Post on 17-Jan-2016
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Flexible Budgets,Overhead Cost Variances,
andManagement Control
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Planning and OverheadVariable overhead—as efficiently as possible,
plan only essential activitiesFixed overhead—as efficiently as possible,
plan only essential activities, especially because fixed costs are predetermined well before the budget period begins
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Standard CostingTraces direct costs to output 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
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A Roadmap: Variable OverheadActual Costs
Incurred:Actual Input
XActual Rate
Flexible Budget:Budgeted Input
Allowed forActual Output
XBudgeted Rate
Actual InputsX
Budgeted Rate
Allocated:Budgeted
Input Allowed forActual Output
XBudgeted Rate
SpendingVariance
EfficiencyVariance
Never aVariance
Never aVariance
Flexible-BudgetVariance
Total Variable Overhead VarianceOver/Under Allocated Variable Overhead
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A Roadmap: Fixed OverheadActual Costs
Incurred
Flexible Budget:Same Budgeted Lump Sum (as in
Static Budget)Regardless of Output Level
Same BudgetedLump Sum(as in Static
Budget)Regardless of Output Level
Allocated:Budgeted
Input Allowed forActual Output
XBudgeted Rate
SpendingVariance
Flexible-BudgetVariance
Total Fixed Overhead VarianceOver/Under Allocated Fixed Overhead
Never aVariance
Production-Volume
Variance
Production-Volume
Variance
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Overhead VariancesOverhead is the most difficult cost to
manage, and is the least understood.Overhead variances involve taking
differences between equations as the analysis moves back and forth between actual results and budgeted amounts.
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Developing Budgeted Variable Overhead Cost Rates1. Choose the period to be used for the
budget.2. Select the cost-allocation bases to use in
allocating variable overhead costs to 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 variable overhead costs to output produced.
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The Details: Variable OH VariancesVariable overhead flexible-budget variance
measures the difference between actual variable overhead costs incurred and flexible-budget variable overhead amounts.
Variable Overhead Actual Costs Flexible-budgetflexible-budget variance Incurred amount= -
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The Details: Variable OH VariancesVariable overhead efficiency variance is the
difference between actual quantity of the cost-allocation base used and budgeted quantity of the cost per unit of the cost-allocation base.
Variable Actual quantity of Budgeted quantity of Budgeted variableOverhead variable overhead variable overhead cost- overhead costEfficiency cost-allocation base allocation based allowed per unit ofVariance used for actual output for actual output cost-allocation base
} X= { -
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The Details: Variable OH VariancesVariable overhead spending variance is the
difference between actual and budgeted variable overhead cost per unit of the cost-allocation base, multiplied by actual quantity of variable overhead cost-allocation base used for actual output.
Variable Actual variable Budgeted variable Actual quantity ofOverhead overhead cost overhead cost variable overheadSpending per unit of per unit of cost-allocation baseVariance cost-allocation base cost-allocation base used for actual output
{ }- X=
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Developing Budgeted Fixed Overhead Cost Rates1. Choose the period to be used for the
budget.2. Select the cost-allocation bases to use in
allocating fixed overhead costs to 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 output produced.
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The Details: Fixed OH VariancesFixed overhead flexible-budget variance is the
difference between actual fixed overhead costs and fixed overhead costs in the flexible budget.
This is the same amount for the fixed overhead spending variance.
Fixed Overhead Actual Costs Flexible-budgetflexible-budget variance Incurred amount= -
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The Details: Fixed OH VariancesProduction-volume variance is the difference
between budgeted fixed overhead and fixed overhead allocated on the basis of actual output produced.
This variance is also known as the denominator-level variance or the output-level overhead variance.
Production-Volume Budgeted Fixed Overhead allocated usingVariance Fixed Overhead budgeted input allowed for
actual output units produced
= -
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Production-Volume VarianceInterpretation 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.
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Variable Overhead Variance Analysis Illustrated
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Fixed Overhead Variance Analysis Illustrated
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Production-Volume Variance
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Integrated Variance Analysis Illustrated
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