Managerial Accounting Ch11(1)[1]

8/12/2019 Managerial Accounting Ch11(1)[1]

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Cornerstonesof Managerial Accounting 3e

MOWEN / HANSEN / HEITGERCOPYRIGHT 2009 South-Western/Cengage Learning


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Chapter Eleven

Flexible Budgets and OverheadAnalysis


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Learning Objectives

1. Prepare a flexible budget, and use itfor performance reporting.

2. Calculate the variable overheadvariances, and explain their meaning.

3. Calculate the fixed overheadvariances, and explain their meaning.

4. Prepare an activity-based flexiblebudget.

3


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OBJECTIVE

1

Prepare a flexiblebudget, and use it forperformance reporting.


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Performance Reports

Compare actual costs with budgetedcosts

Two ways:

Compare actual costs with budgetedcosts for the budgeted level of activity

Based on a static budget

Compare actual costs with the actuallevel of activity

Based on a flexible budget


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Static Budget

A budget for one particular level of activity Performance report will compare:

Direct materials, direct labor, and overheadcosts budgeted for the planned level of activity

with Actual costs for the actual level of activity

Resulting in unfavorable variances when actualproduction exceeds the planned level

To create a meaningful performance

report: Actual costs and expected costs must be

compared at the same level of activity


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Cornerstone 11-1

HOW TO Prepare a Performance ReportBased on a Static Budget (Using Budgeted

Production)

7


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Example

Information:From the Master Budget Actual Data for Quarter 1

Production for Quarter 1: 1,060 Production: 1,200 units

Materials:

1 plain t-shirt @ $3.005 ounces of ink @ $0.20

Labor: 0.12 hours @ $10.00

Variable overhead:

Maintenance: 0.12 hour @ $3.75

Materials cost: $4,380

Labor cost: $1,500

Maintenance cost: $535Power: 0.12 hour @ $1.25 Power cost: $170

Fixed overhead:

Grounds keeping: $1,200 per qtr Grounds keeping: $1,050

Depreciation: $600 per quarter Depreciation: $600


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Example

Required:

Prepare a performance report using a budget

based on expected production.


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Performance Report Example

Units produced 1,060Budgeted

The plan is to produce 1,060 units. All budgetedcosts will be based on 1,060 units.


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($3.00 t-shirt + $1.00 ink) x 1,060 units

Direct materials cost $4,240


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(0.12 hours x $10.00 per hour) x 1,060 units


Direct labor cost 1,272


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Variable overhead:

Maintenance 477


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Variable overhead:

Maintenance 477

Power 159


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Variable overhead:

Maintenance 477

Power 159

Fixed overhead:

Grounds keeping 1,200

Depreciation 600

Groundskeeping anddepreciation

are bothfixed costs.They will be$1,200 and

$600regardless of

the numberof units

produced.


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Variable overhead:

Maintenance 477

Power 159

Fixed overhead:


Depreciation 600

$7,948Total

Total budgeted costs for 1,060 units


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Variable overhead:

Maintenance 477

Power 159

Fixed overhead:


Depreciation 600

$7,948Total

Actual1,200

Variance140 F

140 moreunits wereproduced

thanoriginallybudgeted


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Units produced 1,060

Budgeted



Variable overhead:

Maintenance 477

Power 159

Fixed overhead:


Depreciation 600

$7,948Total

Actual

1,200

Variance

140 F

$4,830 $590 U

1,500 228 U

535 58 U

170 11 U

1,050 (150) F

Overall, actual costs exceeded budgeted costs by $737. Budgeted costs were

based on 1,060 units and 1,200 units were actually produced.

600 0

$8,685 $737 U


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Flexible Budget

Enables a firm to compete expected costs fora range of activity levels

Two types:

Before-the-factAllows managers to see the expected

outcomes for a range of activity levels Used to generate financial results for a number of

plausible scenarios

After-the-factCreated for the actual level of activity

Used to compute what costs should have been forthe actual level of activity

Expected costs are then compared with the actualcosts in order to assess performance


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Cornerstone 11-2

HOW TO Prepare a Flexible ProductionBudget

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Example

Levels of output: 1,000, 1,200 and 1,400

Materials (1 plain t-shirt @ $3.00 & 5 ounces of ink@ $0.20)

Labor: 0.12 hour @ $10.00 per hour

Variable overhead:

Maintenance: 0.12 hours @ $3.75 per hour

Power: 0.12 hours @ $1.25 per hour

Fixed overhead: Grounds keeping: $1,200 perquarter &Depreciation: $600 per quarter

Information:


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Example

Required:

Prepare a budget for three levels of output:

1,000, 1,200 and 1,400 units


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Flexible Budget

Variable:

1,200

Direct materials

1,400

$4.00

1,000Variable cost

per unitRange of Production (units)Production

costs

$3.00 t-shirt and $1.00 of ink


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Flexible Budget

Variable:

1,200

Direct materials

1,400

$4.00

1,000Variable cost


costs

$4,000 $5,600$4,800

$4 x # of units


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Flexible Budget

Variable:

1,200

Direct materials

1,400

$4.00

1,000Variable cost


costs

$4,000 $5,600$4,800

0.12 hours$10 per hour

Direct labor 1.20


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Flexible Budget

Variable:

1,200

Direct materials

1,400

$4.00

1,000Variable cost


costs

$4,000 $5,600$4,800

Direct labor 1.20 1,200 1,6801,440

$1.20# of units


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Flexible Budget

Variable:

1,200

Direct materials

1,400

$4.00

1,000Variable cost


costs

$4,000 $5,600$4,800

Direct labor 1.20 1,200 1,6801,440Variable overhead:

Maintenance 0.45 450 630540

0.12 hours

$3.75 per hour


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Flexible Budget

Variable:

1,200

Direct materials

1,400

$4.00

1,000Variable cost


costs

$4,000 $5,600$4,800

Direct labor 1.20 1,200 1,6801,440Variable overhead:


0.12 hours$1.25 per hour

Power 0.15 150 210180


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Flexible Budget

Variable:

1,200

Direct materials

1,400

$4.00 $4,000 $5,600

Direct labor 1.20 1,200 1,680Variable overhead:


Power 0.15 150 210

1,000

$4,800

1,440

540180

$5.80$5,800

$6,960 $8,120Total variable costs

Variable costper unit

Range of Production (units)Productioncosts

Fixed overhead:

Grounds keepingDepreciation

1,200 1,200 1,200

600 600 600

Fixed costs do no change when levels of output change


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Flexible Budget cont inued

1,200 1,4001,000Variable cost


costs

Fixed overhead:

Grounds keeping

Depreciation

1,200 1,200 1,200

600 600 600$1,800$1,800

$9,920$8,760$7,600

Total fixed costs $1,800

Total production costs


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Cornerstone 11-3

HOW TO Prepare a Performance Reportusing a Flexible Budget

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Example

Budgeted Costs Actual Costs @ 1200 units

Direct Materials: $4 per unit Direct Materials: $4,830

Direct Labor: $1.20 per unitVariable overhead:

Maintenance: $0.45 per unit Maintenance cost: $535

Power: $0.15 per unit Power cost: $170Fixed overhead:

Grounds keeping: $1,200 per qtr Grounds keeping: $1,050

Depreciation: $600 per quarter Depreciation: $600

Direct Labor: $1,500

Information:


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Example

Required:

Prepare a performance report using budgeted

costs for the actual level of activity.


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Units produced 1,200BudgetedActual

1,200Variance

Budgeted costs are based on actual unitsproduced


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Units produced 1,200BudgetedActual

1,200Variance

Direct materials costs to produce 1,200 unitswere $30 higher than expected

Direct materials $4,830 $4,800 $ 30 U


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Variable overhead:Maintenance 540

Power 180

Fixed overhead:Grounds keeping $1,200

Depreciation 600

$7,948Total production costs

Actual1,200

Variance

$4,830 $30 U

1,500 60 U

535 (5) U

170 (10) U

$1,050 $(150) F

600 0

$8,685$ (75) F

$7,035Total variable costs $6,960 $ 75 U

Total fixed costs $1,650 $1,800 $(150) F


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OBJECTIVE 2

Calculate the variableoverhead variances andexplain their meaning.


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Total Overhead Variance

Difference between applied and actualoverhead

Broken down into:

Total Variable Overhead Variance Broken further into:

Variable Overhead Spending Variance

Variable Overhead Efficiency Variance

Total Fixed Overhead Variance Broken further into: Fixed Overhead Spending Variance

Fixed Overhead Volume Variance


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Cornerstone 11-4

HOW TO Calculate the Total VariableOverhead Variance

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Example

Standard variable overhead rate (SVOR)$5.00 per direct labor hour

Actual variable overhead costs

Actual direct labor hours (AH) = 150 hours

Actual Variable Overhead Rate (AVOR) $4.70 perhour

Standard hours (SH) allowed per unit0.12 hour

Actual production 1,200 units

Information:


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Example

Required:

Calculate the total variable overhead variance.

T t l V i bl O h d


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Total Variable OverheadVariance

Actual Costs Applied Costs Total Variance =

(AHAVOR)

Actual HoursActual Variable Overhead Rate

T t l V i bl O h d


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(AHAVOR)

150 hours$4.70

$705

T t l V i bl O h d


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(AHAVOR)

Hours allowed for production (SH)

Standard Variable Overhead Rate (SVOR)

$705

(SHSVOR)

T t l V i bl O h d


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(AHAVOR)

144 hours$5.00

$705

(SHSVOR)

$720

Total Variable O erhead


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(AHAVOR)

This is a favorable variance since actual costs

were less than expected

$705

(SHSVOR)

$720 = $15

Variable Overhead Spending


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Variable Overhead SpendingVariance

Measures the aggregate effect of thedifferences betweenActual variable overhead (AVOR)

Standard variable overhead rate(SVOR)

Two ways to calculate: Three-pronged columnar approach

Formula approach (AVORSVOR) AH

Variable Overhead Efficiency


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Variable Overhead EfficiencyVariance

Measures the change in variableoverhead consumption that occursbecause of efficient (or inefficient)

use of direct labor Two ways to calculate:

Three-pronged columnar approach

Formula approach (AHSH) SVOR


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Cornerstone 11-5

HOW TO Calculate Variable OverheadVariances: Columnar and Formula

Approaches

50


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Example


Actual variable overhead rate (AVOR)$4.70

Actual hours worked (AH) 150 hours

Number of tee shirts produced 1,200units

Hours allowed for production (SH) 144

hours

Information:


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Example

Required:

Calculate the variable overhead spending and

efficiency variances.


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Example

Columnar Approach

1. AH AVOR150 $4.70

$705

2. AHSVOR

150 $5.00

$750

3. SH SVOR144 $5.00

$720

SpendingVariance

(12)$45 F

This is a favorable variance since the actualvariable overhead rate was less than the

expected rate

E l


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Example

Columnar Approach

1. AH AVOR150 $4.70

$705

2. AHSVOR

150 $5.00

$750

3. SH SVOR144 $5.00

$720

SpendingVariance

(12)$45 F

EfficiencyVariance

(23)$30 U

This is an unfavorable variance since the actualhours exceeded budgeted hours

E l


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Example

Columnar Approach

1. AH AVOR150 $4.70

$705

2. AH x SVOR150 x $5.00

$750

3. SH x SVOR144 x $5.00

$720

SpendingVariance

(12)$45 F

EfficiencyVariance

(23)$30 U

Total Variance(13)$15 F


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E l


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Example

(AH - SH) SVOR

(150 - 144) $5.00

$30 Unfavorable

VOH efficiency variance

Formula Approach

C t 11 6


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Cornerstone 11-6

HOW TO Performance Report for theVariable Overhead Variances

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E l


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Example


Actual costs: Maintenance $535 & Power $170

Actual hours worked (AH) 150 hours

Number of t-shirts produced 1,200 units

Hours allowed for production (SH) 144hours

Variable overhead: Maintenance 0.12 hour @$3.75 & Power 0.12 hour @ $1.25

Information:


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Example

Required:

Prepare a performance report that shows the

variances on an item-by-item basis.

Performance Report


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Performance ReportFor the Quarter Ended March 31, 2010

Budget for

SpendingVariance

ActualHours

ActualCosts

CostFormula

$562.50$535$3.75

Cost

Maintenance

150 hours$3.75

Performance Report


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Budget for

SpendingVariance

ActualHours

ActualCosts

CostFormula

$562.50$535$3.75

Cost

Maintenance

$535 - $562.50

$27.50 F

Performance Report ( t i d)


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Performance Report (cont inued)For the Quarter Ended March 31, 2010

Budget for

SpendingVariance

ActualHours

$27.50 F$562.50

Cost

Maintenance

Budget forEfficiencyVariance

StandardHours

$540

144$3.75

Performance Report (cont inued)


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Budget for

SpendingVariance

ActualHours

$27.50 F$562.50

Cost

Maintenance


StandardHours

$540

$562.50 - $540

$22.50 U

Performance Report


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Budget for

SpendingVariance

ActualHours

ActualCosts

CostFormula

$562.50$535$3.75

Cost

Maintenance

$1.25150

$27.50 U

187.501701.25Power

Performance Report


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Budget for

SpendingVariance

ActualHours

ActualCosts

CostFormula

$562.50$535$3.75

Cost

Maintenance

$170 - $187.50

$27.50 F

187.501701.25Power 17.50 F



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Budget for

SpendingVariance

ActualHours

$27.50 F$562.50

Cost

Maintenance


StandardHours

$540 $22.50 U

7.50 U18017.50 F187.50Power

Performance Report


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Budget for

SpendingVariance

ActualHours

ActualCosts

CostFormula

$27.50 F$562.50$535$3.75

Cost

Maintenance

17.50 F187.501701.25Power

Total $5.00 $705 $750.00 $45.00 F



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Budget for

SpendingVariance

ActualHours

$27.50 F$562.50

Cost

Maintenance

17.50 F187.50Power

Total $750.00 $45.00 F


$22.50 U

StandardHours

$540

7.50 U180

$720 $30.00 U


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OBJECTIVE 3

Calculate the fixedoverhead variances, andexplain their meaning.

Total Fixed Overhead


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Variance

Difference between actual andapplied fixed overhead

When applied overhead = standard

fixed overhead ratestandard hoursallowed for the actual output

Broken down into:

Fixed Overhead Spending Variance Fixed Overhead Volume Variance

Cornerstone 11 7


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Cornerstone 11-7

HOW TO Calculate the Total FixedOverhead Variance

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Example


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Example

Standard fixed overhead rate (SFOR)$10.00 per direct labor hour

Actual fixed overhead costs $1,650

Standard hours allowed per unit 0.12hours

Actual production 1,200 units

Information:

E l


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Example

Required:

Calculate the total fixed overhead

variance.

Total Fixed Overhead


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Variance


AFOH

This is an unfavorable variance since actual

costs exceeded applied costs.

$1605

(SH X SFOR)

$1,440 = $210 U

Fixed Overhead Spending


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p gVariance

Difference betweenActual fixed overhead rate (AFOH)

Budgeted fixed overhead rate (BFOH)


Formula approach

AFOHSFOH

Fixed Overhead Volume


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Variance

Difference between Budgeted fixed overhead (BFOH)

Applied fixed overhead (ApFOH)


Formula approach

(SHpSH) SFOR

Cornerstone 11-8


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Cornerstone 11-8

HOW TO Calculate Fixed OverheadVariances: Columnar and Formula

Approaches

78

Example


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Example

Standard fixed overhead rate (SFOR)$10.00 per direct labor hour

Budgeted fixed overhead (BFOH) $1,800

Number of t-shirts produced 1,200 units

Hours allowed for production (SH) 144hours

Information:

E l


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Example

Required:

Calculate the fixed overhead spending

and volume variances.

Fi d O h d V i


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Fixed Overhead Variances

Columnar Approach

1. Actual FixedOverhead

$1,650

2. SH SFOR180 $10$1,800

3. SHpSFOR

144 $10$1,440

SpendingVariance

(12)$150 F

VolumeVariance

(23)$360 U

Total Variance(13)$210 U

Example


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Example

AFOH

BFOH

$1,650 - $1,800

$150 Favorable

Fixed Overhead (FOH)Volume Variance

Formula Approach

Example


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Example

(SHp SH) SFOR

(180144) $10.00

$360 Unfavorable

Formula Approach

Fixed Overhead (FOH)Efficiency Variance


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OBJECTIVE 4

Prepare an activity-based flexible budget.

Activity-Based Budgeting


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Activity Based Budgeting

A powerful planning and control tool

Can be used to emphasize costreduction through the elimination of

wasteful activities and improvingefficiency of necessary activities

Two types:

Static activity budgets

Activity-based flexible budget

Cornerstone 11-9


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Cornerstone 11 9

HOW TO Prepare Static Budget for anActivity

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Example


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Example

Demand for purchase orders based onmaterials requirements: 15,000 purchaseorders

Resources needed:

Five purchasing agents, each capable of processing3,000 orders per year, salary, $40,000 each

Supplies projected to cost $1.00 per purchase order

Desks and computers: depreciation, $5,000 per year

Office space, rent, and utilities, $6,000

Information:

Example


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Example

Required:

Prepare a budget for the purchasing

activity.

Purchasing Budget


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Purchasing Budget

Salaries $200,000

5 agents$40,000 per agent per year

Purchasing Budget


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Purchasing Budget

Supplies

Depreciation

Salaries $200,000

5,000

15,000

$1.00 per purchase order15,000 purchase orders

Purchasing Budget


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Purchasing Budget

$226,000

6,000

Supplies

Depreciation

Salaries $200,000

Occupancy

Total

5,000

15,000

Cornerstone 11-10


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Cornerstone 11 10

HOW TO Prepare an Activity FlexibleBudget

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Example


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Example

The individual activities, drivers, their costformulas, and the output levels are theinputs needed to prepare the budget.

For example:

Activity: Maintenance

Driver: Machine hours

Fixed activity cost: $20,000 Variable activity rate: $5.50 per machine hour

Information:

Example


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Example

Required:

Prepare an activity-based flexible

budget.

Activity-Based Flexible


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Budget

$155,000$95,000$ 7.50$35,000

$20,000

Formula Level of Activity

Direct labor

Direct materials

Fixed

80,000$ 0

$100,000$ ---

Driver: Direct Labor Hours

Subtotal

$64,000$ 5.50MaintenanceMachining 2.00 47,000

Variable 10,000 20,000

$ 10 $200,000

--- 8 160,000$ 18 $180,000 $360,000

Driver: Machine Hours

$108,00015,000 31,000

Subtotal

Fixed Variable 8,000 16,000

Activity-Based Flexible


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Budget cont inued

$80,000 $197,000$177,500

$211,500

Formula Level of Activity

Inspections

Setups

Fixed

132,500

$ 45,000$ ----

Driver: Number of Setups

Subtotal

$226,000$ 1Purchasing

Variable 25 30

$ 1,800 $ 54,000

80,000 2,100 143,000$3,900

Driver: Number of Orders

$236,000Fixed Variable 15,000 30,000

Cornerstone 11-11


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HOW TO Prepare an Activity-Based PerformanceReport

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Example


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p

Information:

Actual ActivityLevel

$101,000 10,000

Actual Costs

$55,000

10,000

Maintenance

Direct labor $80,000

8,000Machining $29,0008,000

Inspections $125,5002525

Setups $46,500

Purchasing $220,000 15,000

Direct materials

Example


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Example

Required:

Prepare an activity-based performance

report.

Activity-Based PerformanceR t


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Report

Maintenance

Direct labor 80,000$100,000Direct materials

Machining

SetupsPurchasing

ActualCosts BudgetedCosts BudgetVariance

$101,00080,000

55,000 64,000

Inspections

Total

$ 1,000 U----

9,000 F29,000 31,000 2,000 F

125,500 132,500 7,000 F46,500 45,000 1,500 U

220,000 226,000 6,000 F

$657,000 $678,500 $21,500 F

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Managerial Accounting Ch11(1)[1]

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