed manufacturing overhead 300,000Total $544,775Overhead allocated:Variable manufacturing overhead $240,000Fixed manufacturing overhead 220,000Total $460,000Amount underallocated $ 84,775
8 - 40©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Integrated AnalysisIntegrated Analysis
4-Variance Analysis:Variable manufacturing overhead:Spending variance $13,225 FEfficiency variance 18,000 UFixed manufacturing overhead:Spending variance 14,000 UVolume variance 66,000 UTotal $84,775 U
8 - 41©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Integrated AnalysisIntegrated Analysis
3-Variance AnalysisVariable and fixed manufacturing overhead:Spending variance$13,225 F + $14,000 U = $ 775 UVariable manufacturing overhead:Efficiency variance 18,000 UFixed manufacturing overhead:Volume variance 66,000 UTotal $84,775 U
8 - 42©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Integrated AnalysisIntegrated Analysis
2-Variance AnalysisVariable and fixed manufacturing overhead:Spending variance $ 775 UVariable manufacturing overhead:Efficiency variance 18,000 UFlexible-budget variance: $18,775 UFixed manufacturing overheadVolume variance: 66,000 UTotal $84,775 U
8 - 43©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Different Purposes of Overhead Cost AnalysisDifferent Purposes of Overhead Cost Analysis
The greater the number of output unitsmanufactured, the higher the budgetedtotal variable manufacturing overheadcosts and the higher the total variable
manufacturing overhead costsallocated to output units.
8 - 44©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Different Purposes of Overhead Cost AnalysisDifferent Purposes of Overhead Cost Analysis
Every output unit that Pasadena manufactureswill increase the fixed overhead allocated
to products by $22.
Managers should not use this unitization offixed manufacturing overhead costs for
planning and control.
8 - 45©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries for Overhead Costs and Variances
Journal Entries for Overhead Costs and Variances
What is the journal entry to record variablemanufacturing overhead?
Variable ManufacturingOverhead Control 244,775
Accounts Payable 244,775To record actual variable manufacturing overheadcosts incurred
8 - 46©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries for Overhead Costs and Variances
Journal Entries for Overhead Costs and Variances
What is the journal entry to allocate variablemanufacturing overhead?
Work in Process Control 240,000Variable ManufacturingOverhead Allocated 240,000
To record variable manufacturing overhead costallocated: (2.00 × 10,000 × $12)
What is the journal entry to isolate variances?
8 - 47©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries for Overhead Costs and Variances
Journal Entries for Overhead Costs and Variances
Variable ManufacturingOverhead Allocated 240,000Variable OverheadEfficiency Variance 18,000
Variable ManufacturingOverhead Control 244,775Variable OverheadSpending Variance 13,225
To isolate variances for the accounting period
8 - 48©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries for Overhead Costs and Variances
Journal Entries for Overhead Costs and Variances
What is the journal entry to record fixedmanufacturing overhead?
Fixed ManufacturingOverhead Control 300,000
AccumulatedDepreciation, etc. 300,000
To record actual fixed manufacturingoverhead costs incurred
8 - 49©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries for Overhead Costs and Variances
Journal Entries for Overhead Costs and Variances
What is the journal entry to allocate fixedmanufacturing overhead?
Work in Process Control 220,000Fixed ManufacturingOverhead Allocated 220,000
To record fixed manufacturing overhead costallocated: (2.00 × 10,000 × $11)
What is the journal entry to isolate variances?
8 - 50©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Journal Entries for Overhead Costs and Variances
Journal Entries for Overhead Costs and Variances
Fixed ManufacturingOverhead Allocated 220,000Fixed OverheadSpending Variance 14,000Fixed OverheadVolume Variance 66,000
Fixed ManufacturingOverhead Control 300,000
To isolate variances for the accounting period
8 - 51©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Financial and Nonfinancial Performance
Financial and Nonfinancial Performance
Overhead variances are examples of financial performance measures.
What are examples of nonfinancial measures?
Actual labor time, relative to budgeted time
Actual indirect materials usage per labor-hour, relative to budgeted indirect materials usage
8 - 53©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Activity-Based Costing and Variance Analysis
Activity-Based Costing and Variance Analysis
ABC systems classify costs of various activities into a cost hierarchy (output-unit level, batch
level, product sustaining, and facility sustaining).
The basic principles and concepts for variableand fixed manufacturing overhead costs can
be extended to ABC systems.
8 - 54©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
End of Chapter 8End of Chapter 8