Student Learning Outcomes

Transcription

1 Chapter 11 Flexible Budgeting and the Management of Overhead andsupport Activity Costs ACG 6309 Dr. Chula King Student Learning Outcomes Distinguish between static and flexible budgets and explain the advantages of a flexible overhead budget Prepare a flexible overhead budget, using both a formula and a columnar format Explain important issues in choosing an activity measure for overhead budgeting and application Compute and interpret the variable overhead spending and efficiency variances and the fixed overhead budget and volume variances Prepare an overhead performance report. Static Budgets Prepared for a single planed level of activity Consider the following comparison between a static budget based on 10,000 machine hours and actual results based on 8,000 machine hours for Apex, Inc. 1

2 Apex, Inc. Static Budget Actual Results s Machine Hours 10,000 8,000 2,000 U Variable Costs Indirect materials $30, $25, $4,500 F Indirect labor 40,000 34,000 6,000 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 Flexible Budget Tool used by most companies to control overhead costs Flexes a static budget to cover a range of activity within which the firm may operate Advantages Revenues and expenses presented for actual level of activity Can be prepared for any level of activity Reveal variances to good cost control or lack thereof Improve performance evaluation Preparing Flexible Budget Apex, Inc. uses machine hours as the activity units The relevant range of activity includes 8,000 hours, 10,000 hours and 12,000 hours Per hour variable costs include: Indirect material, $3.00; indirect labor, $4.00; power, $0.50 Fixed costs include: Depreciation, $12,000; Insurance, $2,000 2

3 Flexible Budget (VC x Activity) + Fixed Costs Variable Cost/Hour Total Fixed Cost 8,000 Hours 10,000 Hours 12,000 Hours Machine hours 8,000 10,000 12,000 Variable costs Indirect materials $3.00 $24,000 $30,000 $36,000 Indirect labor ,000 40,000 48,000 Power ,000 5,000 6,000 Total variable costs $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 costs $14,000 $14,000 $14,000 $14,000 Total overhead costs $74,000 $89,000 $104,000 Flexible Budget Performance Report Variable Cost/Hour Total Fixed Cost Flexible Budget Actual Results s Machine hours 8,000 8,000 Variable costs Indirect materials $3.00 $24,000 $25,500 $1,500 U Indirect labor ,000 34,000 2,000 U Power ,000 3, F Total variable costs $7.50 $60,000 $63,300 $3,300 U Fixed costs Depreciation $12,000 $12,000 $12,000 0 Insurance 2,000 2,000 2,000 0 Total fixed costs $14,000 $14,000 $14,000 0 Total overhead costs $74,000 $77,300 $3,300 U Overhead Application in Standard Costing System Normal Costing System: Overhead application based on actual hours Standard Costing System: Overhead application based on standard hours allowed, given actual output Both use predetermined overhead rate 3

4 Choice of Activity Measure Variable overhead and the activity measure should vary in a similar pattern Identify variable overhead cost drivers, e.g., machinehours, laborhours, process time Avoid dollar measures Overhead Cost s Variable Overhead s Spending : AH x (AR SVR) Efficiency : SVR x (AH SH) Fixed Overhead ds Budget : Actual Fixed Overhead Budgeted Fixed Overhead Volume : Budgeted Fixed Overhead Applied Fixed Overhead Applied Fixed Overhead: SH x PFOHR 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 AH SVR SH SVR Spending Efficiency AH = Actual Hours of Activity AR = Actual Variable Overhead Rate SVR = Standard Variable Overhead Rate SH = Standard Hours Allowed 4

5 Variable Overhead s: A Closer Look Spending : Results from paying more or less than expected for overhead items and from excessive usage of overhead items Efficiency : A function of the selected cost driver. It does not reflect overhead control Fixed Overhead s Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied SH PFOHR Budget Volume PFOHR = Predetermined Fixed Overhead Rate SH = Standard Hours Allowed Fixed Overhead s: A Closer Look Budget : Results from paying more or less than expected for overhead items Volume : Results from the inability of the company to operate at the activity level planned for the period. It has no significance for cost control 5

6 The Next Step Exercises 11 22, 11 23, 11 27, 11 28, Problems 11 36, 11 38(part 1 only), 11 39, 11 41,