Chapter 11 - Flexible Budgets and Overhead Analysis

Flexible Budgets and
Overhead Analysis
Chapter Eleven
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
11-2
Learning Objective 1
Prepare a flexible
budget and explain the
advantages of the flexible
budget approach over the
static budget approach.
McGrawHill/Irwin
11-3
Static Budgets and Performance Reports
Static budgets
are prepared for
a single, planned
level of activity.
Hmm! Comparing
static budgets with
actual costs is like
comparing apples
and oranges.
Performance
evaluation is difficult
when actual activity
differs from the
planned level of
activity.
McGrawHill/Irwin
11-4
Flexible Budgets
May be prepared for any activity
level in 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.
Lets look at CheeseCo.

McGrawHill/Irwin
11-5

CheeseCo
Static
Budget
Machine hours
Variable costs
Indirect labor
Indirect materials
Power
Fixed costs
Depreciation
Insurance
Total overhead costs
McGrawHill/Irwin
Actual
Results
Variances
10,000
$ 40,000
30,000
5,000
12,000
2,000
$ 89,000
11-6

CheeseCo
Static
Budget
Machine hours
Variable costs
Indirect labor
Indirect materials
Power
Fixed costs
Depreciation
Insurance
McGrawHill/Irwin
Actual
Results
10,000
8,000
$ 40,000
30,000
5,000
$ 34,000
25,500
3,800
12,000
2,000
12,000
2,050
$ 89,000
$ 77,350
Variances
11-7

CheeseCo
Static
Budget
Machine hours
10,000
Actual
Results
Variances
8,000
2,000 U
Variable costs
U = Unfavorable variance
Indirect labor
$ 40,000
$ 34,000
CheeseCo
was
unable
to
achieve
Indirect materials
30,000
25,500
level of activity.
Power the budgeted 5,000
3,800
Fixed costs
Depreciation
Insurance
McGrawHill/Irwin
$6,000 F
4,500 F
1,200 F
12,000
2,000
12,000
2,050
0
50 U
$ 89,000
$ 77,350
$11,650 F
11-8

CheeseCo
Static
Budget
Machine hours
Variable costs
Indirect labor
Indirect materials
Power
Actual
Results
Variances
10,000
8,000
2,000 U
$ 40,000
30,000
5,000
$ 34,000
25,500
3,800
$6,000 F
4,500 F
1,200 F
F = Favorable
variance that occurs when
Fixed
costs
actual
costs are less than
budgeted12,000
costs.
Depreciation
12,000
Insurance
2,000
2,050
McGrawHill/Irwin
$ 89,000
$ 77,350
0
50 U
$11,650 F
11-9

CheeseCo
Static
Budget
Machine hours
Variable costs
Indirect labor
Indirect materials
Power
Actual
Results
Variances
10,000
8,000
2,000 U
$ 40,000
30,000
5,000
$ 34,000
25,500
3,800
$6,000 F
4,500 F
1,200 F
Since
cost variances are favorable, have
Fixed
costs
we
done a good job controlling
costs?
Depreciation
12,000
12,000
Insurance
2,000
2,050
McGrawHill/Irwin
$ 89,000
$ 77,350
0
50 U
$11,650 F
11-10
I dont think I
can answer the
question using
a static budget.
McGrawHill/Irwin
Actual activity is below

budgeted activity.
So, shouldnt variable costs
be lower if actual activity
is lower?
11-11
The
The relevant
relevant question
question is
is .. .. ..
How
How much
much of
of the
the favorable
favorable cost
cost variance
variance is
is
due
due to
to lower
lower activity,
activity, and
and how
how much
much is
is due
due to
to
good
good cost
cost control?
control?
To
To answer
answer the
the question,
question,
we
we must
must
the
the budget
budget to
to the
the
actual
actual level
level of
of activity.
activity.
McGrawHill/Irwin
11-12
Preparing a Flexible Budget
To
a budget we need to know that:
Total variable costs change

in direct proportion to
changes in activity.
Total fixed costs remain
unchanged within the
relevant range.
McGrawHill/Irwin
le
b
ria
a
V
Fixed
11-13
Lets prepare
budgets
for CheeseCo.
McGrawHill/Irwin
11-14

CheeseCo
Cost
Formula
per Hour
Total
Fixed
Cost
Flexible Budgets
8,000
10,000
12,000
Hours
Hours
Hours
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable cost
Fixed costs
Depreciation
Insurance
Total fixed cost
McGrawHill/Irwin
8,000
$
4.00
3.00
0.50
7.50
10,000
12,000
Variable costs are expressed as

a constant amount per hour.
$40,000 10,000 hours is
$4.00 per hour.
$ 12,000
2,000
Fixed costs are

expressed as a
total amount.
11-15

CheeseCo
Cost
Formula
per Hour
Total
Fixed
Cost
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable cost
8,000
$
Fixed costs
$4.00
Depreciation
Insurance
Total fixed cost
McGrawHill/Irwin
Flexible Budgets
8,000
10,000
12,000
Hours
Hours
Hours
4.00
3.00
0.50
7.50
10,000
12,000
$ 32,000
24,000
4,000
$ 60,000
per hour 8,000 hours = $32,000

$ 12,000
2,000
11-16

CheeseCo
Cost
Formula
per Hour
Total
Fixed
Cost
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable cost
Fixed costs
Depreciation
Insurance
Total fixed cost
McGrawHill/Irwin
Flexible Budgets
8,000
10,000
12,000
Hours
Hours
Hours
8,000
4.00
3.00
0.50
7.50
10,000
12,000
$ 32,000
24,000
4,000
$ 60,000
$ 12,000
2,000
$ 12,000
2,000
$ 14,000
$ 74,000
11-17

CheeseCo
Cost
Formula
per Hour
Total
Fixed
Cost
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable cost
Fixed costs
Depreciation
Insurance
Total fixed cost
McGrawHill/Irwin
Flexible Budgets
8,000
10,000
12,000
Hours
Hours
Hours
8,000
10,000
4.00
$ 32,000
3.00 fixed costs
24,000
Total
0.50
4,000
do
not
change
in
7.50
$ 60,000
$ 40,000
30,000
5,000
$ 75,000
the relevant range.

$ 12,000
2,000
$ 12,000
2,000
$ 14,000
$ 74,000
$ 12,000
2,000
$ 14,000
$ 89,000
12,000
11-18
Quick Check
What
What should
should be
be the
the total
total overhead
overhead costs
costs for
for the
the
Flexible
Flexible Budget
Budget at
at 12,000
12,000 hours?
hours?
a.
a. $92,500.
$92,500.
b.
b. $89,000.
$89,000.
c.
c. $106,800.
$106,800.
d.
d. $104,000.
$104,000.
McGrawHill/Irwin
11-19
Quick Check
What
What should
should be
be the
the total
total overhead
overhead costs
costs for
for the
the
Flexible
Flexible Budget
Budget at
at 12,000
12,000 hours?
hours?
a.
a. $92,500.
$92,500.
b.
b. $89,000.
$89,000.
c.
c. $106,800.
$106,800.
d.
d. $104,000.
$104,000.
Total overhead cost
= $14,000 + $7.50 per hour 12,000 hours
= $14,000 + $90,000 = $104,000
McGrawHill/Irwin
11-20

Cost
Formula
per Hour
Total
Fixed
Cost
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable cost
Fixed costs
Depreciation
Insurance
Total fixed cost
McGrawHill/Irwin
4.00
3.00
0.50
7.50
$ 12,000
2,000
Flexible Budgets
8,000
10,000
12,000
Hours
Hours
Hours
8,000
10,000
12,000
$ 32,000
24,000
4,000
$ 60,000
$ 40,000
30,000
5,000
$ 75,000
$ 48,000
36,000
6,000
$ 90,000
$ 12,000
2,000
$ 14,000
$ 74,000
$ 12,000
2,000
$ 14,000
$ 89,000
$ 12,000
2,000
$ 14,000
$ 104,000
11-21
Prepare a performance
report for both variable
and fixed overhead costs
using the flexible budget
approach.
McGrawHill/Irwin
11-22
Flexible Budget Performance Report
Lets prepare a
budget performance
report
for CheeseCo.
McGrawHill/Irwin
11-23

CheeseCo
Flexible budget Cost

is
prepared for the
Formula
per Hour
same activity level
(8,000
hours) as
Machine
hours
actually achieved.
Variable costs
Indirect labor
Indirect material
Power
Total variable cost
Fixed costs
Depreciation
Insurance
Total fixed cost
McGrawHill/Irwin
Total
Fixed
Cost
4.00
3.00
0.50
7.50
Flexible
Budget
Actual
Results
8,000
8,000
Variances
0
$ 34,000
25,500
3,800
$ 63,300
$ 12,000
2,000
$ 12,000
2,050
$ 14,050
$ 77,350
11-24
Quick Check
What
What is
is the
the variance
variance for
for indirect
indirect labor
labor when
when the
the
flexible
flexible budget
budget for
for 8,000
8,000 hours
hours is
is compared
compared to
to the
the
actual
actual results?
results?
a.
a. $2,000
$2,000 U
U
b.
b. $2,000
$2,000 FF
c.
c. $6,000
$6,000 U
U
d.
d. $6,000
$6,000 FF
McGrawHill/Irwin
11-25
Quick Check
What
What is
is the
the variance
variance for
for indirect
indirect labor
labor when
when the
the
flexible
flexible budget
budget for
for 8,000
8,000 hours
hours is
is compared
compared to
to the
the
actual
actual results?
results?
a.
a. $2,000
$2,000 U
U
b.
b. $2,000
$2,000 FF
c.
c. $6,000
$6,000 U
U
d.
d. $6,000
$6,000 FF
McGrawHill/Irwin
11-26

CheeseCo
Cost
Formula
per Hour
Total
Fixed
Cost
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable cost
Fixed costs
Depreciation
Insurance
Total fixed cost
McGrawHill/Irwin
4.00
3.00
0.50
7.50
$ 12,000
2,000
Flexible
Budget
Actual
Results
8,000
8,000
$ 32,000
$ 34,000
25,500
3,800
$ 63,300
Variances
0
$ 2,000 U
$ 12,000
2,050
$ 14,050
$ 77,350
11-27
Quick Check
What
What is
is the
the variance
variance for
for indirect
indirect material
material when
when the
the
flexible
flexible budget
budget for
for 8,000
8,000 hours
hours is
is compared
compared to
to the
the
actual
actual results?
results?
a.
a. $1,500
$1,500 U
U
b.
b. $1,500
$1,500 FF
c.
c. $4,500
$4,500 U
U
d.
d. $4,500
$4,500 FF
McGrawHill/Irwin
11-28
Quick Check
What
What is
is the
the variance
variance for
for indirect
indirect material
material when
when the
the
flexible
flexible budget
budget for
for 8,000
8,000 hours
hours is
is compared
compared to
to the
the
actual
actual results?
results?
a.
a. $1,500
$1,500 U
U
b.
b. $1,500
$1,500 FF
c.
c. $4,500
$4,500 U
U
d.
d. $4,500
$4,500 FF
McGrawHill/Irwin
11-29

CheeseCo
Cost
Formula
per Hour
Total
Fixed
Cost
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable cost
Fixed costs
Depreciation
Insurance
Total fixed cost
McGrawHill/Irwin
4.00
3.00
0.50
7.50
$ 12,000
2,000
Flexible
Budget
Actual
Results
8,000
8,000
$ 32,000
24,000
4,000
$ 60,000
$ 34,000
25,500
3,800
$ 63,300
$ 2,000 U
1,500 U
200 F
$ 3,300 U
$ 12,000
2,000
$ 14,000
$ 74,000
$ 12,000
2,050
$ 14,050
$ 77,350
Variances
0
0
50 U
50 U
$ 3,350 U
11-30

Remember the ques
tion:
How much of the to
tal
variance is due to lo
w er
activity and how mu
ch is
due to cost control?
McGrawHill/Irwin
11-31
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?
Static
Budget
Machine hours
Variable costs
Indirect labor
Indirect materials
Power
Fixed costs
Depreciation
Insurance
McGrawHill/Irwin
Actual
Results
Variances
10,000
8,000
2,000 U
$ 40,000
30,000
5,000
$ 34,000
25,500
3,800
$6,000 F
4,500 F
1,200 F
12,000
2,000
12,000
2,050
0
50 U
$ 89,000
$ 77,350
$11,650 F
11-32
Overhead Variance Analysis

Static
Overhead
Budget at
10,000 Hours
$
89,000
Lets place
the flexible
budget for
8,000 hours
here.
Actual
Overhead
at
8,000 Hours
$
77,350
Difference between original static budget

and actual overhead = $11,650 F.
McGrawHill/Irwin
11-33
Overhead Variance Analysis

Static
Overhead
Budget at
10,000 Hours
$
89,000
Flexible
Overhead
Budget at
8,000 Hours
$
Activity
This $15,000F variance is
due to lower activity.
McGrawHill/Irwin
74,000
Actual
Overhead
at
8,000 Hours
$
77,350
Cost control
This $3,350U
variance is due
to poor cost control.
11-34
The Measure of Activity A Critical Choice

Three important
factors in selecting an
activity base for an overhead
flexible budget
Activity
Activity base
base and
and
variable
variable overhead
overhead
should
should be
be
causally
causally related.
related.
McGrawHill/Irwin
Activity
Activity base
base should
should
be
be simple
simple and
and
easily
easily understood.
understood.
Activity
Activity base
base should
should
not
not be
be expressed
expressed
in
in dollars
dollars or
or
other
other currency.
currency.
Variable Overhead Variances

A Closer Look
11-35
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.
McGrawHill/Irwin
11-36
Variable Overhead Variances Example
ColaCos 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.
McGrawHill/Irwin
11-37
Use a flexible budget

to prepare a variable
overhead performance
report containing only
a spending variance.
McGrawHill/Irwin
11-38

Actual
Variable
Overhead
Incurred
Flexible Budget
for Variable
Overhead at
Actual Hours
AH AR
AH SR
Spending
Variance
AH = Actual hours
AR = Actual variable
overhead rate
SR = Standard variable
overhead rate
Spending variance = AH(AR SR)

McGrawHill/Irwin
11-39

Actual
Variable
Overhead
Incurred
Flexible Budget
for Variable
Overhead at
Actual Hours
$6,740
3,300 hours
$2.00 per hour

= $6,600
Spending Variance
= $140 unfavorable
McGrawHill/Irwin

A Closer Look
11-40
Spending Variance
Results from paying more
or less than expected for
overhead items and from
excessive usage of
overhead items.
McGrawHill/Irwin
Now,
Now,lets
letsuse
usethe
the
standard
standardhours
hoursallowed,
allowed,
along
alongwith
withthe
theactual
actual
hours,
hours, to
tocompute
computethe
the
efficiency
efficiencyvariance.
variance.
11-41
Use a flexible budget

to prepare a variable
overhead performance
report containing both a
spending and an efficiency
variance.
McGrawHill/Irwin
11-42

Actual
Variable
Overhead
Flexible Budget
for Variable
Overhead at
Flexible Budget
for Variable
Overhead at
Incurred
AH AR
Actual Hours
AH SR
Standard Hours
SH SR
Spending
Variance
Efficiency
Variance
Spending variance = AH(AR - SR)

Efficiency variance = SR(AH - SH)
McGrawHill/Irwin
11-43

Actual
Variable
Overhead
Flexible Budget
for Variable
Overhead at
Flexible Budget
for Variable
Overhead at
Incurred
Actual
Hours
3,300
hours
$2.00 per hour
Standard
3,200Hours
hours
$2.00 per hour
$6,740
Spending variance
$140 unfavorable
$6,600
$6,400
Efficiency variance
$200 unfavorable
$340
$340unfavorable
unfavorableflexible
flexiblebudget
budgettotal
totalvariance
variance
McGrawHill/Irwin
11-44

A Closer Look
Efficiency Variance
Controlled by
managing the
overhead cost driver.
McGrawHill/Irwin
11-45
Quick Check
Yoder
Yoder Enterprises
Enterprises actual
actual production
production for
for the
the
period
period required
required 2,100
2,100 standard
standard direct
direct labor
labor
hours.
hours. Actual
Actual variable
variable overhead
overhead for
for the
the period
period
was
was $10,950.
$10,950. Actual
Actual direct
direct labor
labor hours
hours worked
worked
were
were 2,050.
2,050. The
The predetermined
predetermined variable
variable
overhead
overhead rate
rate is
is $5
$5 per
per direct
direct labor
labor hour.
hour. What
What
was
was the
the spending
spending variance?
variance?
a.
a. $450
$450 U
U
b.
b. $450
$450 FF
c.
c. $700
$700 FF
d.
d. $700
$700 U
U
McGrawHill/Irwin
11-46
Quick Check
Spending variance = AH (AR - SR)
Yoder
Yoder Enterprises
Enterprises actual
actual production
production for
for the
the
period
2,100
standard
direct
Actual variable
overhead
incurred
(AH SR)
period=required
required
2,100
standard
directlabor
labor
hours.
variable
overhead
for
the
period
hours.=Actual
Actual
variable
overhead
for
the
$10,950 (2,050 hours $5 per hour)period
was
was $10,950.
$10,950. Actual
Actual direct
direct labor
labor hours
hours worked
worked
= $10,950
$10,250
were
The
predetermined
were 2,050.
2,050.
The
variable
overhead
rate
overhead
rate
is $5
$5 per
per direct
direct labor
labor hour.
hour. What
What
= $700
U is
was
was the
the spending
spending variance?
variance?
a.
a. $450
$450 U
U
b.
b. $450
$450 FF
c.
c. $700
$700 FF
d.
d. $700
$700 U
U
McGrawHill/Irwin
11-47
Quick Check
Yoder
Yoder Enterprises
Enterprises actual
actual production
production for
for the
the
period
period required
required 2,100
2,100 standard
standard direct
direct labor
labor
hours.
hours. Actual
Actual variable
variable overhead
overhead for
for the
the period
period
was
was $10,950.
$10,950. Actual
Actual direct
direct labor
labor hours
hours worked
worked
were
were 2,050.
2,050. The
The predetermined
variable
overhead
overhead rate
rate is
is $5
$5 per
per direct
direct labor
labor hour.
hour. What
What
was
was the
the efficiency
efficiency variance?
variance?
a.
a. $450
$450 U
U
b.
b. $450
$450 FF
c.
c. $250
$250 FF
d.
d. $250
$250 U
U
McGrawHill/Irwin
11-48
Quick Check
Yoder
Yoder Enterprises
Enterprises actual
actual production
production for
for the
the
period
period required
required 2,100
2,100 standard
standard direct
direct labor
labor
hours.
hours. Actual
Actual variable
variable overhead
overhead for
for the
the period
period
Efficiency
variance
= SRdirect
(AH labor
SH) hours
was
$10,950.
Actual
was
$10,950.
Actual
direct
labor
hours worked
worked
were
variable
were 2,050.
2,050.
The
predetermined
variable
= $5 perThe
hourpredetermined
(2,050 hours 2,100
hours)
overhead
overhead rate
rate is
is $5
$5 per
per direct
direct labor
labor hour.
hour. What
What
= $250
F
was
the
efficiency
was the efficiency variance?
variance?
a.
a. $450
$450 U
U
b.
b. $450
$450 FF
c.
c. $250
$250 FF
d.
d. $250
$250 U
U
McGrawHill/Irwin
11-49
Quick Check Summary

Actual
Variable
Overhead
Flexible Budget
for Variable
Overhead at
Flexible Budget
for Variable
Overhead at
Incurred
Actual
Hours
2,050 hours
$5 per hour
Standard
Hours
2,100 hours
$5 per hour
$10,950
Spending variance
$700 unfavorable
$10,250
$10,500
Efficiency variance
$250 favorable
$450
$450unfavorable
unfavorableflexible
flexiblebudget
budgettotal
totalvariance
variance
McGrawHill/Irwin
Activity-based Costing
and the Flexible Budget
11-50
ItIt is
is unlikely
unlikely that
that all
all
variable
variable overhead
overhead will
will be
be
driven
driven by
by aa single
single activity.
activity.
Activity-based
Activity-based costing
costing
can
can be
be used
used when
when multiple
multiple
activity
activity bases
bases drive
drive
variable
variable overhead
overhead costs.
costs.
McGrawHill/Irwin
11-51
Compute the
predetermined overhead
rate and apply overhead
to products in a standard
cost system.
McGrawHill/Irwin
11-52
Overhead Rates and Overhead Analysis
Recall that overhead costs are assigned to

products and services using a predetermined
overhead rate (POHR):
Assigned Overhead = POHR Standard Activity
POHR
McGrawHill/Irwin
Overhead from the

flexible budget for the
denominator level of activity
Denominator level of activity
11-53
Overhead Rates and Overhead Analysis
The predetermined overhead rate

can be broken down into fixed
and variable components.
The variable
component is useful
for preparing and analyzing
variable overhead
variances.
McGrawHill/Irwin
The fixed
component is useful
for preparing and analyzing
fixed overhead
variances.
11-54
Normal versus Standard Cost Systems

In a normal cost
system, overhead is
applied to work in
process based on
the actual number
of hours worked
in the period.
McGrawHill/Irwin
In a standard cost
system, overhead is
applied to work in
process based on
the standard hours
allowed for the actual
output of the period.
11-55
Compute and interpret

the fixed overhead budget
and volume variances.
McGrawHill/Irwin
11-56
Fixed Overhead Variances

Actual Fixed
Overhead
Fixed
Overhead
Fixed
Overhead
Incurred
Budget
DH
FR
Applied
SH
FR
Budget
Variance
Volume
Variance
FR = Standard Fixed Overhead Rate

SH = Standard Hours Allowed
DH = Denominator Hours
McGrawHill/Irwin
Overhead Rates and Overhead

Analysis Example
11-57
ColaCo prepared this

Machine
Hours
3,000
4,000
Total
Variable
Overhead
$
budget for overhead:

Variable
Overhead
Rate
6,000
8,000
Total
Fixed
Overhead
$
Fixed
Overhead
Rate
9,000
9,000
Lets calculate overhead rates.

ColaCo
ColaCoapplies
appliesoverhead
overheadbased
based
on
onmachine-hour
machine-hour activity.
activity.
McGrawHill/Irwin

Analysis Example
11-58

Machine
Hours
3,000
4,000
Total
Variable
Overhead
Variable
Overhead
Rate
Total
Fixed
Overhead
6,000
8,000
2.00
2.00
Fixed
Overhead
Rate
9,000
9,000
Rate = Total Variable Overhead Machine Hours

This rate is constant at all levels of activity.
McGrawHill/Irwin

Analysis Example
11-59

Machine
Hours
3,000
4,000
Total
Variable
Overhead
Variable
Overhead
Rate
Total
Fixed
Overhead
Fixed
Overhead
Rate
6,000
8,000
2.00
2.00
9,000
9,000
3.00
2.25
Rate = Total Fixed Overhead Machine Hours

This rate decreases when activity increases.
McGrawHill/Irwin

Analysis Example
11-60

Machine
Hours
3,000
4,000
Total
Variable
Overhead
Variable
Overhead
Rate
Total
Fixed
Overhead
Fixed
Overhead
Rate
6,000
8,000
2.00
2.00
9,000
9,000
3.00
2.25
The total POHR is the sum of

the fixed and variable rates
for a given activity level.
McGrawHill/Irwin
11-61
Fixed Overhead Variances Example
ColaCos 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.
McGrawHill/Irwin
11-62
Overhead Variances
Now lets turn

our attention
to calculating
fixed overhead
variances.
McGrawHill/Irwin
11-63
Actual Fixed
Overhead
Fixed
Overhead
Fixed
Overhead
Incurred
Budget
Applied
$8,450
$9,000
Budget variance
$550 favorable
McGrawHill/Irwin

A Closer Look
11-64
Budget Variance
Results from spending
more or less than
expected for fixed
overhead items.
McGrawHill/Irwin
Now,
Now,lets
letsuse
usethe
the
standard
standard hours
hoursallowed
allowed
to
tocompute
compute the
thefixed
fixed
overhead
overhead volume
volume
variance.
variance.
11-65
Actual Fixed
Overhead
Fixed
Overhead
Fixed
Overhead
Incurred
Budget
Applied
SH
FR
3,200 hours
$3.00 per hour
$8,450
$9,000
$9,600
Budget variance
$550 favorable
McGrawHill/Irwin
Volume variance
$600 favorable
11-66
Volume Variance A Closer Look
Volume
Variance
Results when standard hours
allowed for actual output differs
from the denominator activity.
Unfavorable
when standard hours
< denominator hours
McGrawHill/Irwin
Favorable
when standard hours
> denominator hours
11-67
Volume Variance A Closer Look
Volume
Variance
Does not
measure overor under spending
Results when standard hours
Itallowed
resultsforfrom
fixed
actualtreating
output differs
from
the denominator
activity.
overhead
as if it were
a
variable cost.
Unfavorable
when standard hours
< denominator hours
McGrawHill/Irwin
Favorable
when standard hours
> denominator hours
11-68
Quick Check
Yoder
Yoder Enterprises
Enterprises actual
actual production
production for
for the
the
period
period required
required 2,100
2,100 standard
standard direct
direct labor
labor
hours.
hours. Actual
Actual fixed
fixed overhead
overhead for
for the
the period
period
was
was $14,800.
$14,800. The
The budgeted
budgeted fixed
fixed overhead
overhead
was
was $14,450.
$14,450. The
The predetermined
predetermined fixed
fixed
overhead
overhead rate
rate was
was $7
$7 per
per direct
direct labor
labor hour.
hour.
What
What was
was the
the budget
budget variance?
variance?
a.
a. $350
$350 U
U
b.
b. $350
$350 FF
c.
c. $100
$100 FF
d.
d. $100
$100 U
U
McGrawHill/Irwin
11-69
Quick Check
Budget variance
Yoder
Yoder Enterprises
Enterprises actual
actual production
production for
for the
the
= Actual
fixed overhead
Budgeteddirect
fixed overhead
period
required
2,100
labor
period
required
2,100 standard
standard
direct
labor
hours.
Actual
fixed
hours.
Actual
fixed overhead
overhead for
for the
the period
period
= $14,800
$14,450
was
The
budgeted
fixed
overhead
was= $14,800.
$14,800.
The
budgeted
fixed
overhead
$350 U
was
$14,450.
was $14,450. The
The predetermined
predetermined fixed
fixed
overhead
overhead rate
rate was
was $7
$7 per
per direct
direct labor
labor hour.
hour.
What
What was
was the
the budget
budget variance?
variance?
a.
a. $350
$350 U
U
b.
b. $350
$350 FF
c.
c. $100
$100 FF
d.
d. $100
$100 U
U
McGrawHill/Irwin
11-70
Quick Check
Yoder
Yoder Enterprises
Enterprises actual
actual production
production for
for the
the
period
period required
required 2,100
2,100 standard
standard direct
direct labor
labor
hours.
hours. Actual
Actual fixed
fixed overhead
overhead for
for the
the period
period
was
was $14,800.
$14,800. The
The budgeted
budgeted fixed
fixed overhead
overhead
was
was $14,450.
$14,450. The
The predetermined
predetermined fixed
fixed
overhead
overhead rate
rate was
was $7
$7 per
per direct
direct labor
labor hour.
hour.
What
What was
was the
the volume
volume variance?
variance?
a.
a. $250
$250 U
U
b.
b. $250
$250 FF
c.
c. $100
$100 FF
d.
d. $100
$100 U
U
McGrawHill/Irwin
11-71
Quick Check
Volume variance
Yoder
actual
production
for
the
Yoder Enterprises
Enterprises
actual
production
for
= Budgeted fixed overhead (SH FR) the
period
period required
required 2,100
2,100 standard
standard direct
direct labor
labor
= $14,450 (2,100 hours $7 per hour)
hours.
hours. Actual
Actual fixed
fixed overhead
overhead for
for the
the period
period
= $14,450The
$14,700
was
budgeted
was $14,800.
$14,800.
The
budgeted fixed
fixed overhead
overhead
= $250 F The
was
was $14,450.
$14,450.
The predetermined
predetermined fixed
fixed
overhead
overhead rate
rate was
was $7
$7 per
per direct
direct labor
labor hour.
hour.
What
What was
was the
the volume
volume variance?
variance?
a.
a. $250
$250 U
U
b.
b. $250
$250 FF
c.
c. $100
$100 FF
d.
d. $100
$100 U
U
McGrawHill/Irwin
11-72
Quick Check Summary

Actual Fixed
Overhead
Fixed
Overhead
Fixed
Overhead
Incurred
Budget
Applied
SH
FR
2,100 hours
$7.00 per hour
$14,800
$14,450
Budget variance
$350 unfavorable
McGrawHill/Irwin
$14,700
Volume variance
$250 favorable
11-73

A Graphic Approach
Lets look at a
graph showing
fixed overhead
variances. We will
use ColaCos
numbers from the
previous example.
McGrawHill/Irwin
11-74

A Graphic Approach
Cost
$9,000 budgeted fixed OH
d
a
e
h
ts
r
c
e
u
v
d
o
o
r
d
p
e
Fix d to
e
i
l
p
ap
McGrawHill/Irwin
3,000 Hours
Expected
Activity
Activity

A Graphic Approach
11-75
Cost
$550
Favorable
Budget
Variance
McGrawHill/Irwin

$8,450 actual fixed OH
d
a
e
h
ts
r
c
e
u
v
d
o
o
r
d
p
e
Fix d to
e
i
l
p
ap
3,000 Hours
Expected
Activity
Activity

A Graphic Approach
11-76
Cost
$600
Favorable
Volume
Variance
{
$550 {
Favorable
Budget
Variance
McGrawHill/Irwin
3,200 machine hours $3.00 fixed overhead rate
$9,600 applied fixed OH

$8,450 actual fixed OH
d
a
e
h
ts
r
c
e
u
v
d
o
o
r
d
p
e
Fix d to
e
i
l
p
ap
3,000 Hours
Expected
Activity
Activity
3,200
Standard
Hours
11-77
Overhead Variances and Under- or

Overapplied Overhead Cost
In a standard
cost system:
Unfavorable
variances are equivalent
to underapplied overhead.
Favorable
variances are equivalent
to overapplied overhead.
The sum of the overhead variances

equals the under- or overapplied
overhead cost for a period.
McGrawHill/Irwin
11-78
McGrawHill/Irwin
End of Chapter 11

Chapter 11 - Flexible Budgets and Overhead Analysis

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Chapter 11 - Flexible Budgets and Overhead Analysis

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Flexible Budgets and

Static Budgets and Performance Reports

Lets look at CheeseCo.

Static Budgets and Performance Reports

Static Budgets and Performance Reports

Static Budgets and Performance Reports

Static Budgets and Performance Reports

Static Budgets and Performance Reports

Static Budgets and Performance Reports

Actual activity is below

Static Budgets and Performance Reports

Preparing a Flexible Budget

a budget we need to know that:

Total variable costs change

Preparing a Flexible Budget

Preparing a Flexible Budget

Variable costs are expressed as

Fixed costs are

Preparing a Flexible Budget

per hour 8,000 hours = $32,000

Preparing a Flexible Budget

Preparing a Flexible Budget

the relevant range.

Preparing a Flexible Budget

Flexible Budget Performance Report

Flexible Budget Performance Report

Flexible budget Cost

Flexible Budget Performance Report

Flexible Budget Performance Report

Flexible Budget Performance Report

Static Budgets and Performance

How much of the $11,650 favorable variance is due to

Flexible Budget Performance Report

Overhead Variance Analysis

Difference between original static budget

Flexible Budget Performance Report

Overhead Variance Analysis

The Measure of Activity A Critical Choice

Variable Overhead Variances

Variable Overhead Variances Example

ColaCos actual production for the period required

Use a flexible budget

Variable Overhead Variances

Spending variance = AH(AR SR)

Variable Overhead Variances Example

$2.00 per hour

Variable Overhead Variances

Use a flexible budget

Variable Overhead Variances

Spending variance = AH(AR - SR)

Variable Overhead Variances Example

$2.00 per hour

$2.00 per hour

Variable Overhead Variances

Quick Check Summary

Overhead Rates and Overhead Analysis

Recall that overhead costs are assigned to

Overhead from the

Overhead Rates and Overhead Analysis

The predetermined overhead rate

Normal versus Standard Cost Systems

Compute and interpret

Fixed Overhead Variances