hilton 5th edition chapter eleven
TRANSCRIPT
Flexible Budgeting and Analysis of Overhead Costs
CHAPTER 11
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Flexible BudgetsFlexible 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! Comparingstatic budgets
with actual costsis like comparing
apples and oranges.
11-2
Static ActualBudget Results Variances
Machine hours 10,000 8,000 2,000 U
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 andStatic Budgets andPerformance ReportsPerformance Reports
U = Unfavorable varianceCheese Company wasunable to achieve the
budgeted level of activity.
11-3
Static ActualBudget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs Indirect labor 40,000$ 34,000$ $6,000 F Indirect materials 30,000 25,500 4,500 F Power 5,000 3,800 1,200 F
Fixed costs Depreciation 12,000 12,000 0 Insurance 2,000 2,000 0
Total overhead costs 89,000$ 77,300$ $11,700 F
Static Budgets andStatic Budgets andPerformance ReportsPerformance Reports
F = Favorable variance since actual costs are less than budgeted costs.
Since cost variances are favorable, havewe done a good job controlling costs?
11-4
I don’t think I can answer this question
using a static budget.
I do know thatactual activity is belowbudgeted activity which
is unfavorable. But shouldn’t variable costs
be lower if actual activityis below budgeted activity?
Static Budgets andStatic Budgets andPerformance ReportsPerformance Reports
11-5
Static Budgets andStatic Budgets andPerformance ReportsPerformance Reports
The relevant question is . . .“How much of the favorable cost variance is due to lower activity, and how much is due to good cost control?”
To answer the question,we mustthe budget to theactual level of activity.
11-6
Flexible BudgetsFlexible Budgets Central Concept
If you can tell me what your activity wasfor the period, I will tell you what your costs and
revenue should have been.
11-7
Advantages of Flexible BudgetsAdvantages of Flexible Budgets
Improve performance evaluation.
May be prepared for any activity level in the relevant range.
Show revenues and expensesthat should have occurred at theactual level of activity.
Reveal variances due to good costcontrol or lack of cost control.
11-8
Variable Total Flexible BudgetsCost Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Indirect labor 4.00 Indirect material 3.00 Power 0.50 Total variable cost 7.50$
Fixed costs Depreciation 12,000$ Insurance 2,000 Total fixed costTotal overhead costs
Preparing a Flexible BudgetPreparing a Flexible Budget
11-9
Variable Total Flexible BudgetsCost 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 costTotal overhead costs
Preparing a Flexible BudgetPreparing a Flexible Budget
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.
11-10
Preparing a Flexible BudgetPreparing a Flexible BudgetVariable Total Flexible Budgets
Cost 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 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$Total overhead costs 74,000$
11-11
Preparing a Flexible BudgetPreparing a Flexible BudgetVariable Total Flexible Budgets
Cost 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 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$
11-12
Preparing a Flexible BudgetPreparing a Flexible BudgetVariable Total Flexible Budgets
Cost 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 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$
Note: There is no flexin the fixed costs.
11-13
Preparing a Flexible BudgetPreparing a Flexible BudgetVariable Total Flexible Budgets
Cost 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 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$
Budgeted variable Total overhead cost per activity activity unit units
× + Budgeted fixedoverhead cost
Total budgetedoverhead cost =
11-14
Flexible BudgetFlexible BudgetPerformance ReportPerformance Report
Now let’s prepare a budget performance report at 8,000 actual machine hours for the Cheese Co.
11-15
Flexible BudgetFlexible BudgetPerformance ReportPerformance Report
Variable TotalCost 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$Total overhead costs 77,300$
11-16
Flexible BudgetFlexible BudgetPerformance ReportPerformance Report
Variable TotalCost 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 Total variable costs 7.50$ 63,300$Fixed Expenses Depreciation 12,000$ 12,000$ Insurance 2,000 2,000 Total fixed costs 14,000$Total overhead costs 77,300$
Flexible budget is prepared for the
same activity level (8,000 hours) as
actually achieved.
11-17
Flexible BudgetFlexible BudgetPerformance ReportPerformance Report
Variable TotalCost 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 FTotal variable costs 7.50$ 60,000$ 63,300$ $ 3,300 UFixed Expenses Depreciation 12,000$ 12,000$ 12,000$ 0 Insurance 2,000 2,000 2,000 0Total fixed costs 14,000$ 14,000$ 0Total overhead costs 74,000$ 77,300$ $ 3,300 U
11-18
Flexible BudgetFlexible BudgetPerformance ReportPerformance Report
Variable TotalCost 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 FTotal variable costs 7.50$ 60,000$ 63,300$ $ 3,300 UFixed Expenses Depreciation 12,000$ 12,000$ 12,000$ 0 Insurance 2,000 2,000 2,000 0Total fixed costs 14,000$ 14,000$ 0Total overhead costs 74,000$ 77,300$ $ 3,300 U
Indirect labor and indirect material have unfavorable variances because actual costs
are more than the flexible budget costs.
11-19
Flexible BudgetFlexible BudgetPerformance ReportPerformance Report
Variable TotalCost 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 FTotal variable costs 7.50$ 60,000$ 63,300$ $ 3,300 UFixed Expenses Depreciation 12,000$ 12,000$ 12,000$ 0 Insurance 2,000 2,000 2,000 0Total fixed costs 14,000$ 14,000$ 0Total overhead costs 74,000$ 77,300$ $ 3,300 U
Power has a favorable variance because the
actual cost is less than the flexible budget cost.
11-20
Overhead Application in a Standard Overhead Application in a Standard Costing SystemCosting System
Actual Applied Appliedoverhead overhead: overhead:
Actual hours Actual hoursx x
Predetermined Predeterminedoverhead rate overhead rate
Difference lies in the quantity of hours used.
Actual Applied Appliedoverhead overhead: overhead:
Standard Standardallowed hours allowed hours
x xPredetermined Predeterminedoverhead rate overhead rate
Normal CostingManufacturing Overhead Work-in-Process Inventory
Manufacturing Overhead Work-in-Process InventoryStandard Costing
11-21
Overhead Application in a Standard Overhead Application in a Standard Costing SystemCosting System
BudgetedOverhead
Variable . . . . . . . 60,000$ * . . . . . . . . . 8,000 machine hours . . . . . . . . . 7.50$ per process hourFixed . . . . . . . . . 14,000 * . . . . . . . . . 8,000 machine hours . . . . . . . . . 1.75 per process hourTotal . . . . . . . . . 74,000$ . . . . . . . . . 8,000 machine hours . . . . . . . . . 9.25$ per process hour
* From the flexible budget for planned activity of 8,000 machine hours
PlannedMonthly Activity
PredeterminedOverhead Rate
11-22
Choice of Activity MeasureChoice of Activity Measure 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.
11-23
Cost Management Using Cost Management Using Overhead Cost VariancesOverhead Cost Variances
Let’s turn our attentionto the computation of
overhead cost variances. We will begin withvariable overhead..
11-24
Spending Variance
EfficiencyVariance
AH × SVR
AH × AR
AH = Actual Hours of Activity AR = Actual Variable Overhead RateSVR = Standard Variable Overhead RateSH = Standard Hours Allowed
SH × SVR
Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours
Variable Overhead VariancesVariable Overhead Variances
11-25
Spending Variance
EfficiencyVariance
AH × SVR
AH × AR SH × SVR
Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours
Variable Overhead VariancesVariable Overhead Variances
Spending variance = AH(AR - SVR)Efficiency variance = SVR(AH - SH)
11-26
Variable Overhead Variances – Variable Overhead Variances – ExampleExample
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.
Compute the variable overhead spending and efficiency variances.
11-27
Variable Overhead Variances – Variable Overhead Variances – ExampleExample
ColaCo prepared this budget for overhead:
Budgeted variable Total overhead cost per x activity activity unit units
+ Budgeted fixedoverhead cost
Total budgetedoverhead cost =
Total budgetedoverhead cost =
$2.00 permachine
hour×
Totalmachine hours
+ $9,000
11-28
3,300 hours 3,200 hours × × $2.00 per hour $2.00 per hour
Spending variance$140 unfavorable
Efficiency variance$200 unfavorable
Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours
$6,740 $6,600 $6,400
Variable Overhead Variances – Variable Overhead Variances – ExampleExample
11-29
3,300 hours 3,200 hours × × $2.00 per hour $2.00 per hour
Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours
$6,740 $6,600 $6,400
Variable Overhead Variances – Variable Overhead Variances – ExampleExample
The $140 unfavorable spending variance and the $200 unfavorable efficiency variance results in a $340
unfavorable flexible budget variance.11-30
Variable Overhead Variances – A Variable Overhead Variances – A Closer LookCloser LookSpending Variance Efficiency VarianceResults from paying moreor less than expected foroverhead items and from
excessive usage ofoverhead items.
A function of the selected cost driver.
It does not reflectoverhead control.
11-31
Fixed OverheadFixed Overhead
Now let’s turn our attention to fixed overhead.
11-32
Budget Variance
VolumeVariance
PFOHR = Predetermined Fixed Overhead Rate SH = Standard Hours Allowed
SH × PFOHR
Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied
Fixed Overhead VariancesFixed Overhead Variances
11-33
PFOHR =
Applied Fixed Overhead = PFOHR × Standard Hours
Budgeted Fixed OverheadPlanned Activity in Hours
Fixed OverheadFixed OverheadRecall that fixed overhead costs are applied to products and services using a predetermined
fixed overhead rate (PFOHR):
11-34
Fixed Overhead Variances – Fixed Overhead Variances – ExampleExample
ColaCo used the following predeterminedfixed overhead rate:
PFOHR = Budgeted Fixed OverheadPlanned Activity in Hours
PFOHR =$9,000
3,000 machine hours
PFOHR = $3.00 per machine hour
11-35
Fixed Overhead Variances – Fixed Overhead Variances – ExampleExample
ColaCo’s actual production required 3,200 standard machine hours. Actual fixed overhead
was $8,450.
Compute the fixed overhead budget and volume variances.
11-36
3,200 hours × $3.00 per hour
Fixed Overhead Variances – Fixed Overhead Variances – ExampleExample Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied
$8,450 $9,000 $9,600
Budget variance$550 favorable
Volume variance$600 (neither favorable
nor unfavorable)11-37
Fixed Overhead Variances –Fixed Overhead Variances –A Closer LookA Closer Look
Budget Variance Volume VarianceResults from paying moreor less than expected for
overhead items.
Results from the inabilityto operate at the activity
level planned for the period.
Has no significance for cost control.
11-38
End of Chapter 11End of Chapter 11I’m here to your
budget. Are you ready to ante up?
11-39