Flexible Budgeting and Analysis of Overhead CostsChapt.docx

Flexible Budgeting and Analysis of Overhead Costs
Chapter 11
Copyright © 2011 by The McGraw-Hill Companies, Inc. All
rights reserved.
McGraw-Hill/Irwin
Chapter 11: Flexible Budgeting and Analysis of Overhead Costs
Learning Objective 11-1 – Distinguish between static and
flexible budgets and explain the advantages of a flexible
overhead budget.
10-*
Helen (H) - Slide 2 NN
For format consistency, changed the colon after the number '11-
1' to a period.
Learning Objective 11-1. Distinguish between static and
flexible budgets and explain the advantages of a flexible
overhead budget.

Flexible Budgets
Static budgets are prepared for a single, planned level of
activity.
Performance evaluation for overhead is difficult when actual
activity differs from the planned level of activity.
Hmm! Comparing
static budgets
with actual costs
is like comparing
apples and oranges.
11-*
Static budgets are prepared for a single, planned level of
activity.
Performance evaluation for overhead is difficult when actual
activity differs from the planned level of activity.
Since direct material and direct labor are traceable to products,
it is straightforward to determine standard costs for these
inputs.
But to compare overhead costs at the budgeted level of activity
to actual overhead costs at some other level of activity, is like
comparing apples and oranges. (LO 11-1)
Static Budgets and
Performance Reports
11-*

U = Unfavorable variance
Cheese Company was
unable to achieve the
budgeted level of activity.
Cheese Company was unable to produce at the budgeted level of
activity.
There were only 8,000 machine hours actually used as opposed
to the 10,000 hours budgeted.
Therefore, there was a 2,000 hour unfavorable variance. (LO
11-1)
Static Budgets and
Performance Reports
Since cost variances are favorable, have
we done a good job controlling costs?
11-*
F = Favorable variance since actual costs
are less than budgeted costs.

Because there was less production, the variable overhead costs
were less.
This caused a favorable variance.
But does a favorable cost variance indicate that Cheese
Company has done a good job controlling costs? (LO 11-1)
I don’t think I can
answer this question
using a static budget.
Static Budgets and
Performance Reports
11-*
I do know that
actual activity is below
budgeted activity which
is unfavorable.
But shouldn’t variable costs
be lower if actual activity
is below budgeted activity?

Cheese Company cannot determine how well overhead costs
have been controlled using a static budget.
When actual activity is different from the budgeted activity,
variable costs should also be different.
This is because variable costs vary with the level of activity.
If static budgets do not provide the answer to controlling
overhead, what does? (LO11-1)
Static Budgets and
Performance ReportsThe relevant question is . . .
“How much of the favorable cost variance is due to lower
activity, and how much is due to good cost control?”To answer
the question,
we must
the budget to the
actual level of activity.
11-*
A company must be able to determine how much of the variance
is caused by the activity level and how much of the variance is a
result of good cost control.
The tool used by most companies to control overhead costs is
called a flexible budget.
A flexible budget flexes a static budget to cover a range of
activity within which the firm may operate. (LO 11-1)

58.unknown
Advantages of Flexible Budgets
Improve performance evaluation.
May be prepared for any activity
level in the relevant range.
Shows revenues and expenses
that should have occurred at the
Reveal variances due to good cost
control or lack of cost control.
11-*
There are several advantages of flexible budgets.
Revenues and expenses are what they should have been at the
Flexible budgets can be prepared for any level of activity within
the relevant range.
These budgets make it possible to distinguish if variances are
caused by good cost control or lack of cost control.
The variances can be analyzed to help improve performance
evaluation. (LO 11-1)

Learning Objective 11-2 – Prepare a flexible overhead budget,
using both a formula and a columnar format.
10-*
Changed the font to 12-point.
For format consistency, changed the hyphen to a period.
Learning Objective 11-2. Prepare a flexible overhead budget,
using both a formula and a columnar format.
Preparing a Flexible Budget
11-*
The Cheese Company uses machine hours as the activity units.
The flexible budget is prepared at three levels of activity: 8,000
hours, 10,000 hours, and 12,000 hours, which are all within the
relevant range. (LO 11-2)
Variable costs are expressed as a constant amount per hour.
Fixed costs are expressed as a total amount that does not change
within the relevant range of activity.

11-*
The static budget amounts for each of the variable costs of
overhead are expressed as a constant amount per machine hours.
For example, the static budget for indirect labor was $40,000 at
10,000 machine hours, which is $4.00 per machine hour.
The static budget for indirect materials was $30,000 which is
$3.00 per machine hour.
And for power, the static budget cost was $5,000 which is $0.50
per machine hour.
Fixed costs are expressed as a total amount.
This is due to the nature of fixed costs.
Total fixed costs do not change within the relevant range of
activity. (LO 11-2)
11-*
The flexible budget at the 8,000 machine hour level of activity
can be completed.
Each of the variable costs per hour is multiplied by 8,000.
Total variable costs at the 8,000 machine hour level is $60,000.
Total fixed costs is $14,000.
The total overhead costs is the sum of the total variable costs
and the total fixed costs, which is $74,000. (LO 11-2)
11-*

The flexible budget at the remaining two levels of activity is
completed in the same manner. (LO 11-2)
Note: There is no flex
in the fixed costs.
11-*
Notice that there is no “flex” in the fixed costs. They remain
the same at all three levels of activity. (LO 11-2)
11-*
Budgeted variable Total
overhead cost per activity
activity unit units
×
+
Budgeted fixed
overhead cost
Total budgeted
overhead cost

=
The total overhead cost can be expressed as the formula total
budgeted overhead costs equals budgeted variable overhead cost
per activity unit times the total activity units.
Then add budgeted fixed overhead costs. (LO 11-2)
Flexible Budget
Performance Report
11-*
The variable cost per hour and the total fixed costs are in the
two left-most columns of the flexible budget performance
report.
The fourth column is for the actual results during the period.
(LO 11-2)
Flexible Budget
Performance Report
11-*
A Flexible budget is prepared for the
same activity level (8,000 hours) as
actually achieved.

Now the third column, the flexible budget column, is prepared
for the same level of activity at the actual level, which is 8,000
hours. (LO 11-2)
Flexible Budget
Performance Report
11-*
We are no longer comparing apples and oranges.
The flexible budget column can be completed at the 8,000 hour
level. (LO 11-2)
Flexible Budget
Performance Report
11-*
Indirect labor and indirect material have unfavorable variances
because actual costs are more than the flexible budget costs.
Indirect material costs should have been $32,000, but were
actually $34,000.
This is an unfavorable variance of $2,000.
Indirect labor should have been $24,000, but were actually
$25,500, which is an unfavorable variance of $1,500. (LO 11-2)

Flexible Budget
Performance Report
11-*
Power has a favorable variance because the actual cost is less
than the flexible budget cost.
Power costs should have been $4,000 but were actually $3,800
which is a favorable variance of $200. (LO 11-2)
Learning Objective 11-3 – Explain how overhead is applied to
Work-In-Process Inventory under standard costing.
10-*
Changed the hyphen to a period.
Learning Objective 11-3. Explain how overhead is applied to
Work-In-Process Inventory under standard costing.
Overhead Application in a

Standard Costing System
11-*
Recall that overhead application refers to the addition of
overhead cost to the Work-in-Process Inventory account as a
product cost.
In the normal-costing system, overhead application is based on
actual hours.
In a standard-costing system, overhead application is based on
standard hours allowed, given actual output.
The difference between normal costing and standard costing,
insofar as overhead is concerned, lies in the quantity of hours
used.
Both normal- and standard-costing systems use a predetermined
overhead rate.
In a standard-costing system, the predetermined overhead rate
also is referred to as the standard overhead rate. (LO 11-3)
Ch. 10Raw-Material InventoryxxxDirect-Material Price
VariancexxxRaw-material InventoryWork-in-Process
InventoryWork-in-Process InventoryAccounts
PayablexxxActual quantity atStandard quantityStandard
quantityTo record the purchase of raw material and the
incurrence of anstandard costat standard priceat standard
priceunfavorable price variance.Work-in-Process
InventoryxxxDirect-Material Quantity VariancexxxRaw-
Material InventoryxxxDirect-Material Price VarianceDirect-
Material Quantity VarianceDirect-Labor Rate VarianceTo
record the use of direct material in production and the
incurrenceUnfavorableFavorableUnfavorableFavorableUnfavora
bleFavorableof an unfavorable quantity
variancevariancevariancevariancevariancevariancevarianceWork
-in-Process InventoryxxxDirect-Labor Rate VariancexxxDirect-
Labor Efficiency VariancexxxWages PayablexxxAccount
PayableRaw-material InventoryWages PayableTo record the

usage of direct labor, the incurrance of an unfavorableActual
quantity atActual quantity atActual quantity atdirect-labor rate
variance and the incurrence of a favorable direct-laboractual
coststandard costactual costefficiency varianceCost of Goods
SoldxxxDirect-Labor Efficiency VariancexxxDirect-Labor Rate
VariancexxxCost of Goods SoldDirect-Labor Efficiency
VarianceDirect-Material Price
VariancexxxUnfavorableFavorableUnfavorableFavorableDirect-
Material Quantity
VariancexxxvariancevariancevariancevarianceDisposition of
Variances
Sheet2Normal CostingManufacturing OverheadWork-in-Process
InventoryActualAppliedAppliedoverheadoverhead:overhead:Act
ual hoursActual hoursxxPredeterminedPredeterminedoverhead
rateoverhead rateDifference lies in the quantity of hours
used.Standard CostingManufacturing OverheadWork-in-Process
InventoryActualAppliedAppliedoverheadoverhead:overhead:Sta
ndardStandardallowed hoursallowed
hoursxxPredeterminedPredeterminedoverhead rateoverhead rate
Sheet3
Overhead Application in a
Standard Costing System
11-*
Both normal- and standard-costing systems use a predetermined
overhead rate.
In a standard-costing system, the predetermined overhead rate
also is referred to as the standard overhead rate.
The Cheese Company calculates its predetermined or standard
overhead rate annually.

The rate for the current year is based on planned activity of
8,000 machine hours per month.
Notice that the predetermined overhead rate is broken into a
variable rate and a fixed rate. (LO 11-3)
Material Quantity
Variances

Sheet3BudgetedPlannedPredeterminedOverheadMonthly
ActivityOverhead RateVariable . . . . . . .$ 60,000* . . . . . . . .
.8,000machine hours. . . . . . . . .$ 7.50per process hourFixed .
. . . . . . . .14,000* . . . . . . . . .8,000machine hours. . . . . . . .
.1.75per process hourTotal . . . . . . . . .$ 74,000. . . . . . . .
.8,000machine hours. . . . . . . . .$ 9.25per process hour* From
the flexible budget for planned activity of 8,000 machine hours
Learning Objective 11-4 – Explain the important issues in
choosing an activity measure for overhead budgeting and
application.
10-*
Helen (H) - Slide 24
Changed the word 'budget' to read 'budgeting.'

Changed the word 'budget' to read 'budgeting.'
Learning Objective 11-4. Explain the important issues in
choosing an activity measure for overhead budgeting and
application.
Choice of Activity Measure
11-*
Variable overhead and the activity
measure should vary in a similar
pattern. Identify variable overhead cost
drivers. Examples: machine hours, labor
hours, process time. Dollar measures should be avoided
as they are subject to price-level
changes.
Choosing the appropriate activity measure for the flexible
overhead budget is important, because the flexible budget is the
chief tool for managing overhead costs.
The activity measure should be one that varies in a similar
pattern to the way that variable overhead varies.
As productive activity shifts, both variable-overhead cost and
the activity measure should shift in roughly the same proportion

and in the same direction.
Cost drivers are identified as the most significant factors
affecting overhead costs.
Variable overhead cost drivers, such as machine hours, labor
hours, or process time, should be identified.
Dollar measures, such as raw material costs, should be avoided
because they are subject to price-level changes. (LO 11-4)
Learning Objective 11-5 – Compute and interpret the variable-
overhead spending and efficiency variances and the fixed-
overhead budget and volume variances.
10-*
Learning Objective 11-5. Compute and interpret the variable-
overhead spending and efficiency variances and the fixed-
overhead budget and volume variances.
Spending Variance
Efficiency
Variance

AQ × SVR
AQ × AVR
AQ = Actual Quantity of Activity
AVR = Actual Variable Overhead Rate
SVR = Standard Variable Overhead Rate
SQ = Standard Allowed
SQ × SVR
Actual Flexible Budget Flexible Budget
Variable for Variable for Variable
Overhead Overhead at Overhead at
Incurred Actual Hours Standard Hours
Variable Overhead Variances
11-*
The spending variance for variable overhead is calculated using
two components: actual hours times actual rate and actual hours
times the standard variable rate.
The spending variance is the difference between these two
components.
The efficiency variance for variable overhead is calculated
using two components: actual hours times the standard variable
rate and standard hours times the standard variable rate.
The efficiency variance is the difference between these two
components. (LO 11-5)
Spending Variance
Efficiency

Variance
AQ × SVR
AQ × AVR
SQ × SVR
Actual Flexible Budget Flexible Budget
Variable for Variable for Variable
Overhead Overhead at Overhead at
Incurred Actual Hours Standard Hours
Variable Overhead Variances
Spending variance = AQ(AVR - SVR)
Efficiency variance = SVR(AQ - SQ)
11-*
The spending variance can be restated as the actual rate less the
standard variable rate.
This difference is then multiplied times the actual hours.
The efficiency variance for variable overhead can be restated as
the actual hours less the standard hours.
The difference is then multiplied times the standard variable
rate. (LO 11-5)
Variable Overhead Variances –
A Closer Look
Spending Variance
Efficiency Variance
Results from paying more
or less than expected for

overhead items and from
excessive usage of
overhead items.
A function of the
selected cost driver.
It does not reflect
overhead control.
11-*
An unfavorable spending variance simply means that the total
actual cost of variable overhead is greater than expected, after
adjusting for the actual quantity of process hours used.
An unfavorable spending variance could result from paying a
higher-than-expected price per unit for variable-overhead items.
Or the variance could result from using more of the variable-
overhead items than expected.
The variable overhead efficiency variance is a function of the
cost driver selected.
It does not reflect overhead control.
Therefore, the spending variance is the real control variance for
variable overhead.
Managers can use the spending variance to alert them if
variable-overhead costs are out of line with expectations. (LO
11-5)
Budget Variance

Volume
Variance
AFOHR = Predetermined Fixed Overhead Rate
SH = Standard Allowed Activity
SH × AFOHR
Actual Fixed Fixed Fixed
Overhead Overhead Overhead
Incurred Budget Applied
Fixed Overhead Variances
11-*
To analyze fixed overhead costs, managerial accountants
calculate two fixed-overhead variances: The fixed overhead
budget variance and the fixed overhead volume variance.
The budget variance is the difference between the actual fixed
overhead costs incurred and the budgeted fixed overhead.
The volume variance is the difference between the budgeted
fixed overhead and the applied fixed overhead.
Applied fixed overhead is the standard hours allowed for the
actual level of activity times the predetermined fixed overhead
rate. (LO 11-5)
PFOHR =
Applied Fixed Overhead = PFOHR × Standard Allowed
Fixed Overhead

Recall that fixed overhead costs are applied to products
and services using a predetermined fixed overhead rate
(PFOHR):
11-*
Budgeted Fixed Overhead
Planned Activity in Hours
Remember that fixed overhead costs are applied to products and
services using a predetermined overhead rate times the standard
hours allowed.
That predetermined overhead rate is established by dividing the
budgeted fixed overhead by the planned activity in hours. (LO
11-5)
Fixed Overhead Variances –
A Closer Look
Budget Variance
Volume Variance
Results from paying more
or less than expected for
overhead items.
Results from the inability
to operate at the activity
level planned for the period.
Has no significance for

cost control.
11-*
The budget variance is the real control variance for fixed
overhead, because it compares actual expenditures with
budgeted fixed-overhead costs.
The volume variance provides a way of reconciling two
different purposes of the cost management system.
For the control purpose, the system recognizes that fixed
overhead does not change as production activity varies.
Hence, budgeted fixed overhead is the same at all activity levels
in the flexible budget.
(Review Exhibit 11–3 to verify this.)
Budgeted fixed overhead is the basis for controlling fixed
overhead, because it provides the benchmark against which
actual expenditures are compared. (LO 11-5)
Volume
Cost
Fixed overhead
applied to products
Fixed Overhead Variances
{
$600
Volume Variance
$8,450 actual fixed OH
3,200 Standard
Hours
3,000 Hours Planned

Activity
11-*
$9,600 applied fixed OH
$9,000 budgeted fixed OH
3,200 machine hours × $3.00 fixed overhead rate
{
$550
Favorable
Budget Variance
The applied fixed overhead for the period was $9,600 because
there were 3,200 machine hours allowed and the predetermined
fixed overhead rate was $3.00 per machine hour.
Budgeted fixed overhead is $9,000 for all levels of activity. The
difference between these two resulted in a $600 volume
variance.
The actual fixed overhead costs were $8,450, which, when
compared to the $9,000 budgeted fixed overhead, resulted in a
$550 favorable budget variance. (LO 11-5)
Learning Objective 11-6 – Prepare an overhead cost
performance report.

10-*
Learning Objective 11-6. Prepare an overhead cost performance
report.
Overhead Cost Performance Report
11-*
The variable-overhead spending and efficiency variances and
the fixed-overhead budget variance can be computed for each
overhead cost item in the flexible budget.
When these itemized variances are presented along with actual
and budgeted costs for each overhead item, the result is an
overhead cost performance report.
The overhead cost performance report will include only
spending and efficiency variances for the variable items, and
only a budget variance for the fixed items. (LO 11-6)

Material Quantity
Variances
. . . . . . . .14,000* . . . . . . . . .8,000machine hours. . . . . . . .

Sheet1Variable costs:Indirect material:WaxPlastic wrapPaper
productsMisc. suppliesIndirect
labor:MaintenanceJanitorialUtilities:ElectricityNatural
gasWaterTotal variable costFixed costs:Indirect
labor:InspectionProduction supervisorSet
upDepreciation:EquipmentInsuranceProperty taxesTotal fixed
costTotal overhead cost

Material Quantity
Variances
. . . . . . . .14,000* . . . . . . . . .8,000machine hours. . . . . . . .
Learning Objective 11-7 – Explain how an activity-based
flexible budget differs from a conventional flexible budget.

10-*
Learning Objective 11-7. Explain how an activity-based flexible
budget differs from a conventional flexible budget.
Activity-Based Flexible Budget
The Cheese Co.’s flexible
budget is based on a single
cost driver, machine hours
11-*
The flexible budget for Cheese Company, used for our variance
analysis, is based on a single cost driver.
Overhead costs that vary with respect to machine hours are
categorized as variable; all other overhead costs are treated as
fixed.
This approach is consistent with traditional, volume-based
product-costing systems. (LO 11-7)

Activity-Based Flexible Budget
If different cost drivers are identified for the
different variable costs, an activity-based flexible
budget should be prepared with different cost
formulas based on the different drivers.
11-*
Under the more accurate product-costing method called activity-
based costing, several cost drivers are identified.
Costs that may appear fixed with respect to a single volume-
based cost driver, such as machine hours, may be variable with
respect to some other cost driver.
The activity-based costing approach also can be used as the
basis for a flexible budget for planning and cost management
purposes.
An activity-based flexible budget should be prepared with
different cost formulas based on the different cost drivers. (LO
11-7)
Learning Objective 11-8 – Prepare journal entries to record
production overhead under standard costing (Appendix A).
10-*

Deleted the period after the word 'costing' and added a period
after the word '(Appendix A).'
Deleted the period after the word 'costing' and added a period
after the word '(Appendix A.'
Learning Objective 11-8. Prepare journal entries to record
production overhead under standard costing (Appendix A).
Standard Costs and Product Costing
11-*
Variances are closed directly to the cost of goods sold account.
When actual overhead is greater than applied overhead, a debit
balance remains in manufacturing overhead.
That balance is closed by crediting manufacturing overhead and
debiting cost of goods sold.
When applied overhead is greater than actual overhead, a credit
balance remains in manufacturing overhead.
That balance is closed by debiting manufacturing overhead and

crediting cost of goods sold. (LO 11-8)
Material Quantity
Variances

. . . . . . . .14,000* . . . . . . . . .8,000machine hours. . . . . . . .
rateoverhead rateStandard CostingManufacturing
OverheadWork-in-Process
hoursxxPredeterminedPredeterminedoverhead rateoverhead
rateDisposition of VariancesManufacturing OverheadCost of
Goods SoldActualAppliedBalance (1)Balance
(2)overheadoverhead:ActualAppliedStandardoverheadoverheada
llowed hoursgreater thangreater
thanxAppliedActualPredeterminedoverheadoverheadoverhead
rateBalance (1)Balance (2)Balance (2)Balance (1)

Learning Objective 11-9 – Compute and interpret the sales-price
and sales-volume variances (Appendix B).
10-*
Added a period at the end of the sentence.
Added a period at the end of the sentence.
Learning Objective 11-9. Compute and interpret the sales-price
and sales-volume variances (Appendix B).
A General Model for Variance Analysis
Actual Sales Volume Actual Sales Volume Budgeted Sales
Volume

× ×
×
Actual Sales Price Budgeted Sales Price Budgeted
Sales Price
Sales Price Variance
Sales Volume Variance
ASV(ASP - BSP) BSP(ASV - BSV)
ASV = Actual Sales Volume BSP = Budgeted Sales
Price
ASP = Actual Sales Price BSV = Budgeted Sales
Volume
11-*
To calculate the sales-price variance, start by subtracting the
budgeted sales price from the actual sales price.
This difference is then multiplied by the actual sales volume.
If the amount is negative, the variance is unfavorable because
the budgeted sales price was greater than the actual sales price.
If the amount is positive, the variance is favorable because the
actual sales price was greater than the budgeted sales price.
To calculate the sales-volume variance, start by subtracting the
budgeted sales volume from the actual sales volume.
This difference is then multiplied by the budgeted sales price.
If the amount is negative, the variance is unfavorable because
the budgeted sales volume was greater than the actual sales
volume.
If the amount is positive, the variance is favorable because the
actual sales volume was greater than the budgeted sales volume.
Together, the sales-price and sales-volume variances explain the
variance between actual and budgeted sales revenue. (LO 11-9)

End Chapter 11
10-*
Static
Actual
Budget
Results
Variances
Machine hours
10,000
8,000
2,000
U
Variable costs
Ind
irect labor
40,000
$
Indirect materials
30,000
Power
5,000
Fixed costs
Depreciation
12,000
Insurance
2,000

Total overhead costs
89,000
$
Static
Actual
Budget
Results
Variances
Machine hours
10,000
8,000
2,000
U
Variable costs
Ind
irect labor
40,000
$
34,000
$
$6,000
F
Indirect materials
30,000
25,500
4,500
F
Power
5,000
3,800

1,200
F
Fixed costs
Depreciation
12,000
12,000
0
Insurance
2,000
2,000
0
89,000
$
77,300
$
$11,700
F
Variable
Total
Flexible Budgets
Cost
Fixed
8,000
10,000
12,000
Per Hour
Cost
Hours
Hours
Hours

Machine hours
8,000
10,000
12,000
Variable costs
Indirect labor
4.00
Indirect material
3.00
Power
0.50
Total variable cost
7.50
$
Fixed costs
Depreciation
12,000
$
Insurance
2,000
Total fixed cost
Variable
Total
Flexible Budgets
Cost
Fixed
8,000
10,000

12,000
Per Hour
Cost
Hours
Hours
Hours
Machine hours
8,000
10,000
12,000
Variable costs
Indirect labor
4.00
32,000
$
Indirect material
3.00
24,000
Power
0.50
4,000
Total variable cost
7.50
$
60,000
$
Fixed costs
Depreciation

12,000
$
Insurance
2,000
Total fixed cost
Variable
Total
Flexible Budgets
Cost
Fixed
8,000
10,000
12,000
Per Hour
Cost
Hours
Hours
Hours
Machine hours
8,000
10,000
12,000
Variable costs
Indirect labor
4.00
32,000
$
Indirect material
3.00

24,000
Power
0.50
4,000
Total variable cost
7.50
$
60,000
$
Fixed costs
Depreciation
12,000
$
12,000
$
Insurance
2,000
2,000
Total fixed cost
14,000
$
74,000
$
Variable
Total
Flexible Budgets
Cost
Fixed
8,000
10,000

12,000
Per Hour
Cost
Hours
Hours
Hours
Machine hours
8,000
10,000
12,000
Variable costs
Indirect labor
4.00
32,000
$
40,000
$
48,000
$
Indirect material
3.00
24,000
30,000
36,000
Power
0.50
4,000

5,000
6,000
Total variable cost
7.50
$
60,000
$
75,000
$
90,000
$
Fixed costs
Depreciation
12,000
$
12,000
$
12,000
$
12,000
$
Insurance
2,000
2,000
2,000
2,000
Total fixed cost
14,000
$

14,000
$
14,000
$
74,000
$
89,000
$
104,000
$
Variable
Total
Flexible Budgets
Cost
Fixed
8,000
10,000
12,000
Per Hour
Cost
Hours
Hours
Hours
Machine hours
8,000
10,000
12,000
Variable costs
Indirect labor
4.00
32,000

$
40,000
$
48,000
$
Indirect material
3.00
24,000
30,000
36,000
Power
0.50
4,000
5,000
6,000
Total variable cost
7.50
$
60,000
$
75,000
$
90,000
$
Fixed costs
Depreciation
12,000
$

12,000
$
12,000
$
12,000
$
Insurance
2,000
2,000
2,000
2,000
Total fixed cost
14,000
$
14,000
$
14,000
$
74,000
$
89,000
$
104,000
$
Variable
Total
Flexible Budgets
Cost
Fixed
8,000
10,000

14,000
$
14,000
$
74,000
$
89,000
$
104,000
$
Variable
Total
Cost
Fixed
Flexible
Actual
Per Hour
Costs
Budget
Results
Variances
Machine hours
8,000
0
Variable costs
Indirect labor
4.00
$
34,000
$
Indirect material
3.00
25,500

Power
0.50
3,800
Total variable costs
7.50
$
63,300
$
Fixed Expenses
Depreciation
12,000
$
12,000
$
Insurance
2,000
2,000
Total fixed costs
14,000
$
77,300
$
Variable
Total
Cost
Fixed
Flexible
Actual
Per Hour
Costs

Budget
Results
Variances
Machine hours
8,000
8,000
0
Variable costs
Indirect labor
4.00
$
34,000
$
Indirect material
3.00
25,500
Power
0.50
3,800
7.50
$
63,300
$
Fixed Expenses
Depreciation
12,000
$
12,000
$

Insurance
2,000
2,000
Total fixed costs
14,000
$
77,300
$
Variable
Total
Cost
Fixed
Flexible
Actual
Per Hour
Costs
Budget
Results
Variances
Machine hours
8,000
8,000
0
Variable costs
Indirect labor
4.00
$
32,000
$
34,000
$

$ 2,000 U
Indirect material
3.00
24,000
25,500
1,500 U
Power
0.50
4,000
3,800
200 F
7.50
$
60,000
$
63,300
$
$ 3,300 U
Fixed Expenses
Depreciation
12,000
$
12,000
$
12,000
$
0
Insurance
2,000

2,000
2,000
0
Total fixed costs
14,000
$
14,000
$
0
74,000
$
77,300
$
$ 3,300 U
Variable
Total
Cost
Fixed
Flexible
Actual
Per Hour
Costs
Budget
Results
Variances
Machine hours
8,000
8,000
0
Variable costs

Indirect labor
4.00
$
32,000
$
34,000
$
$ 2,000 U
Indirect material
3.00
24,000
25,500
1,500 U
Power
0.50
4,000
3,800
200 F
7.50
$
60,000
$
63,300
$
$ 3,300 U
Fixed Expenses
Depreciation
12,000
$

12,000
$
12,000
$
0
Insurance
2,000
2,000
2,000
0
Total fixed costs
14,000
$
14,000
$
0
74,000
$
77,300
$
$ 3,300 U
Variable
Total
Cost
Fixed
Flexible
Actual
Per Hour
Costs
Budget
Results
Variances

Machine hours
8,000
8,000
0
Variable costs
Indirect labor
4.00
$
32,000
$
34,000
$
$ 2,000 U
Indirect material
3.00
24,000
25,500
1,500 U
Power
0.50
4,000
3,800
200 F
7.50
$
60,000
$

63,300
$
$ 3,300 U
Fixed Expenses
Depreciation
12,000
$
12,000
$
12,000
$
0
Insurance
2,000
2,000
2,000
0
Total fixed costs
14,000
$
14,000
$
0
74,000
$
77,300
$
$ 3,300 U
ActualAppliedApplied
overheadoverhead:overhead:
Actual hoursActual hours
xx

PredeterminedPredetermined
overhead rateoverhead rate
Difference lies in the
quantity of hours used.
ActualAppliedApplied
overheadoverhead:overhead:
StandardStandard
allowed hoursallowed hours
xx
PredeterminedPredetermined
overhead rateoverhead rate
Normal Costing
Manufacturing Overhead Work-in-Process Inventory
Manufacturing Overhead Work-in-Process Inventory
Standard Costing
Budgeted
Overhead
Variable . . . . . . .60,000$ * . . . . . . . . .8,000 machine
hours. . . . . . . . .7.50$ per process hour
Fixed . . . . . . . . .14,000 * . . . . . . . . .8,000 machine
hours. . . . . . . . .1.75 per process hour
Total . . . . . . . . . 74,000$ . . . . . . . . .8,000 machine hours. .
. . . . . . .9.25$ per process hour
* From the flexible budget for planned activity of 8,000
machine hours
Planned
Monthly Activity
Predetermined
Overhead Rate
Variable costs:
Indirect material:
Wax
Plastic wrap
Paper products
Misc. supplies
Indirect labor:

Maintenance
Janitorial
Utilities:
Electricity
Natural gas
Water
Total variable cost
Fixed costs:
Indirect labor:
Inspection
Production supervisor
Set up
Depreciation:
Equipment
Insurance
Property taxes
Total fixed cost
Total overhead cost
ActualAppliedBalance (1)Balance (2)
overheadoverhead:ActualApplied
Standardoverheadoverhead
allowed hoursgreater thangreater than
xAppliedActual
Predeterminedoverheadoverhead
overhead rate
Balance (1)Balance (2)
Balance (2)Balance (1)
Manufacturing OverheadCost of Goods Sold
Disposition of Variances
Seven Steps to Making a Difference for the World
Dr. Leo P. Corriveau, Plymouth State University
Step 1: Preparation for Leadership

In some fundamental sense, we can not learn how to have
relationships, how to raise kids, how to lead others – how to be
human, if you will. Why? Because to a great extent it is the very
condition of not knowing, of being vulnerable to and surprised
by life, of being unable to manage or control our lovers, our
children, or our colleagues that makes us human. (Farson, 40)
We can not begin to accept the responsibility of leadership
without first acknowledging our humanity, both in its limits and
its marvels. The first task in knowing that humanity is to come
to terms with the limitations that being human places upon us
and, paradoxically, by accepting these limitations we free
ourselves to receive the boundless riches that human existence
holds for each of us. We who lead cannot afford the self
congratulation which comes from seeing ourselves above the
fray of human striving, nor can we allow ourselves to be fooled
by the skewed vision that such egotism affords. Instead, if we
are to be worthy of guiding others, we must first have the
strength to accept our own human failings for we cannot see the
truth in others until we see the truth in ourselves.
Bennis writes, “To become a leader, then, you must become
yourself, become the maker of your own life”. He observes that
knowing thyself is “the most difficult task any of us faces. But
until you truly know yourself, strengths and weaknesses, know
what you want to do and why you want to do it, you cannot
succeed in any but the most superficial sense of the word.”
(Kouzes, 59)
Bennis is doing more than simply encouraging us to become the
“captain of our own ship”. The making of a life in the truest
sense happens from the inside out and not from the outside in.
We are, many times, so busy becoming who we think we need to
be (or should be) that we often ignore that faint voice of the
true self within our soul. The choice to reconcile that faint inner

voice with the cacophony of the outer world and to balance the
two within our human being takes courage to begin,
determination to continue, and humility to accept the truths that
unfold. Such a life journey will in the end afford you a sense of
who you are, your place in the world, and that you belong where
you have chosen to be.
Our best qualities are integrity, dedication, magnanimity,
humility, openness, and creativity. These, of course, are the
basic ingredients of leadership, and our unwillingness to tap
these qualities in ourselves explains, to a large extent, the
leadership shortage. (Bennis, 117)
“The spirit is willing but the flesh is weak” Each human being
is filled with the great qualities of the human race. The choice
to use those qualities or more precisely to answer to their
demands is not easy and, many times, is contradictory to our
own sense of self preservation. There will always be a shortage
of leaders because the way of the honorable leader is strewn
with the choice between “doing what is right for me” and
“doing what is right for all”. To lead with honor is to accept
one’s responsibility to do what is right for all, to uphold one’s
faith in the goodness of humankind, and to do so with full
knowledge of the probable cost to one’s self.
Step 2: The Notion of Trust
Being seen as someone who can be trusted, who has high
integrity, and who is honest and truthful is essential. But if you
have a sense that the person is not being honest, you will not
accept the message, and you will not willingly follow. So the
credibility check can reliably be simplified to just one question:
“Do I trust this person?” (Kouzes, 24)
People who choose to follow do so as much for emotional
reasons as for rational ones. Trust is one of those “gut

feelings”. Trusting someone does not mean that we assume they
will make no mistakes. On the contrary, trust implies that when
that person does make mistakes that those errors were made
from a position of honor and integrity. We choose to follow
because we trust at a “gut level” not that they are always going
to be right but instead, that they are always seeking to do what
is right.
Leaders must reach out and attend to all their constituents if
they wish to be credible. Credibility, like quality and service,
is determined by the constituents, so leaders must be able to
view themselves as their constituents do. It requires effort and
new skills; one benefit is that a natural by-product of attending
to other people is that they in turn come to trust us and we trust
them. (Kouzes, 90)
Trust in leadership is not created by those who lead it is given
by those who follow.
Step 3: Focus & Clarity
As perspective is vital to the painter or writer, it is vital to
leaders and their associates. (Bennis, 158)
Perspective, it should be remembered, is from a single point or
position and therefore there are as many perspectives of what is
seen as there are positions to see it from. Artists must be able to
visualize how others see differently from different positions and
more importantly, how others see differently from the exact
same position as the artist. So too, must leaders. It should also
be remembered that what the artist “sees” not only comes from
what they empirically observe but from what they feel in their
heart and what resonates in their soul. So too, must leaders.
Gandhi said, “We must be the change we wish to see in the
world.” (Bennis, 154)

Leadership is about living the vision. To create the pathway
between the present and the future for others to follow we must
be the bridge which connects the two. This can only be done by
consciously living our vision of the future in the present
moment.
All leaders see in a special way … Leaders never confuse that
which is real with that which is reality … Furthermore, leaders
know that what we see is completely a matter of choice. But
beyond all that, leaders know that how we see and what we see
are exactly the same. (Cook, 41)
What “is” is. How we see it (interpret it), however, is a matter
of our own choosing. We all have elected at one time or another
to look the other way when faced with harsh facts of what “is”.
Intellectually or emotionally it is many times an understandable
necessity for survival. But it therefore also follows that we can
choose to change the depth of our intellectual and emotional
vision and see beyond the constraints of what we perceive to be
our present reality. Leaders need to have the courage to say as
Martin Luther King said, “I have a dream.”
Step 4: Commitment
A Chinese proverb is useful in this regard: “Tell me, I may
listen. Teach me, I may remember. Involve me, I will do it.”
(Kouzes, 146)
Commitment is not possible to attain without caring. Caring is
never about the outside it always about the inside. Until a leader
creates a way for people to feel involved they will not be able to
generate the emotional linkage between involvement, caring,
and committing.
One of the most common mistakes made in attempting to create

shared values is announcing which are most important and
should guide the department (or company). Instead leaders
must cast the net widely to capture the broadest possible
understanding of constituents’ values. Participation is vital, for
people’s perspectives change once they are involved. If the key
question asked is “what principles should we have?” merely
rhetorical statements will result, (Kouzes, 125)
The whole is always greater than the sum of its parts. As more
parts are added, the identity of the whole will change. All parts
of the whole share in this identity and each newly added part
changes how all of the parts share that common identity. This
identity therefore needs to remain dynamic in order to remain
authentic. Stasis (balance) of the whole is maintained by the
constant change in the relationship between the parts to
maintain identity. Interference from outside the system will
result in an imbalance that the parts cannot efficiently respond
to since they respond best to changes within the authentic
identity that they all share.
The creation of the shared vision of an organization must
respond to these system principles.
Creating a shared vision honoring these principles will
strengthen and increase commitment. If a leader wants to be a
part of this system he/she must join as a “part of the whole” in
order to keep the process authentic.
… for a strong community and for strong and vibrant
organizations, we must be willing to make other people’s
problems our own and to live them together. (Kouzes, 129)
Empathy receives a lot of lip service. It is easy to “talk the talk”
but much tougher to “walk the walk”. If a leader says, “I
believe in you, how can I help?” they had better be willing to
put their heart and soul where their mouth is. People commit to

leader who has made a commitment to them.
Step 5: Marshalling Resources
We have all seen leaders who successfully move from one
organization to another even though they may not be expert in
the second organization’s business. They are able to do this
because they define their task as evoking the knowledge skills
and creativity of those who are already within the organization.
They are secure enough in their own identities to be able to be
influenced by new information and to accept the ideas of others
in the group. They are especially able to elicit the intelligence
and participation of group members who otherwise might not
join in. (Farson, 145)
Most people know how to solve their own problems they just
can’t seem to get around to it. Many times what they appreciate
and need is a little encouragement in getting started. Leadership
then becomes a matter of pointing out (hopefully with kindness)
that the reason they have trouble moving forward is because
they are stepping on their own feet.
How do we identify and develop such innovators? How do we
spot new information in institutions, organizations, and
professions? Innovators, like all creative people, see things
differently; think in fresh and original ways. They have useful
contacts in other areas, other institutions; they are seldom seen
as good organization men or women and often viewed as
mischievous troublemakers. The true leader not only is him- or
herself an innovator but makes every effort to locate and use
other innovators in the organization. He or she creates a
climate in which conventional wisdom can be questioned and
challenged and one in which errors are embraced rather than
shunned in favor of safe, low-risk goals. (Bennis, 29 - 30)
If doing things the same old way was the best adaptation to

change dinosaurs would still alive. Limiting resources to what
has always been in the past limits the possibility of what can be
in the future. Life demands fresh and original ideas. Leaders
welcome that which is fresh and original because to do so is to
welcome life into their cause.
If people of authority are to succeed, they must know
themselves and listen to themselves, integrating their ideals and
actions but being able, at the same time, to tolerate the gap
between the desirable and the necessary as they work to close it.
They must know how to not merely listen but hear, not merely
look but see, to play as hard as they work, and to live with
ambiguity and inconsistency. The ultimate test of anyone in
authority is whether he or she can successfully ride and direct
the tides of change and, in doing so, grow stronger. As
Sophocles said, “It is hard to learn the mind of any mortal, or
the heart, till he be tried in chief authority. Power shows the
man” (Antigone). And the thoughtful, imaginative, and
effective use of power is what separates leaders from people in
authority. (Bennis, 156)
There is no greater resource for leaders than to know they can
trust the internal compass that guides their being. That although
there will be times of doubt and indecision, if granted the
needed time it will find a way to point true. In the course of
events there will be much need to hear outside council, to see
what cannot be turned away from, to laugh with what life
presents, and to accept the doubt and regret that is part of being
human. But when all of this is done it is to one’s inner self that
leaders must return and know in their heart that their internal
compass pointed true and that from it they chose an honorable
course.
Step 6: Achievement & Celebration
Leadership can be felt throughout an organization. It gives pace

and energy to the work and empowers the work force.
Empowerment is the collective effect of leadership. In
organizations with effective leaders, empowerment is most
evident in four themes:
1. People feel significant.
2. Learning and competence matter.
3. People are part of a community.
4. Work is exciting. (Bennis, 23)
People need to believe that what they do matters. They need to
feel a sense of gratification for a job well done. There very few,
if any external motivations, that will create the will to achieve
as well as the internal knowledge that what they are trying to do
is recognized as something that makes a difference.
“[Your goal is] not to achieve wholeness by suppressing
diversity, not to make wholeness impossible by enthroning
diversity, but to preserve both. Each element in the diversity
must be respected, but each must ask itself sincerely what it can
contribute to the whole. I don’t think it is venturing beyond the
truth to say that “wholeness incorporating diversity” defines the
transcendent task for your generation.” (Kouzes, 124,125)
We are all striving to find our individual selves as well as find
our place among others. We as leaders must encourage this
process to be open and honest both to each individual and
between all who are together. We must find ways each day to
enable people to quietly celebrate each others’ unique
contribution to what we have achieved together.
Leaders do not avoid, repress, or deny conflict, but rather see it
as an opportunity. Once everyone has come to see it that way,

they can exchange their combative posture for a creative stance,
because they don’t feel threatened, they feel challenged.
(Bennis, 158)
If we are to achieve, we need to celebrate the arrival of the
opportunity to try. This does not mean that we are blind to the
effort, hardship and disappointment that may lie along the
journeys that such opportunities provide for us. But along with
these harsh realities, we use our faith in our abilities and that of
our peers to acknowledge the strengths that we have together.
As long as we are willing to be a part of that mutual creative
strength we know that we are not alone and can rely on the
agreements and disagreements of our peers to move forward
towards what we need to achieve.
Step 7: Renewal
We must learn how to harness the commitment of our people –
then our commitment to building a better world will have some
meaning … This requires a new paradigm, a new model of how
organizations work – organizations that operate in a continual
learning mode, creating change. (Senge, 348 – 349)
Organizations are given life through the people within them.
Therefore in order to create change in an organization there
must a way to create change in the individual. It is not enough
to do what has always been successful, individually or
organizationally, because the possibilities of learning then
stagnate and become barriers to rather than liberators of human
thought. As leaders we must be willing to enable others to seek
out their own liberators of human thought and use those
moments to refresh and renew themselves, each other, and the
vision they all share.
Choice is different from desire. Try an experiment. Say, “I
want.” Now, say, “I choose.” What is the difference? For most

people, “I want is passive; “I choose” is active. For most
wanting is a state if deficiency – we want what we do not have.
Choosing is a state of sufficiency – electing to have what we
truly want. For most of us, as we look back over our life, we
can see that certain choices we made are played a pivotal role in
how our life developed. So too, will the choices we make in the
future be pivotal. (Senge, 360)
Choice is part of renewal. We cannot renew without making an
active choice to do so. We can (and do) want many things but it
is when we make the choice to pursue one option and put aside
others that the chance of renewal becomes available to us. We
must then accept that we need to leave behind what is past, no
matter how comfortable, and choose to move on.
To search for understanding, knowing there is no ultimate
answer, becomes a creative process – one which involves
rationality but also something more … Einstein said, that “the
most beautiful thing we can experience is the mysterious. It is
the source of all true art and science.” (Senge, 282 – 283)
Our work is never done. That is both good and bad news. The
possibilities are so vast though that one need never tire of
looking to the stars and searching for ways to touch them.
______________________________________
References:
Farson, Management of the Absurd
Kouzes and Posner, Credibility
Warren Bennis, Why Leaders Can’t Lead
Peter Senge, The Fifth Discipline
William Cook, Strategics
Arthur M. Young, The Theory of Process
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