Flexible Budgets and Overhead Analysis · 2015-01-16 · Variable Overhead Variances – Example...
Transcript of Flexible Budgets and Overhead Analysis · 2015-01-16 · Variable Overhead Variances – Example...
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Flexible Budgets and Overhead Analysis
Management Accounting Lecture 15 (Chapter 9)
McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Today’s Agenda
n What is a Flexible Budget n Flexible versus Static Budget
n Shortcomings of Static Budgets
n Advantages of Flexible Budgets
n Building a Flexible Budget
n Variance Analysis
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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.
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Flexible Budgets
Let’s look at a Specific Example.
Flexible Budget
May be prepared for any activity level within 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.
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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$
Static Budgets and Performance Reports
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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$
Static Budgets and Performance Reports
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Static ActualBudget 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$ $11,650 F
U = Unfavorable variance CheeseCo was unable to achieve
the budgeted level of activity.
CheeseCo
Static Budgets and Performance Reports
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Static ActualBudget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs Indirect labor 40,000$ 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$ $11,650 F
CheeseCo
F = Favorable variance that occurs when actual costs are less than budgeted costs.
Static Budgets and Performance Reports
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Static ActualBudget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs Indirect labor 40,000$ 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$ $11,650 F
Since cost variances are favorable, have we done a good job controlling costs?
CheeseCo
Static Budgets and Performance Reports
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I don’t think I can answer the question using a static budget.
Actual activity is below budgeted activity.
So, shouldn’t variable costs be lower if actual activity
is lower?
Static Budgets and Performance Reports
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Static Budgets and Performance Reports
" The relevant question is . . . “How much of the favorable cost variance is due to lower activity, and how much is due to good cost control?”
" To answer the question, we must the budget to the actual level of activity.
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Preparing a Flexible Budget
To a budget we need to know that: n Total variable costs change
in direct proportion to changes in activity.
n Total fixed costs remain unchanged within the relevant range. Fixed
Variable
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Preparing a Flexible Budget
Give me a budget.
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Cost Total Formula Fixed 8,000 10,000 12,000per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Indirect labor 4.00$ Indirect materials 3.00 Power 0.50 Total variable cost 7.50$
Fixed costs Depreciation 12,000$ Insurance 2,000 Total fixed costTotal overhead costs
Flexible Budgets
Preparing a Flexible Budget
Fixed costs are expressed as a total amount.
Variable costs are expressed as a constant amount per hour.
$40,000 ÷ 10,000 hours is $4.00 per hour.
CheeseCo
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Cost Total Formula Fixed 8,000 10,000 12,000per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Indirect labor 4.00$ 32,000$ Indirect materials 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 costTotal overhead costs
Flexible Budgets
Preparing a Flexible Budget
$4.00 per hour × 8,000 hours = $32,000
CheeseCo
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Preparing a Flexible Budget
CheeseCo Cost Total
Formula Fixed 8,000 10,000 12,000per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Indirect labor 4.00$ 32,000$ Indirect materials 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$
Flexible Budgets
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Cost Total Formula Fixed 8,000 10,000 12,000per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Indirect labor 4.00$ 32,000$ 40,000$ Indirect materials 3.00 24,000 30,000 Power 0.50 4,000 5,000 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$ ?
Flexible Budgets
Preparing a Flexible Budget
Total fixed costs do not change in
the relevant range.
CheeseCo
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Preparing a Flexible Budget
Cost Total Formula Fixed 8,000 10,000 12,000per 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 materials 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$
Flexible Budgets
CheeseCo
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Let’s use a
budget for our performance
report.
Flexible Budget Performance Report
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Cost Total Formula Fixed Flexible Actualper Hour Cost Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs Indirect labor 4.00$ 34,000$ Indirect materials 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$
CheeseCo A flexible budget is
prepared for the same activity level
(8,000 hours) as actually achieved.
Flexible Budget Performance Report
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Cost Total Formula Fixed Flexible Actualper 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 materials 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$
CheeseCo
Flexible Budget Performance Report
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Cost Total Formula Fixed Flexible Actualper 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 materials 3.00 24,000 25,500 1,500 U Power 0.50 4,000 3,800 200 FTotal 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 UTotal fixed cost 14,000$ 14,050$ 50 UTotal overhead costs 74,000$ 77,350$ $ 3,350 U
CheeseCo Flexible Budget Performance Report
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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?”
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Static ActualBudget 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
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?
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Difference between original static budget and actual overhead = $11,650 F.
Overhead Variance Analysis Static Actual
Overhead OverheadBudget at at
10,000 Hours 8,000 Hours
89,000$ 77,350$
Let’s insert the flexible budget for
8,000 hours here.
Flexible Budget Performance Report
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Overhead Variance Analysis
This $15,000 F variance is due to lower activity.
Activity
This $3,350 U variance is due
to poor cost control.
Cost control
Static Flexible ActualOverhead Overhead OverheadBudget at Budget at at
10,000 Hours 8,000 Hours 8,000 Hours
89,000$ 74,000$ 77,350$
Flexible Budget Performance Report
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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.
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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.
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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.
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Actual Flexible Budget Variable for Variable Overhead Overhead at Incurred Actual Hours
AH × SR AH × AR
Spending Variance
Spending variance = AH(AR – SR)
Variable Overhead Variances
AH = Actual hours AR = Actual variable overhead rate SR = Standard variable overhead rate
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Actual Flexible Budget Variable for Variable Overhead Overhead at Incurred Actual Hours
3,300 hours ×
$2.00 per hour = $6,600 $6,740
Spending Variance = $140 unfavorable
Variable Overhead Variances – Example
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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 standard hours
allowed, along with the actual hours, to
compute the efficiency variance.
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Review
n What is a Flexible Budget n Flexible versus Static Budget
n Shortcomings of Static Budgets
n Advantages of Flexible Budgets
n Building a Flexible Budget
n Variance Analysis
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Tutorial
n Review of today’s and last weeks lecture
n Questions to be provided n C n D
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Exercise C (Question)
145. Flick Company uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of standard direct labor-hours. The company's total budgeted variable and fixed manufacturing overhead costs at the denominator level of activity are $20,000 for variable overhead and $30,000 for fixed overhead. The predetermined overhead rate, including both fixed and variable components, is $2.50 per direct labor-hour. The standards call for two direct labor-hours per unit of output produced. Last year, the company produced 11,500 units of product and worked 22,000 direct labor-hours. Actual costs were $22,500 for variable overhead and $31,000 for fixed overhead. Required: a. What is the denominator level of activity? b. What were the standard hours allowed for the output last year? c. What was the variable overhead spending variance? d. What was the variable overhead efficiency variance? e. What was the fixed overhead budget variance? f. What was the fixed overhead volume variance?
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Exercise D (Question) Chapter 009, Flexible Budgets and Overhead Analysis
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153. Creger Corporation, which makes landing gears, has provided the following data for a recent month:
Required: Determine the total variance, the spending variance, and the efficiency variance for the variable overhead item supplies cost that would appear on the company's variable overhead performance report. Show your work!
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Learning Objective: 4 Level: Easy