Flexible Budgets and Overhead Analysis

Transcription

1 9-1 Today s Agenda Management Accounting Lecture 16 (Chapter 9) n What is a Flexible Budget n Flexible versus Static Budget n Shortcomings of Static Budgets Flexible Budgets and Overhead Analysis n Advantages of Flexible Budgets n Building a Flexible Budget n Analysis Variable Overhead s Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours AH AR Spending AH SR Efficiency SH SR Spending variance = AH(AR - SR) Efficiency variance = SR(AH - SH) Variable Overhead s 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 $340 unfavorable flexible budget total variance Variable Overhead s A Closer Look Efficiency Controlled by managing the overhead cost driver. 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 $450 unfavorable flexible budget total variance

2 9-2 -based Costing and the Flexible Budget It is unlikely that all variable overhead will be driven by a single activity. Computing Overhead Rates Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR): -based costing can be used when multiple activity bases drive variable overhead costs. Assigned Overhead = POHR Standard POHR = Overhead from the flexible budget for the denominator level of activity Denominator level of activity Computing Overhead Rates Normal versus Standard Cost Systems The predetermined overhead rate can be broken down into fixed and variable components. The variable The fixed component is useful component is useful for preparing and analyzing for preparing and variable overhead analyzing fixed overhead variances. variances. 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. The General Model Fixed Overhead s DH FR SH FR Budget FR = Standard Fixed Overhead Rate SH = Standard Hours Allowed DH = Denominator Hours 3,000 $ 6,000? $ 9,000? 4,000 8,000? 9,000? Let s calculate overhead rates. ColaCo applies overhead based on machine-hour activity.

3 9-3 3,000 $ 6,000 $ 2.00 $ 9,000? 4,000 8, ,000? 3,000 $ 6,000 $ 2.00 $ 9,000 $ ,000 8, , Rate = Total Variable Overhead Machine Hours This rate is constant at all levels of activity. Rate = Total Fixed Overhead Machine Hours This rate decreases when activity increases. Fixed Overhead s Example 3,000 $ 6,000 $ 2.00 $ 9,000 $ ,000 8, , 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. The total POHR is the sum of the fixed and variable rates for a given activity level. Overhead s Fixed Overhead s Example Now let s turn our attention to calculating fixed overhead variances $8,450 $9,000 Budget variance $550 favorable

4 9-4 Fixed Overhead s A Closer Look Fixed Overhead s Example Budget 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 variance. SH FR 3,200 hours $3.00 per hour $8,450 $9,000 $9,600 Budget variance $550 favorable variance $600 favorable A Closer Look Results allowed for actual output differs from the denominator activity. Unfavorable < denominator hours > denominator hours A Closer Look Does not measure over- or under spending. It is a measure Results of utilization when standard of facilities. hours allowed Results for when actual standard output hours differs allowed from It results the for denominator from actual treating output activity. differs fixed from overhead the denominator as if it were activity. a variable cost. Unfavorable < denominator hours > denominator hours Quick Check Summary Overhead s SH FR 2,100 hours $7.00 per hour $14,800 $14,450 $14,700 Budget variance $350 unfavorable variance $250 favorable Let s look at a graph showing fixed overhead variances. We will use ColaCo s numbers from the previous example.

5 9-5 Fixed Overhead s Fixed Overhead s Cost Cost $9,000 budgeted fixed OH Fixed overhead applied to products 3,000 Hours Expected Note: The slope of the line indicates that fixed overhead is applied at the rate of $3 per machine hour ($9,000/3,000) $550 Budget { $9,000 budgeted fixed OH $8,450 actual fixed OH Fixed overhead applied to products 3,000 Hours Expected Fixed Overhead s 3,200 machine hours $3.00 fixed overhead rate Cost $600 $9,600 applied fixed OH { $9,000 budgeted fixed OH $550 { $8,450 actual fixed OH Budget Fixed overhead applied to products 3,000 Hours Expected 3,200 Standard Hours Overhead s and Under- or Overapplied Overhead Cost Unfavorable variances are equivalent to underapplied overhead. In a standard cost system: variances are equivalent to overapplied overhead. The sum of the overhead variances equals the under- or over applied overhead cost for a period. Review Tutorial n What is a Flexible Budget n Flexible versus Static Budget n Shortcomings of Static Budgets n n Review of today s lecture Questions to be provided n E n F n Advantages of Flexible Budgets n Building a Flexible Budget n Analysis

6 9-6 Exercise E (Question) Exercise F (Question) 158. Holl Corporation has provided the following data for November Creger Corporation, which makes landing gears, has provided the following data for a recent month: Required: a. Compute the budget variance for November. Show your work! b. Compute the volume variance for November. Show your work! 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!