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Chapter11 140823230340-phpapp02

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Ray Garrison, POMA

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Chapter11 140823230340-phpapp02

  1. 1. 11th Edition Chapter 11 Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  2. 2. Flexible Budgets and Overhead Analysis Chapter Eleven Copyright © 2006, The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  3. 3. Static Budgets and Performance Reports Static budgets are prepared for a single, planned level of activity. Performance evaluation 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. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  4. 4. Flexible Budgets May be prepared for any activity level in the relevant range. Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons. Reveal variances related to cost control. Improve performance evaluation. Let’s look at CheeseCo. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  5. 5. Static Budgets and Performance Reports CheeseCo Static Actual Budget Results Variances Machine hours 10,000 Variable costs Indirect labor $ 40,000 Indirect materials 30,000 Power 5,000 Fixed costs Depreciation 12,000 Insurance 2,000 Total overhead costs $ 89,000 Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  6. 6. Static Budgets and Performance Reports CheeseCo Static Actual Budget Results Variances Machine hours 10,000 8,000 Variable costs Indirect labor $ 40,000 $ 34,000 Indirect materials 30,000 25,500 Power 5,000 3,800 Fixed costs Depreciation 12,000 12,000 Insurance 2,000 2,050 Total overhead costs $ 89,000 $ 77,350 Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  7. 7. Static Budgets and Performance Reports CheeseCo Static Actual Budget Results Variances Machine hours 10,000 8,000 2,000 U Variable costs U = Unfavorable variance Indirect Indirect CheeseCo labor $ 40,000 $ 34,000 $6,000 F materials was 30,000 unable to achieve 25,500 4,500 F Power the budgeted 5,000 level of activity. 3,800 1,200 F Fixed costs Depreciation 12,000 12,000 0 Insurance 2,000 2,050 50 U Total overhead costs $ 89,000 $ 77,350 $11,650 F Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  8. 8. Static Budgets and Performance Reports CheeseCo Static Actual Budget Results Variances Machine hours 10,000 8,000 2,000 U Variable costs Indirect 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 F = Favorable variance that occurs when actual costs are less than budgeted costs. Fixed costs Depreciation 12,000 12,000 0 Insurance 2,000 2,050 50 U Total overhead costs $ 89,000 $ 77,350 $11,650 F Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  9. 9. Static Budgets and Performance Reports CheeseCo Static Actual Budget Results Variances Machine hours 10,000 8,000 2,000 U Variable costs Indirect 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 Since cost variances are favorable, have we done a good job controlling costs? Fixed costs Depreciation 12,000 12,000 0 Insurance 2,000 2,050 50 U Total overhead costs $ 89,000 $ 77,350 $11,650 F Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  10. 10. Static Budgets and Performance Reports I don’t think I can answer the question using a static budget. Actual activity is below budgeted activity. So, shouldn’t variable costs be lower if actual activity is lower? Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  11. 11. Static Budgets and Performance Reports The 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. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  12. 12. Preparing a Flexible Budget To a budget we need to know that:  Total variable costs change in direct proportion to changes in activity.  Total fixed costs remain Variable unchanged within the relevant range. Fixed Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  13. 13. Preparing a Flexible Budget Let’s prepare budgets for CheeseCo. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  14. 14. Preparing a Flexible Budget CheeseCo Cost Total Flexible Budgets Formula 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 Variable costs are expressed as a constant amount per hour. $40,000 ÷ 10,000 hours is Depreciation $ 12,000 Insurance 2,000 Total fixed cost Total overhead costs $4.00 per hour. Fixed costs are expressed as a total amount. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  15. 15. Preparing a Flexible Budget CheeseCo Cost Total Flexible Budgets Formula 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 $4.00 per hour × 8,000 hours = $32,000 Depreciation $ 12,000 Insurance 2,000 Total fixed cost Total overhead costs Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  16. 16. Preparing a Flexible Budget CheeseCo Cost Total Flexible Budgets Formula 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 Total overhead costs $ 74,000 Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  17. 17. Preparing a Flexible Budget CheeseCo Cost Total Flexible Budgets Formula 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 Indirect material 3.00 24,000 30,000 Power 0.50 4,000 5,000 Total fixed costs do not change in the relevant range. Total variable cost $ 7.50 $ 60,000 $ 75,000 Fixed costs Depreciation $ 12,000 $ 12,000 $ 12,000 Insurance 2,000 2,000 2,000 Total fixed cost $ 14,000 $ 14,000 Total overhead costs $ 74,000 $ 89,000 ? Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  18. 18. Quick Check  What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  19. 19. Quick Check  What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000. Total overhead cost = $14,000 + $7.50 per hour ´ 12,000 hours = $14,000 + $90,000 = $104,000 Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  20. 20. Preparing a Flexible Budget Cost Total Flexible Budgets Formula 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 Total overhead costs $ 74,000 $ 89,000 $ 104,000 Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  21. 21. Flexible Budget Performance Report Let’s prepare a budget performance report for CheeseCo. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  22. 22. Flexible Budget Performance Report CheeseCo Flexible budget is prepared for the same activity level (8,000 hours) as actually achieved. Cost Total Formula Fixed Flexible Actual per Hour Cost 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 Total variable cost $ 7.50 $ 63,300 Fixed costs Depreciation $ 12,000 $ 12,000 Insurance 2,000 2,050 Total fixed cost $ 14,050 Total overhead costs $ 77,350 Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  23. 23. Quick Check  What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  24. 24. Quick Check  What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  25. 25. Flexible Budget Performance Report CheeseCo Cost Total Formula Fixed Flexible Actual per Hour Cost 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 25,500 Power 0.50 3,800 Total variable cost $ 7.50 $ 63,300 Fixed costs Depreciation $ 12,000 $ 12,000 Insurance 2,000 2,050 Total fixed cost $ 14,050 Total overhead costs $ 77,350 Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  26. 26. Quick Check  What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  27. 27. Quick Check  What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  28. 28. Flexible Budget Performance Report CheeseCo Cost Total Formula Fixed Flexible Actual per Hour Cost 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 Total variable cost $ 7.50 $ 60,000 $ 63,300 $ 3,300 U Fixed costs Depreciation $ 12,000 $ 12,000 $ 12,000 $ 0 Insurance 2,000 2,000 2,050 50 U Total fixed cost $ 14,000 $ 14,050 50 U Total overhead costs $ 74,000 $ 77,350 $ 3,350 U Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  29. 29. Flexible Budget Performance Report Remember the question: “How much of the total variance is due to lower activity and how much is due to cost control?” Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  30. 30. Static Budgets and Performance How much of the $11,650 favorable variance is due to lower activity and how much is due to cost control? Static Actual Budget Results Variances Machine hours 10,000 8,000 2,000 U Variable costs Indirect 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 2,050 50 U Total overhead costs $ 89,000 $ 77,350 $11,650 F Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  31. 31. Flexible Budget Performance Report Overhead Variance Analysis Static Let’s place Actual Overhead the flexible Overhead Budget at budget for at 10,000 Hours 8,000 hours 8,000 Hours $ 89,000 $ 77,350 here. Difference between original static budget and actual overhead = $11,650 F. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  32. 32. Flexible Budget Performance Report Overhead Variance Analysis Static Flexible Actual Overhead Overhead Overhead Budget at Budget at at 10,000 Hours 8,000 Hours 8,000 Hours $ 89,000 $ 74,000 $ 77,350 Activity This $15,000F variance is due to lower activity. Cost control This $3,350U variance is due to poor cost control. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  33. 33. The Measure of Activity– A Critical Choice Three important factors in selecting an activity base for an overhead flexible budget Activity base and variable overhead should be causally related. Activity base should not be expressed in dollars or other currency. Activity base should be simple and easily understood. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  34. 34. Variable Overhead Variances – A Closer Look If flexible budget is based on actual hours If flexible budget is based on standard hours Only a spending variance can be computed. Both spending and efficiency variances can be computed. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  35. 35. Variable Overhead Variances – Example ColaCo’s actual production for the period required 3,200 standard machine hours. Actual variable overhead incurred for the period was $6,740. Actual machine hours worked were 3,300. The standard variable overhead cost per machine hour is $2.00. Compute the variable overhead spending variance first using actual hours. Then use standard hours allowed to calculate the variable overhead efficiency variance. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  36. 36. Variable Overhead Variances Actual Flexible Budget Variable for Variable Overhead Overhead at Incurred Actual Hours AH × AR AH × SR Spending Variance Spending variance = AH(AR – SR) AH = Actual hours AR = Actual variable overhead rate SR = Standard variable overhead rate Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  37. 37. Variable Overhead Variances – Example Actual Flexible Budget Variable for Variable Overhead Overhead at Incurred Actual Hours 3,300 hours × $2.00 per hour $6,740 = $6,600 Spending Variance = $140 unfavorable Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  38. 38. Variable Overhead Variances – A Closer Look Spending Variance Results from paying more or less than expected for overhead items and from excessive usage of overhead items. Now, let’s use the Now, let’s use the standard hours allowed, along with the actual hours, to compute the efficiency variance. standard hours allowed, along with the actual hours, to compute the efficiency variance. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  39. 39. Variable Overhead Variances Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours AH × SR AH × AR Spending Variance Efficiency Variance Spending variance = AH(AR - SR) Efficiency variance = SR(AH - SH) SH × SR Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  40. 40. Variable Overhead Variances – Example Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours 3,300 hours 3,200 hours × × $2.00 per hour $2.00 per hour $6,740 $6,600 $6,400 Spending variance $140 unfavorable Efficiency variance $200 unfavorable $$334400 uunnffaavvoorraabblele fflelexxibiblele bbuuddggeett ttoottaal l vvaarriaiannccee Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  41. 41. Variable Overhead Variances – A Closer Look Efficiency Variance Controlled by managing the overhead cost driver. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  42. 42. Quick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the spending variance? a. $450 U b. $450 F c. $700 F d. $700 U Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  43. 43. Quick Check  Spending variance = AH (AR - SR) Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the spending variance? a. $450 U b. $450 F c. $700 F d. $700 U = Actual variable overhead incurred – (AH ´ SR) = $10,950 – (2,050 hours ´ $5 per hour) = $10,950 – $10,250 = $700 U Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  44. 44. Quick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the efficiency variance? a. $450 U b. $450 F c. $250 F d. $250 U Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  45. 45. Quick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was Efficiency $10,950. variance Actual = SR direct (AH – labor SH) hours worked were 2,050. = $5 per The hour predetermined (2,050 hours – 2,100 variable hours) overhead rate is $5 per direct labor hour. What was the = $efficiency 250 F variance? a. $450 U b. $450 F c. $250 F d. $250 U Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  46. 46. Quick Check Summary Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours 2,050 hours 2,100 hours × × $5 per hour $5 per hour $10,950 $10,250 $10,500 Spending variance $700 unfavorable Efficiency variance $250 favorable $$445500 uunnffaavvoorraabblele fflelexxibiblele bbuuddggeett ttoottaal l vvaarriaiannccee Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  47. 47. Activity-based Costing and the Flexible Budget It is unlikely that all variable overhead will be driven by a single activity. Activity-based costing can be used when multiple activity bases drive variable overhead costs. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  48. 48. Overhead Rates and Overhead Analysis Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR): Assigned Overhead = POHR × Standard Activity Overhead from the flexible budget for the denominator level of activity POHR = Denominator level of activity Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  49. 49. Overhead Rates and Overhead Analysis The predetermined overhead rate can be broken down into fixed and variable components. The variable component is useful for preparing and analyzing variable overhead variances. The fixed component is useful for preparing and analyzing fixed overhead variances. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  50. 50. Normal versus Standard Cost Systems In a normal cost system, overhead is applied to work in process based on the actual number of hours worked in the period. In a standard cost system, overhead is applied to work in process based on the standard hours allowed for the output of the period. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  51. 51. Fixed Overhead Variances Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied Budget Variance SH × FR Volume Variance DH × FR FR = Standard Fixed Overhead Rate SH = Standard Hours Allowed DH = Denominator Hours Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  52. 52. Overhead Rates and Overhead Analysis – Example ColaCo prepared this budget for overhead: Total Variable Total Fixed Machine Variable Overhead Fixed Overhead Hours Overhead Rate Overhead Rate 3,000 $ 6,000 ? $ 9,000 ? 4,000 8,000 ? 9,000 ? Let’s calculate overhead rates. ColaCo applies overhead based ColaCo applies overhead based on machine-hour activity. on machine-hour activity. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  53. 53. Overhead Rates and Overhead Analysis – Example ColaCo prepared this budget for overhead: Total Variable Total Fixed Machine Variable Overhead Fixed Overhead Hours Overhead Rate Overhead Rate 3,000 $ 6,000 $ 2.00 $ 9,000 ? 4,000 8,000 2.00 9,000 ? Rate = Total Variable Overhead ÷ Machine Hours This rate is constant at all levels of activity. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  54. 54. Overhead Rates and Overhead Analysis – Example ColaCo prepared this budget for overhead: Total Variable Total Fixed Machine Variable Overhead Fixed Overhead Hours Overhead Rate Overhead Rate 3,000 $ 6,000 $ 2.00 $ 9,000 $ 3.00 4,000 8,000 2.00 9,000 2.25 Rate = Total Fixed Overhead ÷ Machine Hours This rate decreases when activity increases. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  55. 55. Overhead Rates and Overhead Analysis – Example ColaCo prepared this budget for overhead: Total Variable Total Fixed Machine Variable Overhead Fixed Overhead Hours Overhead Rate Overhead Rate 3,000 $ 6,000 $ 2.00 $ 9,000 $ 3.00 4,000 8,000 2.00 9,000 2.25 The total POHR is the sum of the fixed and variable rates for a given activity level. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  56. 56. Fixed Overhead Variances – Example ColaCo’s actual production required 3,200 standard machine hours. Actual fixed overhead was $8,450. The predetermined overhead rate is based on 3,000 machine hours. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  57. 57. Overhead Variances Now let’s turn our attention to calculating fixed overhead variances. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  58. 58. Fixed Overhead Variances – Example Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied $8,450 $9,000 Budget variance $550 favorable Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  59. 59. Fixed Overhead Variances – A Closer Look Budget Variance Results from spending more or less than expected for fixed overhead items. Now, let’s use the standard hours allowed to compute the fixed overhead volume Now, let’s use the standard hours allowed to compute the fixed overhead volume variance. variance. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  60. 60. Fixed Overhead Variances – Example Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied SH × FR 3,200 hours × $3.00 per hour $8,450 $9,000 $9,600 Budget variance $550 favorable Volume variance $600 favorable Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  61. 61. Volume Variance – A Closer Look Volume Variance Results when standard hours allowed for actual output differs from the denominator activity. Unfavorable when standard hours < denominator hours Favorable when standard hours > denominator hours Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  62. 62. Volume Variance – A Closer Look Volume Variance Does not measure over-or under spending Results when standard hours allowed for actual output differs from the denominator activity. It results from treating fixed overhead as if it were a Unfavorable variable cost. when standard hours < denominator hours Favorable when standard hours > denominator hours Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  63. 63. Quick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance? a. $350 U b. $350 F c. $100 F d. $100 U Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  64. 64. Quick Check  Budget variance Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance? a. $350 U b. $350 F c. $100 F d. $100 U = Actual fixed overhead – Budgeted fixed overhead = $14,800 – $14,450 = $350 U Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  65. 65. Quick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance? a. $250 U b. $250 F c. $100 F d. $100 U Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  66. 66. Quick Check  Volume variance Yoder Enterprises’ actual production for the period = required Budgeted 2,100 fixed overhead standard – (SH direct ´ FR) labor hours. = Actual $14,450 fixed – (2,100 overhead hours ´ $for 7 per the hour) period was $14,800. = $14,450 The – $14,700 budgeted fixed overhead was $14,450. = $250 F The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance? a. $250 U b. $250 F c. $100 F d. $100 U Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  67. 67. Quick Check Summary Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied SH × FR 2,100 hours × $7.00 per hour $14,800 $14,450 $14,700 Budget variance $350 unfavorable Volume variance $250 favorable Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  68. 68. Overhead Variances Let’s look at a graph showing fixed overhead variances. We will use ColaCo’s numbers from the previous example. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  69. 69. Fixed Overhead Variances Activity Cost $9,000 budgeted fixed OH Fixed overhead applied to products 3,000 Hours Expected Activity Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  70. 70. Fixed Overhead Variances Cost $9,000 budgeted fixed OH $8,450 actual fixed OH Activity Fixed overhead applied to products 3,000 Hours Expected Activity { $550 Favorable Budget Variance Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  71. 71. Fixed Overhead Variances Cost $600 Favorable Volume Variance { 3,200 machine hours × $3.00 fixed overhead rate $9,600 applied fixed OH $9,000 budgeted fixed OH $8,450 actual fixed OH Activity 3,200 Standard Hours Fixed overhead applied to products 3,000 Hours Expected Activity { $550 Favorable Budget Variance Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  72. 72. Overhead Variances and Under- or Overapplied Overhead Cost In a standard cost system: Unfavorable variances are equivalent to underapplied overhead. Favorable variances are equivalent to overapplied overhead. The sum of the overhead variances equals the under- or overapplied overhead cost for a period. Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.
  73. 73. End of Chapter 11 Copyright © 2006. The McGraw-McGraw-Hill/Irwin Hill Companies, Inc.

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