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Course Name: Cost Accounting 2
Course code: ACT404E
Credit hours : 3 hours
Semester/Academic year: Spring 2022-2023
Lecture: 10&11
Course instructor : Dr. Mahmoud Zain
Teaching assistant: Esraa Khairy
Cost Accounting 2 - lecture ( 10,11 )
1
Nahda University
Faculty of Business
Administration
Intended Learning outcomes (ILOs)
By the end of this lecture the student will be able to:
1- Identify standard costs and target cost approach
2- List the deviations of cost elements.
3- Analyze the deviations of cost elements
4- Discuss the considerations needed to implement the standard
costing system.
5- Calculate the deviations of the cost elements
Cost Accounting 2 - lecture ( 10,11 )
2
Chapter 8
Flexible Budgets,
Overhead Cost Variances,
and
Management Control
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Cost Accounting
Sixteenth Edition, Global Edition
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Learning Objectives (1 of 2)
• 8.1 Explain the similarities and differences in planning
• variable overhead costs and fixed overhead costs
• 8.2 Develop budgeted variable overhead cost rates and
• budgeted fixed overhead cost rates
• 8.3 Compute the variable overhead flexible-budget
• variance, the variable overhead efficiency variance and
• the variable overhead spending variance
• 8.4 Compute the fixed overhead flexible-budget variance,
• the fixed overhead spending variance and the fixed
• overhead production-volume variance
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Learning Objectives (2 of 2)
• 8.5 Show how the 4-variance analysis approach reconciles
• the actual overhead incurred with the overhead
• amounts allocated during the period
• 8.6 Explain the relationship between the sales-volume
• variance and the production-volume variance
• 8.7 Calculate variances in activity-based costing
• 8.8 Examine the use of overhead variances in
• nonmanufacturing settings
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Planning of Variable and Fixed
Overhead Costs
• To effectively plan variable overhead costs for a product or
service, managers must focus on the activities that create
a superior product or service for their customers and
eliminate activities that do not add value.
• Planning fixed overhead costs is similar to planning
variable overhead costs—undertake only essential
activities and then plan to be efficient in that undertaking.
But there is an additional strategic issue when it comes to
planning fixed overhead costs: choosing the appropriate
level of capacity or investment that will benefit the
company in the long run.
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Standard Costing
…is a costing system that:
 Traces direct costs to output produced by multiplying the
standard prices or rate by the standard quantities of inputs
allowed for actual outputs produced.
 Allocates overhead costs on the basis of the standard
overhead cost rates times the standard quantities of the
allocation bases allowed for the actual outputs produced.
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Developing Budgeted Variable
Overhead Cost Rates
1. Choose the period to be used for the budget.
2. Select the cost-allocation bases to use in allocating the
variable overhead costs to the output produced.
3. Identify the variable overhead costs associated with each
cost-allocation base.
4. Compute the rate per unit of each cost-allocation base
used to allocate to variable overhead costs to the output
produced.
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Developing Budgeted Fixed Overhead
Cost Rates-intro
Fixed overhead costs are, by definition, a lump sum of costs
that remain unchanged for a given period despite wide
changes in activity within the relevant range.
These costs are fixed in the sense that, unlike variable costs,
fixed costs do not automatically increase or decrease with
the level of activity within the relevant range.
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Developing Budgeted Fixed Overhead
Cost Rates
1. Choose the period to use for the budget.
2. Select the cost-allocation base (or bases) to use in
allocating the fixed overhead costs to the output
produced.
3. Identify the fixed overhead costs associated with each
cost-allocation base.
4. Compute the rate per unit of each cost-allocation base
used to allocate fixed overhead costs to the output
produced.
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Overhead variance analysis techniques:
1- Total analysis
2- Detailed analysis
Total Analysis:
 One way analysis
 Two ways analysis
 Three ways analysis
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
On way analysis:
Total variance = Actual overhead – fixed budget
Fixed budget =
(units produced X Standard hours X standard variable costs)
per unit per hour
+
(units produced X Standard hours per unit X Average Fixed costs)
Average fixed costs = Total fixed costs / planned hours
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Two ways analysis
Total variance = Actual overhead – fixed budget
Flexible budget variance = Actual OH – Flexible budget
Flexible budget =
(units produced X Standard hours X standard variable costs)
per unit per hour
+
Total fixed costs
Volume variance = Flexible budget – fixed budget
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Three ways analysis
Total variance = Actual overhead – fixed budget
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Variable Overhead Cost Variances—
Flexible Budget Analysis
Variable overhead flexible-budget variance measures the
difference between actual variable overhead costs incurred
and flexible-budget variable overhead amounts.
VARIABLE OVERHEAD FLEXIBLE BUDGET VARIANCE =
Actual Costs Incurred – Flexible-budget amount
This variance can be further broken down into the:
Variable Overhead Efficiency Variance and the
Variable Overhead Spending Variance
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Variable Overhead Cost Variances—
Efficiency Variance
Variable overhead efficiency variance is the difference between
the actual quantity of the cost-allocation base used and budgeted
quantity of the cost-allocation base that should have been used to
produce the actual output, multiplied by the budgeted variable
overhead cost per unit of the cost-allocation base.
VARIABLE OVERHEAD EFFICIENCY VARIANCE =
{Actual quantity of variable overhead cost-allocation base used for
actual output –
Budgeted quantity of variable overhead cost-allocation base
allowed for actual output} X
Budgeted variable overhead cost per unit of cost-allocation base
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Variable Overhead Cost Variances—
Spending Variance
Variable overhead spending variance is the difference between
the actual variable overhead cost per unit of the cost-allocation
base and the budgeted variable overhead cost per unit of the cost-
allocation base, multiplied by the actual quantity of variable
overhead cost-allocation base used.
VARIABLE OVERHEAD SPENDING VARIANCE =
{Actual variable overhead cost per unit of cost-allocation base –
Budgeted variable overhead cost per unit of cost-allocation base}
X
Actual quantity of variable overhead cost-allocation base used
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Journal Entries for Variable Overhead
Costs and Variances (1 of 2)
Here are the journal entries for the Variable Overhead
accounts:
1)Variable Overhead Control XX
Accounts Payable & Other accounts XX
To record actual variable cost incurred
2)Work-in-Process Control XX
Variable Overhead Allocated XX
To record variable overhead costs allocated (absorbed)
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Journal Entries for Variable Overhead
Costs and Variances (2 of 2)
Here are the journal entries for the Variable Overhead
accounts:
3)Variable Overhead Allocated XX
Variable Overhead Efficiency Variance XX
Variable Overhead Control XX
Variable Overhead Spending Variance XX
To record variances for the accounting period.
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Variable Overhead
Variance Analysis Illustrated
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Fixed Overhead Cost Variances— Fixed
Overhead Flexible-Budget Variance and
Fixed Overhead Spending Variance
Fixed overhead flexible-budget variance is the difference
between actual fixed overhead costs and fixed overhead
costs in the flexible budget.
The fixed overhead spending variance is the same variance
as the Fixed Overhead Flexible-Budget Variance.
The formula is: Actual Costs Incurred – Flexible Budget
Amount
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Fixed Overhead Cost Variances—
Production-Volume Variance
The production-volume variance arises only for fixed costs.
It is the difference between the budgeted fixed overhead and
the fixed overhead allocated on the basis of actual output
produced.
This variance is also know as the denominator-level
variance.
The formula is:
Budgeted Fixed Overhead – Fixed Overhead allocated for
actual output units produced
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Interpreting the Production—Volume
Variance
• Interpretation of this variance is difficult due to the nature
of the costs involved and how they are budgeted.
• Fixed costs are by definition somewhat inflexible. While
market conditions may cause production to flex up or
down, the associated fixed costs remain the same.
• Fixed costs may be set years in advance, and may be
difficult to change quickly.
• Contradiction: Despite this, examination of the fixed
overhead budget formulae reveals that it is budgeted
similar to a variable cost.
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Journal Entries for Fixed Overhead
Costs and Variances (1 of 2)
Here are the journal entries for the Fixed Overhead
accounts:
1) Fixed Overhead Control XX
Salaries Payable, Accum Depr, etc. XX
To record actual fixed overhead costs incurred
2) Work-in-Process Control XX
Fixed Overhead Allocated XX
To record fixed overhead costs allocated
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Journal Entries for Fixed Overhead
Costs and Variances (2 of 2)
Here are the journal entries for the Variable Overhead
accounts:
3) Fixed Overhead Allocated XX
Fixed Overhead Spending Variance XX
Fixed Overhead Production-Volume Var. XX
Fixed Overhead Control XX
To record variances for the accounting period.
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Fixed Overhead Variance Analysis,
Illustrated
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Integrated Variance Analysis, Illustrated
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
4-Variance Analysis
4-VARIANCE
ANALYSIS
SPENDING
VARIANCE
EFFICIENCY
VARIANCE
PRODUCTION-
VOLUME
VARIANCE
VARIABLE
OVERHEAD
YES YES NEVER A
VARIANCE
FIXED
OVERHEAD
YES NEVER A
VARIANCE
YES
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Production-Volume Variance and Sales-
Volume Variance
You may recall from Chapter 7 that the static budget
variance (the difference between the static budget and the
actual results) was $93,100 Unfavorable for Webb Company,
our sample company.
The sales-volume variance (the difference between the
flexible budget and the static budget) was $64,000
Unfavorable.
The sales-volume variance consists of two components:
The operating-income volume variance and the production-
volume variance.
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Summary of Variance Analysis
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Variance Analysis and Activity— Based
Costing
• Activity-based costing systems focus on individual activities as the
fundamental cost objects.
• Variances are calculated for each activity.
• Here is an example of the variance analysis for one activity at Lyco
Brass works
EXHIBIT 8.6 Columnar Presentation of Variance Analysis for Direct Materials-Handling
Labor Costs: Lyco Brass Works for 2017a
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Overhead Variances in
Nonmanufacturing Settings
• Nonmanufacturing companies can benefit from overhead
variances just as manufacturing companies can.
• Variance analysis can be used to examine overhead costs
and make decisions about pricing, managing costs, and
the mix of products.
• Output measures will be different and can be passenger-
miles flown, patient days provided, rooms-days occupied,
ton-miles of freight hauled, etc.
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Financial and Nonfinancial Performance
Measures
The overhead variances discussed in this chapter are
examples of financial performance measures. Nonfinancial
measures such as those related to capacity utilization and
physical measures of input usage also provide useful
information.
Both financial and nonfinancial performance measures are
used to evaluate the performance of managers.
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Terms to Learn
TERMS TO LEARN PAGE NUMBER
REFERENCE
Denominator level 311
Denominator-level variance 318
Fixed overhead flexible-budget variance 317
Fixed overhead spending variance 317
Operating-income volume variance 326
Production-volume variance 318
Standard costing 310
Total-overhead variance 325
Variable overhead efficiency variance 313
Variable overhead flexible-budget variance 312
Variable overhead spending variance 314
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Copyright

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1011_471b076e2d6314d87c81ce05be087aeb.pptx

  • 1. Course Name: Cost Accounting 2 Course code: ACT404E Credit hours : 3 hours Semester/Academic year: Spring 2022-2023 Lecture: 10&11 Course instructor : Dr. Mahmoud Zain Teaching assistant: Esraa Khairy Cost Accounting 2 - lecture ( 10,11 ) 1
  • 2. Nahda University Faculty of Business Administration Intended Learning outcomes (ILOs) By the end of this lecture the student will be able to: 1- Identify standard costs and target cost approach 2- List the deviations of cost elements. 3- Analyze the deviations of cost elements 4- Discuss the considerations needed to implement the standard costing system. 5- Calculate the deviations of the cost elements Cost Accounting 2 - lecture ( 10,11 ) 2
  • 3. Chapter 8 Flexible Budgets, Overhead Cost Variances, and Management Control Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Cost Accounting Sixteenth Edition, Global Edition
  • 4. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Learning Objectives (1 of 2) • 8.1 Explain the similarities and differences in planning • variable overhead costs and fixed overhead costs • 8.2 Develop budgeted variable overhead cost rates and • budgeted fixed overhead cost rates • 8.3 Compute the variable overhead flexible-budget • variance, the variable overhead efficiency variance and • the variable overhead spending variance • 8.4 Compute the fixed overhead flexible-budget variance, • the fixed overhead spending variance and the fixed • overhead production-volume variance
  • 5. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Learning Objectives (2 of 2) • 8.5 Show how the 4-variance analysis approach reconciles • the actual overhead incurred with the overhead • amounts allocated during the period • 8.6 Explain the relationship between the sales-volume • variance and the production-volume variance • 8.7 Calculate variances in activity-based costing • 8.8 Examine the use of overhead variances in • nonmanufacturing settings
  • 6. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Planning of Variable and Fixed Overhead Costs • To effectively plan variable overhead costs for a product or service, managers must focus on the activities that create a superior product or service for their customers and eliminate activities that do not add value. • Planning fixed overhead costs is similar to planning variable overhead costs—undertake only essential activities and then plan to be efficient in that undertaking. But there is an additional strategic issue when it comes to planning fixed overhead costs: choosing the appropriate level of capacity or investment that will benefit the company in the long run.
  • 7. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Standard Costing …is a costing system that:  Traces direct costs to output produced by multiplying the standard prices or rate by the standard quantities of inputs allowed for actual outputs produced.  Allocates overhead costs on the basis of the standard overhead cost rates times the standard quantities of the allocation bases allowed for the actual outputs produced.
  • 8. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Developing Budgeted Variable Overhead Cost Rates 1. Choose the period to be used for the budget. 2. Select the cost-allocation bases to use in allocating the variable overhead costs to the output produced. 3. Identify the variable overhead costs associated with each cost-allocation base. 4. Compute the rate per unit of each cost-allocation base used to allocate to variable overhead costs to the output produced.
  • 9. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Developing Budgeted Fixed Overhead Cost Rates-intro Fixed overhead costs are, by definition, a lump sum of costs that remain unchanged for a given period despite wide changes in activity within the relevant range. These costs are fixed in the sense that, unlike variable costs, fixed costs do not automatically increase or decrease with the level of activity within the relevant range.
  • 10. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Developing Budgeted Fixed Overhead Cost Rates 1. Choose the period to use for the budget. 2. Select the cost-allocation base (or bases) to use in allocating the fixed overhead costs to the output produced. 3. Identify the fixed overhead costs associated with each cost-allocation base. 4. Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to the output produced.
  • 11. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Overhead variance analysis techniques: 1- Total analysis 2- Detailed analysis Total Analysis:  One way analysis  Two ways analysis  Three ways analysis
  • 12. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. On way analysis: Total variance = Actual overhead – fixed budget Fixed budget = (units produced X Standard hours X standard variable costs) per unit per hour + (units produced X Standard hours per unit X Average Fixed costs) Average fixed costs = Total fixed costs / planned hours
  • 13. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Two ways analysis Total variance = Actual overhead – fixed budget Flexible budget variance = Actual OH – Flexible budget Flexible budget = (units produced X Standard hours X standard variable costs) per unit per hour + Total fixed costs Volume variance = Flexible budget – fixed budget
  • 14. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Three ways analysis Total variance = Actual overhead – fixed budget
  • 15. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Variable Overhead Cost Variances— Flexible Budget Analysis Variable overhead flexible-budget variance measures the difference between actual variable overhead costs incurred and flexible-budget variable overhead amounts. VARIABLE OVERHEAD FLEXIBLE BUDGET VARIANCE = Actual Costs Incurred – Flexible-budget amount This variance can be further broken down into the: Variable Overhead Efficiency Variance and the Variable Overhead Spending Variance
  • 16. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Variable Overhead Cost Variances— Efficiency Variance Variable overhead efficiency variance is the difference between the actual quantity of the cost-allocation base used and budgeted quantity of the cost-allocation base that should have been used to produce the actual output, multiplied by the budgeted variable overhead cost per unit of the cost-allocation base. VARIABLE OVERHEAD EFFICIENCY VARIANCE = {Actual quantity of variable overhead cost-allocation base used for actual output – Budgeted quantity of variable overhead cost-allocation base allowed for actual output} X Budgeted variable overhead cost per unit of cost-allocation base
  • 17. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Variable Overhead Cost Variances— Spending Variance Variable overhead spending variance is the difference between the actual variable overhead cost per unit of the cost-allocation base and the budgeted variable overhead cost per unit of the cost- allocation base, multiplied by the actual quantity of variable overhead cost-allocation base used. VARIABLE OVERHEAD SPENDING VARIANCE = {Actual variable overhead cost per unit of cost-allocation base – Budgeted variable overhead cost per unit of cost-allocation base} X Actual quantity of variable overhead cost-allocation base used
  • 18. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Journal Entries for Variable Overhead Costs and Variances (1 of 2) Here are the journal entries for the Variable Overhead accounts: 1)Variable Overhead Control XX Accounts Payable & Other accounts XX To record actual variable cost incurred 2)Work-in-Process Control XX Variable Overhead Allocated XX To record variable overhead costs allocated (absorbed)
  • 19. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Journal Entries for Variable Overhead Costs and Variances (2 of 2) Here are the journal entries for the Variable Overhead accounts: 3)Variable Overhead Allocated XX Variable Overhead Efficiency Variance XX Variable Overhead Control XX Variable Overhead Spending Variance XX To record variances for the accounting period.
  • 20. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Variable Overhead Variance Analysis Illustrated
  • 21. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Fixed Overhead Cost Variances— Fixed Overhead Flexible-Budget Variance and Fixed Overhead Spending Variance Fixed overhead flexible-budget variance is the difference between actual fixed overhead costs and fixed overhead costs in the flexible budget. The fixed overhead spending variance is the same variance as the Fixed Overhead Flexible-Budget Variance. The formula is: Actual Costs Incurred – Flexible Budget Amount
  • 22. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Fixed Overhead Cost Variances— Production-Volume Variance The production-volume variance arises only for fixed costs. It is the difference between the budgeted fixed overhead and the fixed overhead allocated on the basis of actual output produced. This variance is also know as the denominator-level variance. The formula is: Budgeted Fixed Overhead – Fixed Overhead allocated for actual output units produced
  • 23. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Interpreting the Production—Volume Variance • Interpretation of this variance is difficult due to the nature of the costs involved and how they are budgeted. • Fixed costs are by definition somewhat inflexible. While market conditions may cause production to flex up or down, the associated fixed costs remain the same. • Fixed costs may be set years in advance, and may be difficult to change quickly. • Contradiction: Despite this, examination of the fixed overhead budget formulae reveals that it is budgeted similar to a variable cost.
  • 24. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Journal Entries for Fixed Overhead Costs and Variances (1 of 2) Here are the journal entries for the Fixed Overhead accounts: 1) Fixed Overhead Control XX Salaries Payable, Accum Depr, etc. XX To record actual fixed overhead costs incurred 2) Work-in-Process Control XX Fixed Overhead Allocated XX To record fixed overhead costs allocated
  • 25. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Journal Entries for Fixed Overhead Costs and Variances (2 of 2) Here are the journal entries for the Variable Overhead accounts: 3) Fixed Overhead Allocated XX Fixed Overhead Spending Variance XX Fixed Overhead Production-Volume Var. XX Fixed Overhead Control XX To record variances for the accounting period.
  • 26. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Fixed Overhead Variance Analysis, Illustrated
  • 27. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Integrated Variance Analysis, Illustrated
  • 28. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. 4-Variance Analysis 4-VARIANCE ANALYSIS SPENDING VARIANCE EFFICIENCY VARIANCE PRODUCTION- VOLUME VARIANCE VARIABLE OVERHEAD YES YES NEVER A VARIANCE FIXED OVERHEAD YES NEVER A VARIANCE YES
  • 29. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Production-Volume Variance and Sales- Volume Variance You may recall from Chapter 7 that the static budget variance (the difference between the static budget and the actual results) was $93,100 Unfavorable for Webb Company, our sample company. The sales-volume variance (the difference between the flexible budget and the static budget) was $64,000 Unfavorable. The sales-volume variance consists of two components: The operating-income volume variance and the production- volume variance.
  • 30. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Summary of Variance Analysis
  • 31. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Variance Analysis and Activity— Based Costing • Activity-based costing systems focus on individual activities as the fundamental cost objects. • Variances are calculated for each activity. • Here is an example of the variance analysis for one activity at Lyco Brass works EXHIBIT 8.6 Columnar Presentation of Variance Analysis for Direct Materials-Handling Labor Costs: Lyco Brass Works for 2017a
  • 32. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Overhead Variances in Nonmanufacturing Settings • Nonmanufacturing companies can benefit from overhead variances just as manufacturing companies can. • Variance analysis can be used to examine overhead costs and make decisions about pricing, managing costs, and the mix of products. • Output measures will be different and can be passenger- miles flown, patient days provided, rooms-days occupied, ton-miles of freight hauled, etc.
  • 33. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Financial and Nonfinancial Performance Measures The overhead variances discussed in this chapter are examples of financial performance measures. Nonfinancial measures such as those related to capacity utilization and physical measures of input usage also provide useful information. Both financial and nonfinancial performance measures are used to evaluate the performance of managers.
  • 34. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Terms to Learn TERMS TO LEARN PAGE NUMBER REFERENCE Denominator level 311 Denominator-level variance 318 Fixed overhead flexible-budget variance 317 Fixed overhead spending variance 317 Operating-income volume variance 326 Production-volume variance 318 Standard costing 310 Total-overhead variance 325 Variable overhead efficiency variance 313 Variable overhead flexible-budget variance 312 Variable overhead spending variance 314
  • 35. Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved. Copyright