Lecture 2 ama

1/23/21 OVERHEAD COST VARIANCE LECTURE Planning of variable and fixed overhead costs Budgeted variable and fixed overhead rates Learning objectives Variable overhead variances • Spending variance • Efficiency variance Fixed overhead variances • Spending variance • Production volume variance 1/23/21 Review – Variance analysis Level - Variance 1/23/21 Level - Variances Level – Variances 1/23/21 Example – Problem 8-34 Budgeted annual production: 410,000 doorknobs Example – Problem 8-34 1/23/21 Direct material variances Price variance Efficiency variance Direct labour variances • Price variance • Efficiency variance 10 1/23/21 Planning and Overhead Variable overhead—as efficiently as possible, plan only essential activities Fixed overhead—as efficiently as possible, plan only essential activities and choosing the appropriate level of capacity 11 Standard costing Traces direct costs to output by multiplying the standard prices or rate by the standard quantities of inputs allowed for actual outputs produced Allocates overhead costs on the basis of the standard overhead-cost rates times the standard quantities of the allocation bases allowed for the actual outputs produced 12 1/23/21 Budgeted variable overhead rates Step Choose the Period to Be Used for the Budget Step Select the Cost-Allocation Bases to Use in Allocating the Variable Overhead Costs to the Output Produced Step Identify the Variable Overhead Costs Associated with Each Cost-Allocation Base Step Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate the Variable Overhead Costs to the Output Produced 13 VOH flexible budget variance 14 1/23/21 VOH Efficiency variance 15 VOH Spending variance 16 1/23/21 Variable overhead cost variance 17 Budgeted fixed overhead rates Step Choose the Period to Use for the Budget Step Select the Cost-Allocation Bases to Use in Allocating the Fixed Overhead Costs to the Output Produced Step Identify the Fixed Overhead Costs Associated with Each Cost-Allocation Base Step Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Fixed Overhead Costs to the Output Produced 18 1/23/21 FOH flexible budget variance 19 FOH production-volume variance 20 10 1/23/21 FOH ProductionVolume Variance • Interpretation of this variance is difficult due to the nature of the costs involved and how they are budgeted • Fixed costs are by definition somewhat inflexible While market conditions may cause production to flex up or down, the associated fixed costs remain the same • Fixed costs may be set years in advance, and may be difficult to change quickly • Contradiction: Despite this, examination of the fixed overhead budget formulae reveals that it is budgeted similar to a variable cost 21 Fixed overhead cost variance 22 11 1/23/21 Summary of variance analysis 23 12 ... formulae reveals that it is budgeted similar to a variable cost 21 Fixed overhead cost variance 22 11 1 /23 /21 Summary of variance analysis 23 12 ...1 /23 /21 Review – Variance analysis Level - Variance 1 /23 /21 Level - Variances Level – Variances 1 /23 /21 Example – Problem 8-34 Budgeted annual production:... Allocate Fixed Overhead Costs to the Output Produced 18 1 /23 /21 FOH flexible budget variance 19 FOH production-volume variance 20 10 1 /23 /21 FOH ProductionVolume Variance • Interpretation of this