Accounting for leaders
Jdr
Hilton_11e_Chap011PPT.ppt
Flexible Budgeting and Analysis of Overhead Costs
Chapter 11
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Chapter 11: Flexible Budgeting and Analysis of Overhead Costs
Learning Objective 11-1 – Distinguish between static and flexible budgets and explain the advantages of a flexible overhead budget.
10-*
Helen (H) - Slide 2 NN For format consistency, changed the colon after the number '11-1' to a period.
Learning Objective 11-1. Distinguish between static and flexible budgets and explain the advantages of a flexible overhead budget.
Flexible 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! Comparing
static budgets
with actual costs
is like comparing
apples and oranges.
11-*
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.
Since direct material and direct labor are traceable to products, it is straightforward to determine standard costs for these inputs.
But to compare overhead costs at the budgeted level of activity to actual overhead costs at some other level of activity, is like comparing apples and oranges. (LO 11-1)
Static Budgets and
Performance Reports
11-*
U = Unfavorable variance
Cheese Company was
unable to achieve the
budgeted level of activity.
Cheese Company was unable to produce at the budgeted level of activity.
There were only 8,000 machine hours actually used as opposed to the 10,000 hours budgeted.
Therefore, there was a 2,000 hour unfavorable variance. (LO 11-1)
Static Budgets and
Performance Reports
Since cost variances are favorable, have
we done a good job controlling costs?
11-*
F = Favorable variance since actual costs
are less than budgeted costs.
Because there was less production, the variable overhead costs were less.
This caused a favorable variance.
But does a favorable cost variance indicate that Cheese Company has done a good job controlling costs? (LO 11-1)
I don’t think I can
answer this question
using a static budget.
Static Budgets and
Performance Reports
11-*
I do know that
actual activity is below
budgeted activity which
is unfavorable.
But shouldn’t variable costs
be lower if actual activity
is below budgeted activity?
Cheese Company cannot determine how well overhead costs have been controlled using a static budget.
When actual activity is different from the budgeted activity, variable costs should also be different.
This is because variable costs vary with the level of activity.
If static budgets do not provide the answer to controlling overhead, what does? (LO11-1)
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.
11-*
A company must be able to determine how much of the variance is caused by the activity level and how much of the variance is a result of good cost control.
The tool used by most companies to control overhead costs is called a flexible budget.
A flexible budget flexes a static budget to cover a range of activity within which the firm may operate. (LO 11-1)
58.unknown
Advantages of Flexible Budgets
Improve performance evaluation.
May be prepared for any activity
level in the relevant range.
Shows revenues and expenses
that should have occurred at the
actual level of activity.
Reveal variances due to good cost
control or lack of cost control.
11-*
There are several advantages of flexible budgets.
Revenues and expenses are what they should have been at the actual level of activity.
Flexible budgets can be prepared for any level of activity within the relevant range.
These budgets make it possible to distinguish if variances are caused by good cost control or lack of cost control.
The variances can be analyzed to help improve performance evaluation. (LO 11-1)
Learning Objective 11-2 – Prepare a flexible overhead budget, using both a formula and a columnar format.
10-*
Helen (H) - Slide 9 NN Changed the font to 12-point. For format consistency, changed the hyphen to a period.
Learning Objective 11-2. Prepare a flexible overhead budget, using both a formula and a columnar format.
Preparing a Flexible Budget
11-*
The Cheese Company uses machine hours as the activity units.
The flexible budget is prepared at three levels of activity: 8,000 hours, 10,000 hours, and 12,000 hours, which are all within the relevant range. (LO 11-2)
Preparing 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-*
The static budget amounts for each of the variable costs of overhead are expressed as a constant amount per machine hours.
For example, the static budget for indirect labor was $40,000 at 10,000 machine hours, which is $4.00 per machine hour.
The static budget for indirect materials was $30,000 which is $3.00 per machine hour.
And for power, the static budget cost was $5,000 which is $0.50 per machine hour.
Fixed costs are expressed as a total amount.
This is due to the nature of fixed costs.
Total fixed costs do not change within the relevant range of activity. (LO 11-2)
Preparing a Flexible Budget
11-*
The flexible budget at the 8,000 machine hour level of activity can be completed.
Each of the variable costs per hour is multiplied by 8,000.
Total variable costs at the 8,000 machine hour level is $60,000.
Total fixed costs is $14,000.
The total overhead costs is the sum of the total variable costs and the total fixed costs, which is $74,000. (LO 11-2)
Preparing a Flexible Budget
11-*
The flexible budget at the remaining two levels of activity is completed in the same manner. (LO 11-2)
Preparing a Flexible Budget
Note: There is no flex
in the fixed costs.
11-*
Notice that there is no “flex” in the fixed costs. They remain the same at all three levels of activity. (LO 11-2)
Preparing a Flexible Budget
11-*
Budgeted variable Total
overhead cost per activity
activity unit units
×
+
Budgeted fixed
overhead cost
Total budgeted
overhead cost
=
The total overhead cost can be expressed as the formula total budgeted overhead costs equals budgeted variable overhead cost per activity unit times the total activity units.
Then add budgeted fixed overhead costs. (LO 11-2)
Flexible Budget
Performance Report
11-*
The variable cost per hour and the total fixed costs are in the two left-most columns of the flexible budget performance report.
The fourth column is for the actual results during the period. (LO 11-2)
Flexible Budget
Performance Report
11-*
A Flexible budget is prepared for the
same activity level (8,000 hours) as
actually achieved.
Now the third column, the flexible budget column, is prepared for the same level of activity at the actual level, which is 8,000 hours. (LO 11-2)
Flexible Budget
Performance Report
11-*
We are no longer comparing apples and oranges.
The flexible budget column can be completed at the 8,000 hour level. (LO 11-2)
Flexible Budget
Performance Report
11-*
Indirect labor and indirect material have unfavorable variances because actual costs are more than the flexible budget costs.
Indirect material costs should have been $32,000, but were actually $34,000.
This is an unfavorable variance of $2,000.
Indirect labor should have been $24,000, but were actually $25,500, which is an unfavorable variance of $1,500. (LO 11-2)
Flexible Budget
Performance Report
11-*
Power has a favorable variance because the actual cost is less than the flexible budget cost.
Power costs should have been $4,000 but were actually $3,800 which is a favorable variance of $200. (LO 11-2)
Learning Objective 11-3 – Explain how overhead is applied to Work-In-Process Inventory under standard costing.
10-*
Helen (H) - Slide 21 NN Changed the font to 12-point. Changed the hyphen to a period.
Learning Objective 11-3. Explain how overhead is applied to Work-In-Process Inventory under standard costing.
Overhead Application in a
Standard Costing System
11-*
Recall that overhead application refers to the addition of overhead cost to the Work-in-Process Inventory account as a product cost.
In the normal-costing system, overhead application is based on actual hours.
In a standard-costing system, overhead application is based on standard hours allowed, given actual output.
The difference between normal costing and standard costing, insofar as overhead is concerned, lies in the quantity of hours used.
Both normal- and standard-costing systems use a predetermined overhead rate.
In a standard-costing system, the predetermined overhead rate also is referred to as the standard overhead rate. (LO 11-3)
Ch. 10
| Raw-Material Inventory | xxx | |||||||||||
| Direct-Material Price Variance | xxx | Raw-material Inventory | Work-in-Process Inventory | Work-in-Process Inventory | ||||||||
| Accounts Payable | xxx | Actual quantity at | Standard quantity | Standard quantity | ||||||||
| To record the purchase of raw material and the incurrence of an | standard cost | at standard price | at standard price | |||||||||
| unfavorable price variance. | ||||||||||||
| Work-in-Process Inventory | xxx | |||||||||||
| Direct-Material Quantity Variance | xxx | |||||||||||
| Raw-Material Inventory | xxx | Direct-Material Price Variance | Direct-Material Quantity Variance | Direct-Labor Rate Variance | ||||||||
| To record the use of direct material in production and the incurrence | Unfavorable | Favorable | Unfavorable | Favorable | Unfavorable | Favorable | ||||||
| of an unfavorable quantity variance | variance | variance | variance | variance | variance | variance | ||||||
| Work-in-Process Inventory | xxx | |||||||||||
| Direct-Labor Rate Variance | xxx | |||||||||||
| Direct-Labor Efficiency Variance | xxx | |||||||||||
| Wages Payable | xxx | Account Payable | Raw-material Inventory | Wages Payable | ||||||||
| To record the usage of direct labor, the incurrance of an unfavorable | Actual quantity at | Actual quantity at | Actual quantity at | |||||||||
| direct-labor rate variance and the incurrence of a favorable direct-labor | actual cost | standard cost | actual cost | |||||||||
| efficiency variance | ||||||||||||
| Cost of Goods Sold | xxx | |||||||||||
| Direct-Labor Efficiency Variance | xxx | |||||||||||
| Direct-Labor Rate Variance | xxx | Cost of Goods Sold | Direct-Labor Efficiency Variance | |||||||||
| Direct-Material Price Variance | xxx | Unfavorable | Favorable | Unfavorable | Favorable | |||||||
| Direct-Material Quantity Variance | xxx | variance | variance | variance | variance | |||||||
| Disposition of Variances |
Sheet2
| Normal Costing | ||||||||||||
| Manufacturing Overhead | Work-in-Process Inventory | |||||||||||
| Actual | Applied | Applied | ||||||||||
| overhead | overhead: | overhead: | ||||||||||
| Actual hours | Actual hours | |||||||||||
| x | x | |||||||||||
| Predetermined | Predetermined | |||||||||||
| overhead rate | overhead rate | |||||||||||
| Difference lies in the quantity of hours used. | Standard Costing | |||||||||||
| Manufacturing Overhead | Work-in-Process Inventory | |||||||||||
| Actual | Applied | Applied | ||||||||||
| overhead | overhead: | overhead: | ||||||||||
| Standard | Standard | |||||||||||
| allowed hours | allowed hours | |||||||||||
| x | x | |||||||||||
| Predetermined | Predetermined | |||||||||||
| overhead rate | overhead rate |
Sheet3
Overhead Application in a
Standard Costing System
11-*
Both normal- and standard-costing systems use a predetermined overhead rate.
In a standard-costing system, the predetermined overhead rate also is referred to as the standard overhead rate.
The Cheese Company calculates its predetermined or standard overhead rate annually.
The rate for the current year is based on planned activity of 8,000 machine hours per month.
Notice that the predetermined overhead rate is broken into a variable rate and a fixed rate. (LO 11-3)
Ch. 10
| Raw-Material Inventory | xxx | |||||||||||
| Direct-Material Price Variance | xxx | Raw-material Inventory | Work-in-Process Inventory | Work-in-Process Inventory | ||||||||
| Accounts Payable | xxx | Actual quantity at | Standard quantity | Standard quantity | ||||||||
| To record the purchase of raw material and the incurrence of an | standard cost | at standard price | at standard price | |||||||||
| unfavorable price variance. | ||||||||||||
| Work-in-Process Inventory | xxx | |||||||||||
| Direct-Material Quantity Variance | xxx | |||||||||||
| Raw-Material Inventory | xxx | Direct-Material Price Variance | Direct-Material Quantity Variance | Direct-Labor Rate Variance | ||||||||
| To record the use of direct material in production and the incurrence | Unfavorable | Favorable | Unfavorable | Favorable | Unfavorable | Favorable | ||||||
| of an unfavorable quantity variance | variance | variance | variance | variance | variance | variance | ||||||
| Work-in-Process Inventory | xxx | |||||||||||
| Direct-Labor Rate Variance | xxx | |||||||||||
| Direct-Labor Efficiency Variance | xxx | |||||||||||
| Wages Payable | xxx | Account Payable | Raw-material Inventory | Wages Payable | ||||||||
| To record the usage of direct labor, the incurrance of an unfavorable | Actual quantity at | Actual quantity at | Actual quantity at | |||||||||
| direct-labor rate variance and the incurrence of a favorable direct-labor | actual cost | standard cost | actual cost | |||||||||
| efficiency variance | ||||||||||||
| Cost of Goods Sold | xxx | |||||||||||
| Direct-Labor Efficiency Variance | xxx | |||||||||||
| Direct-Labor Rate Variance | xxx | Cost of Goods Sold | Direct-Labor Efficiency Variance | |||||||||
| Direct-Material Price Variance | xxx | Unfavorable | Favorable | Unfavorable | Favorable | |||||||
| Direct-Material Quantity Variance | xxx | variance | variance | variance | variance | |||||||
| Disposition of Variances |
Sheet2
| Normal Costing | ||||||||||||
| Manufacturing Overhead | Work-in-Process Inventory | |||||||||||
| Actual | Applied | Applied | ||||||||||
| overhead | overhead: | overhead: | ||||||||||
| Actual hours | Actual hours | |||||||||||
| x | x | |||||||||||
| Predetermined | Predetermined | |||||||||||
| overhead rate | overhead rate | |||||||||||
| Difference lies in the quantity of hours used. | Standard Costing | |||||||||||
| Manufacturing Overhead | Work-in-Process Inventory | |||||||||||
| Actual | Applied | Applied | ||||||||||
| overhead | overhead: | overhead: | ||||||||||
| Standard | Standard | |||||||||||
| allowed hours | allowed hours | |||||||||||
| x | x | |||||||||||
| Predetermined | Predetermined | |||||||||||
| overhead rate | overhead rate |
Sheet3
| Budgeted | Planned | Predetermined | ||||||
| Overhead | Monthly Activity | Overhead Rate | ||||||
| Variable . . . . . . . | $ 60,000 | * . . . . . . . . . | 8,000 | machine hours | . . . . . . . . . | $ 7.50 | per process hour | |
| Fixed . . . . . . . . . | 14,000 | * . . . . . . . . . | 8,000 | machine hours | . . . . . . . . . | 1.75 | per process hour | |
| Total . . . . . . . . . | $ 74,000 | . . . . . . . . . | 8,000 | machine hours | . . . . . . . . . | $ 9.25 | per process hour | |
| * From the flexible budget for planned activity of 8,000 machine hours |
Learning Objective 11-4 – Explain the important issues in choosing an activity measure for overhead budgeting and application.
10-*
Helen (H) - Slide 24 Changed the word 'budget' to read 'budgeting.'
Helen (H) - Slide 24 NN Changed the font to 12-point. Changed the hyphen to a period. Changed the word 'budget' to read 'budgeting.'
Learning Objective 11-4. Explain the important issues in choosing an activity measure for overhead budgeting and application.
Choice of Activity Measure
11-*
- 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.
Choosing the appropriate activity measure for the flexible overhead budget is important, because the flexible budget is the chief tool for managing overhead costs.
The activity measure should be one that varies in a similar pattern to the way that variable overhead varies.
As productive activity shifts, both variable-overhead cost and the activity measure should shift in roughly the same proportion and in the same direction.
Cost drivers are identified as the most significant factors affecting overhead costs.
Variable overhead cost drivers, such as machine hours, labor hours, or process time, should be identified.
Dollar measures, such as raw material costs, should be avoided because they are subject to price-level changes. (LO 11-4)
Learning Objective 11-5 – Compute and interpret the variable-overhead spending and efficiency variances and the fixed-overhead budget and volume variances.
10-*
Helen (H) - Slide 26 NN Changed the font to 12-point. Changed the hyphen to a period.
Learning Objective 11-5. Compute and interpret the variable-overhead spending and efficiency variances and the fixed-overhead budget and volume variances.
Spending Variance
Efficiency
Variance
AQ × SVR
AQ × AVR
AQ = Actual Quantity of Activity
AVR = Actual Variable Overhead Rate
SVR = Standard Variable Overhead Rate
SQ = Standard Allowed
SQ × SVR
Actual Flexible Budget Flexible Budget
Variable for Variable for Variable
Overhead Overhead at Overhead at
Incurred Actual Hours Standard Hours
Variable Overhead Variances
11-*
The spending variance for variable overhead is calculated using two components: actual hours times actual rate and actual hours times the standard variable rate.
The spending variance is the difference between these two components.
The efficiency variance for variable overhead is calculated using two components: actual hours times the standard variable rate and standard hours times the standard variable rate.
The efficiency variance is the difference between these two components. (LO 11-5)
Spending Variance
Efficiency
Variance
AQ × SVR
AQ × AVR
SQ × SVR
Actual Flexible Budget Flexible Budget
Variable for Variable for Variable
Overhead Overhead at Overhead at
Incurred Actual Hours Standard Hours
Variable Overhead Variances
Spending variance = AQ(AVR - SVR)
Efficiency variance = SVR(AQ - SQ)
11-*
The spending variance can be restated as the actual rate less the standard variable rate.
This difference is then multiplied times the actual hours.
The efficiency variance for variable overhead can be restated as the actual hours less the standard hours.
The difference is then multiplied times the standard variable rate. (LO 11-5)
Variable Overhead Variances –
A Closer Look
Spending Variance
Efficiency Variance
Results from paying more
or less than expected for
overhead items and from
excessive usage of
overhead items.
A function of the
selected cost driver.
It does not reflect
overhead control.
11-*
An unfavorable spending variance simply means that the total actual cost of variable overhead is greater than expected, after adjusting for the actual quantity of process hours used.
An unfavorable spending variance could result from paying a higher-than-expected price per unit for variable-overhead items.
Or the variance could result from using more of the variable-overhead items than expected.
The variable overhead efficiency variance is a function of the cost driver selected.
It does not reflect overhead control.
Therefore, the spending variance is the real control variance for variable overhead.
Managers can use the spending variance to alert them if variable-overhead costs are out of line with expectations. (LO 11-5)
Budget Variance
Volume
Variance
AFOHR = Predetermined Fixed Overhead Rate
SH = Standard Allowed Activity
SH × AFOHR
Actual Fixed Fixed Fixed
Overhead Overhead Overhead
Incurred Budget Applied
Fixed Overhead Variances
11-*
To analyze fixed overhead costs, managerial accountants calculate two fixed-overhead variances: The fixed overhead budget variance and the fixed overhead volume variance.
The budget variance is the difference between the actual fixed overhead costs incurred and the budgeted fixed overhead.
The volume variance is the difference between the budgeted fixed overhead and the applied fixed overhead.
Applied fixed overhead is the standard hours allowed for the actual level of activity times the predetermined fixed overhead rate. (LO 11-5)
PFOHR =
Applied Fixed Overhead = PFOHR × Standard Allowed
Fixed Overhead
Recall that fixed overhead costs are applied to products and services using a predetermined fixed overhead rate (PFOHR):
11-*
Budgeted Fixed Overhead
Planned Activity in Hours
Remember that fixed overhead costs are applied to products and services using a predetermined overhead rate times the standard hours allowed.
That predetermined overhead rate is established by dividing the budgeted fixed overhead by the planned activity in hours. (LO 11-5)
Fixed Overhead Variances –
A Closer Look
Budget Variance
Volume Variance
Results from paying more
or less than expected for
overhead items.
Results from the inability
to operate at the activity
level planned for the period.
Has no significance for
cost control.
11-*
The budget variance is the real control variance for fixed overhead, because it compares actual expenditures with budgeted fixed-overhead costs.
The volume variance provides a way of reconciling two different purposes of the cost management system.
For the control purpose, the system recognizes that fixed overhead does not change as production activity varies.
Hence, budgeted fixed overhead is the same at all activity levels in the flexible budget.
(Review Exhibit 11–3 to verify this.)
Budgeted fixed overhead is the basis for controlling fixed overhead, because it provides the benchmark against which actual expenditures are compared. (LO 11-5)
Volume
Cost
Fixed overhead
applied to products
Fixed Overhead Variances
{
$600
Volume Variance
$8,450 actual fixed OH
3,200 Standard
Hours
3,000 Hours Planned
Activity
11-*
$9,600 applied fixed OH
$9,000 budgeted fixed OH
3,200 machine hours × $3.00 fixed overhead rate
{
$550
Favorable
Budget Variance
The applied fixed overhead for the period was $9,600 because there were 3,200 machine hours allowed and the predetermined fixed overhead rate was $3.00 per machine hour.
Budgeted fixed overhead is $9,000 for all levels of activity. The difference between these two resulted in a $600 volume variance.
The actual fixed overhead costs were $8,450, which, when compared to the $9,000 budgeted fixed overhead, resulted in a $550 favorable budget variance. (LO 11-5)
Learning Objective 11-6 – Prepare an overhead cost performance report.
10-*
Helen (H) - Slide 34 NN Changed the font to 12-point. Changed the hyphen to a period.
Learning Objective 11-6. Prepare an overhead cost performance report.
Overhead Cost Performance Report
11-*
The variable-overhead spending and efficiency variances and the fixed-overhead budget variance can be computed for each overhead cost item in the flexible budget.
When these itemized variances are presented along with actual and budgeted costs for each overhead item, the result is an overhead cost performance report.
The overhead cost performance report will include only spending and efficiency variances for the variable items, and only a budget variance for the fixed items. (LO 11-6)
Ch. 10
| Raw-Material Inventory | xxx | |||||||||||
| Direct-Material Price Variance | xxx | Raw-material Inventory | Work-in-Process Inventory | Work-in-Process Inventory | ||||||||
| Accounts Payable | xxx | Actual quantity at | Standard quantity | Standard quantity | ||||||||
| To record the purchase of raw material and the incurrence of an | standard cost | at standard price | at standard price | |||||||||
| unfavorable price variance. | ||||||||||||
| Work-in-Process Inventory | xxx | |||||||||||
| Direct-Material Quantity Variance | xxx | |||||||||||
| Raw-Material Inventory | xxx | Direct-Material Price Variance | Direct-Material Quantity Variance | Direct-Labor Rate Variance | ||||||||
| To record the use of direct material in production and the incurrence | Unfavorable | Favorable | Unfavorable | Favorable | Unfavorable | Favorable | ||||||
| of an unfavorable quantity variance | variance | variance | variance | variance | variance | variance | ||||||
| Work-in-Process Inventory | xxx | |||||||||||
| Direct-Labor Rate Variance | xxx | |||||||||||
| Direct-Labor Efficiency Variance | xxx | |||||||||||
| Wages Payable | xxx | Account Payable | Raw-material Inventory | Wages Payable | ||||||||
| To record the usage of direct labor, the incurrance of an unfavorable | Actual quantity at | Actual quantity at | Actual quantity at | |||||||||
| direct-labor rate variance and the incurrence of a favorable direct-labor | actual cost | standard cost | actual cost | |||||||||
| efficiency variance | ||||||||||||
| Cost of Goods Sold | xxx | |||||||||||
| Direct-Labor Efficiency Variance | xxx | |||||||||||
| Direct-Labor Rate Variance | xxx | Cost of Goods Sold | Direct-Labor Efficiency Variance | |||||||||
| Direct-Material Price Variance | xxx | Unfavorable | Favorable | Unfavorable | Favorable | |||||||
| Direct-Material Quantity Variance | xxx | variance | variance | variance | variance | |||||||
| Disposition of Variances |
Sheet2
| Normal Costing | ||||||||||||
| Manufacturing Overhead | Work-in-Process Inventory | |||||||||||
| Actual | Applied | Applied | ||||||||||
| overhead | overhead: | overhead: | ||||||||||
| Actual hours | Actual hours | |||||||||||
| x | x | |||||||||||
| Predetermined | Predetermined | |||||||||||
| overhead rate | overhead rate | |||||||||||
| Difference lies in the quantity of hours used. | Standard Costing | |||||||||||
| Manufacturing Overhead | Work-in-Process Inventory | |||||||||||
| Actual | Applied | Applied | ||||||||||
| overhead | overhead: | overhead: | ||||||||||
| Standard | Standard | |||||||||||
| allowed hours | allowed hours | |||||||||||
| x | x | |||||||||||
| Predetermined | Predetermined | |||||||||||
| overhead rate | overhead rate |
Sheet3
| Budgeted | Planned | Predetermined | ||||||
| Overhead | Monthly Activity | Overhead Rate | ||||||
| Variable . . . . . . . | $ 60,000 | * . . . . . . . . . | 8,000 | machine hours | . . . . . . . . . | $ 7.50 | per process hour | |
| Fixed . . . . . . . . . | 14,000 | * . . . . . . . . . | 8,000 | machine hours | . . . . . . . . . | 1.75 | per process hour | |
| Total . . . . . . . . . | $ 74,000 | . . . . . . . . . | 8,000 | machine hours | . . . . . . . . . | $ 9.25 | per process hour | |
| * From the flexible budget for planned activity of 8,000 machine hours |
Sheet1
| Variable costs: | |||||||||||||
| Indirect material: | |||||||||||||
| Wax | |||||||||||||
| Plastic wrap | |||||||||||||
| Paper products | |||||||||||||
| Misc. supplies | |||||||||||||
| Indirect labor: | |||||||||||||
| Maintenance | |||||||||||||
| Janitorial | |||||||||||||
| Utilities: | |||||||||||||
| Electricity | |||||||||||||
| Natural gas | |||||||||||||
| Water | |||||||||||||
| Total variable cost | |||||||||||||
| Fixed costs: | |||||||||||||
| Indirect labor: | |||||||||||||
| Inspection | |||||||||||||
| Production supervisor | |||||||||||||
| Set up | |||||||||||||
| Depreciation: | |||||||||||||
| Equipment | |||||||||||||
| Insurance | |||||||||||||
| Property taxes | |||||||||||||
| Total fixed cost | |||||||||||||
| Total overhead cost |
Ch. 10
| Raw-Material Inventory | xxx | |||||||||||
| Direct-Material Price Variance | xxx | Raw-material Inventory | Work-in-Process Inventory | Work-in-Process Inventory | ||||||||
| Accounts Payable | xxx | Actual quantity at | Standard quantity | Standard quantity | ||||||||
| To record the purchase of raw material and the incurrence of an | standard cost | at standard price | at standard price | |||||||||
| unfavorable price variance. | ||||||||||||
| Work-in-Process Inventory | xxx | |||||||||||
| Direct-Material Quantity Variance | xxx | |||||||||||
| Raw-Material Inventory | xxx | Direct-Material Price Variance | Direct-Material Quantity Variance | Direct-Labor Rate Variance | ||||||||
| To record the use of direct material in production and the incurrence | Unfavorable | Favorable | Unfavorable | Favorable | Unfavorable | Favorable | ||||||
| of an unfavorable quantity variance | variance | variance | variance | variance | variance | variance | ||||||
| Work-in-Process Inventory | xxx | |||||||||||
| Direct-Labor Rate Variance | xxx | |||||||||||
| Direct-Labor Efficiency Variance | xxx | |||||||||||
| Wages Payable | xxx | Account Payable | Raw-material Inventory | Wages Payable | ||||||||
| To record the usage of direct labor, the incurrance of an unfavorable | Actual quantity at | Actual quantity at | Actual quantity at | |||||||||
| direct-labor rate variance and the incurrence of a favorable direct-labor | actual cost | standard cost | actual cost | |||||||||
| efficiency variance | ||||||||||||
| Cost of Goods Sold | xxx | |||||||||||
| Direct-Labor Efficiency Variance | xxx | |||||||||||
| Direct-Labor Rate Variance | xxx | Cost of Goods Sold | Direct-Labor Efficiency Variance | |||||||||
| Direct-Material Price Variance | xxx | Unfavorable | Favorable | Unfavorable | Favorable | |||||||
| Direct-Material Quantity Variance | xxx | variance | variance | variance | variance | |||||||
| Disposition of Variances |
Sheet2
| Normal Costing | ||||||||||||
| Manufacturing Overhead | Work-in-Process Inventory | |||||||||||
| Actual | Applied | Applied | ||||||||||
| overhead | overhead: | overhead: | ||||||||||
| Actual hours | Actual hours | |||||||||||
| x | x | |||||||||||
| Predetermined | Predetermined | |||||||||||
| overhead rate | overhead rate | |||||||||||
| Difference lies in the quantity of hours used. | Standard Costing | |||||||||||
| Manufacturing Overhead | Work-in-Process Inventory | |||||||||||
| Actual | Applied | Applied | ||||||||||
| overhead | overhead: | overhead: | ||||||||||
| Standard | Standard | |||||||||||
| allowed hours | allowed hours | |||||||||||
| x | x | |||||||||||
| Predetermined | Predetermined | |||||||||||
| overhead rate | overhead rate |
Sheet3
| Budgeted | Planned | Predetermined | ||||||
| Overhead | Monthly Activity | Overhead Rate | ||||||
| Variable . . . . . . . | $ 60,000 | * . . . . . . . . . | 8,000 | machine hours | . . . . . . . . . | $ 7.50 | per process hour | |
| Fixed . . . . . . . . . | 14,000 | * . . . . . . . . . | 8,000 | machine hours | . . . . . . . . . | 1.75 | per process hour | |
| Total . . . . . . . . . | $ 74,000 | . . . . . . . . . | 8,000 | machine hours | . . . . . . . . . | $ 9.25 | per process hour | |
| * From the flexible budget for planned activity of 8,000 machine hours |
Sheet1
| Variable costs: | |||||||||||||
| Indirect material: | |||||||||||||
| Wax | |||||||||||||
| Plastic wrap | |||||||||||||
| Paper products | |||||||||||||
| Misc. supplies | |||||||||||||
| Indirect labor: | |||||||||||||
| Maintenance | |||||||||||||
| Janitorial | |||||||||||||
| Utilities: | |||||||||||||
| Electricity | |||||||||||||
| Natural gas | |||||||||||||
| Water | |||||||||||||
| Total variable cost | |||||||||||||
| Fixed costs: | |||||||||||||
| Indirect labor: | |||||||||||||
| Inspection | |||||||||||||
| Production supervisor | |||||||||||||
| Set up | |||||||||||||
| Depreciation: | |||||||||||||
| Equipment | |||||||||||||
| Insurance | |||||||||||||
| Property taxes | |||||||||||||
| Total fixed cost | |||||||||||||
| Total overhead cost |
Learning Objective 11-7 – Explain how an activity-based flexible budget differs from a conventional flexible budget.
10-*
Helen (H) - Slide 36 NN Changed the font to 12-point. Changed the hyphen to a period.
Learning Objective 11-7. Explain how an activity-based flexible budget differs from a conventional flexible budget.
Activity-Based Flexible Budget
The Cheese Co.’s flexible
budget is based on a single
cost driver, machine hours
11-*
The flexible budget for Cheese Company, used for our variance analysis, is based on a single cost driver.
Overhead costs that vary with respect to machine hours are categorized as variable; all other overhead costs are treated as fixed.
This approach is consistent with traditional, volume-based product-costing systems. (LO 11-7)
Activity-Based Flexible Budget
If different cost drivers are identified for the
different variable costs, an activity-based flexible
budget should be prepared with different cost
formulas based on the different drivers.
11-*
Under the more accurate product-costing method called activity-based costing, several cost drivers are identified.
Costs that may appear fixed with respect to a single volume-based cost driver, such as machine hours, may be variable with respect to some other cost driver.
The activity-based costing approach also can be used as the basis for a flexible budget for planning and cost management purposes.
An activity-based flexible budget should be prepared with different cost formulas based on the different cost drivers. (LO 11-7)
Learning Objective 11-8 – Prepare journal entries to record production overhead under standard costing (Appendix A).
10-*
Helen (H) - Slide 39 Deleted the period after the word 'costing' and added a period after the word '(Appendix A).'
Helen (H) - Slide 39 NN Changed the font to 12-point. Changed the hyphen to a period. Deleted the period after the word 'costing' and added a period after the word '(Appendix A.'
Learning Objective 11-8. Prepare journal entries to record production overhead under standard costing (Appendix A).
Standard Costs and Product Costing
11-*
Variances are closed directly to the cost of goods sold account.
When actual overhead is greater than applied overhead, a debit balance remains in manufacturing overhead.
That balance is closed by crediting manufacturing overhead and debiting cost of goods sold.
When applied overhead is greater than actual overhead, a credit balance remains in manufacturing overhead.
That balance is closed by debiting manufacturing overhead and crediting cost of goods sold. (LO 11-8)
Ch. 10
| Raw-Material Inventory | xxx | |||||||||||
| Direct-Material Price Variance | xxx | Raw-material Inventory | Work-in-Process Inventory | Work-in-Process Inventory | ||||||||
| Accounts Payable | xxx | Actual quantity at | Standard quantity | Standard quantity | ||||||||
| To record the purchase of raw material and the incurrence of an | standard cost | at standard price | at standard price | |||||||||
| unfavorable price variance. | ||||||||||||
| Work-in-Process Inventory | xxx | |||||||||||
| Direct-Material Quantity Variance | xxx | |||||||||||
| Raw-Material Inventory | xxx | Direct-Material Price Variance | Direct-Material Quantity Variance | Direct-Labor Rate Variance | ||||||||
| To record the use of direct material in production and the incurrence | Unfavorable | Favorable | Unfavorable | Favorable | Unfavorable | Favorable | ||||||
| of an unfavorable quantity variance | variance | variance | variance | variance | variance | variance | ||||||
| Work-in-Process Inventory | xxx | |||||||||||
| Direct-Labor Rate Variance | xxx | |||||||||||
| Direct-Labor Efficiency Variance | xxx | |||||||||||
| Wages Payable | xxx | Account Payable | Raw-material Inventory | Wages Payable | ||||||||
| To record the usage of direct labor, the incurrance of an unfavorable | Actual quantity at | Actual quantity at | Actual quantity at | |||||||||
| direct-labor rate variance and the incurrence of a favorable direct-labor | actual cost | standard cost | actual cost | |||||||||
| efficiency variance | ||||||||||||
| Cost of Goods Sold | xxx | |||||||||||
| Direct-Labor Efficiency Variance | xxx | |||||||||||
| Direct-Labor Rate Variance | xxx | Cost of Goods Sold | Direct-Labor Efficiency Variance | |||||||||
| Direct-Material Price Variance | xxx | Unfavorable | Favorable | Unfavorable | Favorable | |||||||
| Direct-Material Quantity Variance | xxx | variance | variance | variance | variance | |||||||
| Disposition of Variances |
Sheet2
| Normal Costing | ||||||||||||
| Manufacturing Overhead | Work-in-Process Inventory | |||||||||||
| Actual | Applied | Applied | ||||||||||
| overhead | overhead: | overhead: | ||||||||||
| Actual hours | Actual hours | |||||||||||
| x | x | |||||||||||
| Predetermined | Predetermined | |||||||||||
| overhead rate | overhead rate | |||||||||||
| Difference lies in the quantity of hours used. | Standard Costing | |||||||||||
| Manufacturing Overhead | Work-in-Process Inventory | |||||||||||
| Actual | Applied | Applied | ||||||||||
| overhead | overhead: | overhead: | ||||||||||
| Standard | Standard | |||||||||||
| allowed hours | allowed hours | |||||||||||
| x | x | |||||||||||
| Predetermined | Predetermined | |||||||||||
| overhead rate | overhead rate |
Sheet3
| Budgeted | Planned | Predetermined | ||||||
| Overhead | Monthly Activity | Overhead Rate | ||||||
| Variable . . . . . . . | $ 60,000 | * . . . . . . . . . | 8,000 | machine hours | . . . . . . . . . | $ 7.50 | per process hour | |
| Fixed . . . . . . . . . | 14,000 | * . . . . . . . . . | 8,000 | machine hours | . . . . . . . . . | 1.75 | per process hour | |
| Total . . . . . . . . . | $ 74,000 | . . . . . . . . . | 8,000 | machine hours | . . . . . . . . . | $ 9.25 | per process hour | |
| * From the flexible budget for planned activity of 8,000 machine hours |
Sheet1
| Variable costs: | |||||||||||||
| Indirect material: | |||||||||||||
| Wax | |||||||||||||
| Plastic wrap | |||||||||||||
| Paper products | |||||||||||||
| Misc. supplies | |||||||||||||
| Indirect labor: | |||||||||||||
| Maintenance | |||||||||||||
| Janitorial | |||||||||||||
| Utilities: | |||||||||||||
| Electricity | |||||||||||||
| Natural gas | |||||||||||||
| Water | |||||||||||||
| Total variable cost | |||||||||||||
| Fixed costs: | |||||||||||||
| Indirect labor: | |||||||||||||
| Inspection | |||||||||||||
| Production supervisor | |||||||||||||
| Set up | |||||||||||||
| Depreciation: | |||||||||||||
| Equipment | |||||||||||||
| Insurance | |||||||||||||
| Property taxes | |||||||||||||
| Total fixed cost | |||||||||||||
| Total overhead cost |
Sheet4
| Normal Costing | |||||||||||||
| Manufacturing Overhead | Work-in-Process Inventory | ||||||||||||
| Actual | Applied | Applied | |||||||||||
| overhead | overhead: | overhead: | |||||||||||
| Actual hours | Actual hours | ||||||||||||
| x | x | ||||||||||||
| Predetermined | Predetermined | ||||||||||||
| overhead rate | overhead rate | ||||||||||||
| Standard Costing | |||||||||||||
| Manufacturing Overhead | Work-in-Process Inventory | ||||||||||||
| Actual | Applied | Applied | |||||||||||
| overhead | overhead: | overhead: | |||||||||||
| Standard | Standard | ||||||||||||
| allowed hours | allowed hours | ||||||||||||
| x | x | ||||||||||||
| Predetermined | Predetermined | ||||||||||||
| overhead rate | overhead rate | ||||||||||||
| Disposition of Variances | |||||||||||||
| Manufacturing Overhead | Cost of Goods Sold | ||||||||||||
| Actual | Applied | Balance (1) | Balance (2) | ||||||||||
| overhead | overhead: | Actual | Applied | ||||||||||
| Standard | overhead | overhead | |||||||||||
| allowed hours | greater than | greater than | |||||||||||
| x | Applied | Actual | |||||||||||
| Predetermined | overhead | overhead | |||||||||||
| overhead rate | |||||||||||||
| Balance (1) | Balance (2) | ||||||||||||
| Balance (2) | Balance (1) |
Learning Objective 11-9 – Compute and interpret the sales-price and sales-volume variances (Appendix B).
10-*
Helen (H) - Slide 41 Added a period at the end of the sentence.
Helen (H) - Slide 41 NN Changed the font to 12-point. Changed the hyphen to a period. Added a period at the end of the sentence.
Learning Objective 11-9. Compute and interpret the sales-price and sales-volume variances (Appendix B).
A General Model for Variance Analysis
Actual Sales Volume Actual Sales Volume Budgeted Sales Volume
× × ×
Actual Sales Price Budgeted Sales Price Budgeted Sales Price
Sales Price Variance
Sales Volume Variance
ASV(ASP - BSP) BSP(ASV - BSV)
ASV = Actual Sales Volume BSP = Budgeted Sales Price
ASP = Actual Sales Price BSV = Budgeted Sales Volume
11-*
To calculate the sales-price variance, start by subtracting the budgeted sales price from the actual sales price.
This difference is then multiplied by the actual sales volume.
If the amount is negative, the variance is unfavorable because the budgeted sales price was greater than the actual sales price.
If the amount is positive, the variance is favorable because the actual sales price was greater than the budgeted sales price.
To calculate the sales-volume variance, start by subtracting the budgeted sales volume from the actual sales volume.
This difference is then multiplied by the budgeted sales price.
If the amount is negative, the variance is unfavorable because the budgeted sales volume was greater than the actual sales volume.
If the amount is positive, the variance is favorable because the actual sales volume was greater than the budgeted sales volume.
Together, the sales-price and sales-volume variances explain the variance between actual and budgeted sales revenue. (LO 11-9)
End Chapter 11
10-*
Static
Actual
Budget
Results
Variances
Machine hours
10,000
8,000
2,000
U
Variable costs
Ind
irect labor
40,000
$
Indirect materials
30,000
Power
5,000
Fixed costs
Depreciation
12,000
Insurance
2,000
Total overhead costs
89,000
$
Static
Actual
Budget
Results
Variances
Machine hours
10,000
8,000
2,000
U
Variable costs
Ind
irect 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
Variable
Total
Flexible Budgets
Cost
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 cost
Total overhead costs
Variable
Total
Flexible Budgets
Cost
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 cost
Total overhead costs
Variable
Total
Flexible Budgets
Cost
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
$
12,000
$
Insurance
2,000
2,000
Total fixed cost
14,000
$
Total overhead costs
74,000
$
Variable
Total
Flexible Budgets
Cost
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
$
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
$
Variable
Total
Flexible Budgets
Cost
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
$
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
$
Variable
Total
Flexible Budgets
Cost
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
$
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
$
Variable
Total
Cost
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
$
Variable
Total
Cost
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
$
Variable
Total
Cost
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 F
Total variable costs
7.50
$
60,000
$
63,300
$
$ 3,300 U
Fixed Expenses
Depreciation
12,000
$
12,000
$
12,000
$
0
Insurance
2,000
2,000
2,000
0
Total fixed costs
14,000
$
14,000
$
0
Total overhead costs
74,000
$
77,300
$
$ 3,300 U
Variable
Total
Cost
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 F
Total variable costs
7.50
$
60,000
$
63,300
$
$ 3,300 U
Fixed Expenses
Depreciation
12,000
$
12,000
$
12,000
$
0
Insurance
2,000
2,000
2,000
0
Total fixed costs
14,000
$
14,000
$
0
Total overhead costs
74,000
$
77,300
$
$ 3,300 U
Variable
Total
Cost
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 F
Total variable costs
7.50
$
60,000
$
63,300
$
$ 3,300 U
Fixed Expenses
Depreciation
12,000
$
12,000
$
12,000
$
0
Insurance
2,000
2,000
2,000
0
Total fixed costs
14,000
$
14,000
$
0
Total overhead costs
74,000
$
77,300
$
$ 3,300 U
ActualAppliedApplied
overheadoverhead:overhead:
Actual hoursActual hours
xx
PredeterminedPredetermined
overhead rateoverhead rate
Difference lies in the
quantity of hours used.
ActualAppliedApplied
overheadoverhead:overhead:
StandardStandard
allowed hoursallowed hours
xx
PredeterminedPredetermined
overhead rateoverhead rate
Normal Costing
Manufacturing Overhead Work-in-Process Inventory
Manufacturing Overhead Work-in-Process Inventory
Standard Costing
Budgeted
Overhead
Variable . . . . . . .60,000$ * . . . . . . . . .8,000 machine hours. . . . . . . . .7.50$ per process hour
Fixed . . . . . . . . .14,000 * . . . . . . . . .8,000 machine hours. . . . . . . . .1.75 per process hour
Total . . . . . . . . . 74,000$ . . . . . . . . .8,000 machine hours. . . . . . . . .9.25$ per process hour
* From the flexible budget for planned activity of 8,000 machine hours
Planned
Monthly Activity
Predetermined
Overhead Rate
Variable costs:
Indirect material:
Wax
Plastic wrap
Paper products
Misc. supplies
Indirect labor:
Maintenance
Janitorial
Utilities:
Electricity
Natural gas
Water
Total variable cost
Fixed costs:
Indirect labor:
Inspection
Production supervisor
Set up
Depreciation:
Equipment
Insurance
Property taxes
Total fixed cost
Total overhead cost
ActualAppliedBalance (1)Balance (2)
overheadoverhead:ActualApplied
Standardoverheadoverhead
allowed hoursgreater thangreater than
xAppliedActual
Predeterminedoverheadoverhead
overhead rate
Balance (1)Balance (2)
Balance (2)Balance (1)
Manufacturing OverheadCost of Goods Sold
Disposition of Variances
