After completing this chapter, you should be able to: 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 how overhead is applied to Work-in-Process Inventory under standard costing;...
Chapter 11 Flexible Budgeting and Analysis of Overhead Costs Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Flexible Budgets 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 for overhead is difficult when actual activity differs from the planned level of activity 112 Advantages of Flexible Budgets Show revenues and expenses that should have occurred at the actual level of activity May be prepared for any activity level in the relevant range Reveal variances due to good cost control or lack of cost control Improve performance evaluation 113 Preparing a Flexible Budget Variable Cost Per Hour Total Fixed Cost Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 $ 10,000 12,000 4.00 3.00 0.50 7.50 $12,000 2,000 114 Preparing a Flexible Budget Variable Cost Per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs Total Fixed Cost 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 Variable costs are expressed as a constant amount per hour $ 32,000 24,000 Fixed costs are expressed as a 4,000 total amount that does not $ 60,000 $12,000 2,000 change within the relevant range of activity 115 Preparing a Flexible Budget Variable Cost Per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs Total Fixed Cost 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 $ 12,000 2,000 2,000 $ 14,000 $ 74,000 116 Preparing a Flexible Budget Variable Cost Per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 Total Fixed Cost 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 $ 12,000 2,000 2,000 $ 14,000 $ 74,000 $ 12,000 2,000 $ 14,000 $ 89,000 $ 12,000 2,000 $ 14,000 $ 104,000 117 Preparing a Flexible Budget Variable Cost Per Hour Machine hours Variable costs IndirectThere labor is no Note: Indirect material inPower the fixed costs Total variable cost $ Fixed costs Depreciation Insurance Total fixed cost Total overhead costs 4.00 flex 3.00 0.50 7.50 Total Fixed Cost 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 $ 12,000 2,000 2,000 $ 14,000 $ 74,000 $ 12,000 2,000 $ 14,000 $ 89,000 $ 12,000 2,000 $ 14,000 $ 104,000 118 Preparing a Flexible Budget Variable Cost Per Hour Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours Machine hours 8,000 10,000 12,000 Total budgeted Variable costs Indirect labor 4.00 $ 32,000 overhead cost Indirect material 3.00 24,000 Power 0.50 Budgeted variable Total 4,000 Total variable cost $ 7.50 $ 60,000 $ 40,000 30,000 5,000 Budgeted $ 75,000 $ 48,000 36,000 6,000 fixed $ 90,000 $ 12,000 2,000 $ 14,000 $ 89,000 $ 12,000 2,000 $ 14,000 $ 104,000 = overhead cost per Fixed costs Depreciation Insurance activity unit Total fixed cost Total overhead costs × activity + $12,000 $ 12,000 2,000 units 2,000 $ 14,000 $ 74,000 overhead cost 119 Flexible Budget Performance Report Variable Cost Per Hour Total Fixed Costs Machine hours Variable costs Indirect labor $ Indirect material Power Total variable costs $ Fixed Expenses Depreciation Insurance Total fixed costs Total overhead costs Flexible Budget Actual Results 8,000 4.00 3.00 0.50 7.50 Variances $ 34,000 25,500 3,800 $ 63,300 $12,000 2,000 $ 12,000 2,000 $ 14,000 $ 77,300 1110 Overhead Application in a Standard Costing System Normal Costing Manufacturing Overhead Actual Applied overhead overhead: Actual hours x Predetermined overhead rate Difference lies in the quantity of hours used Work-in-Process Inventory Applied overhead: Actual hours x Predetermined overhead rate Standard Costing Manufacturing Overhead Work-in-Process Inventory Actual Applied Applied overhead overhead: overhead: Standard allowed hours x Predetermined overhead rate Standard allowed hours x Predetermined overhead rate 1115 Overhead Application in a Standard Costing System Budgeted Overhead Planned Monthly Activity Predetermined 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 1116 Choice of Activity Measure 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 1117 Variable Overhead Variances Actual Variable Overhead Flexible Budget for Variable Overhead at Flexible Budget for Variable Overhead at Incurred AH × AR Actual Hours AH × SVR Standard Hours SH × SVR Spending Variance AH AR SVR SH Efficiency Variance = Actual Hours of Activity = Actual Variable Overhead Rate = Standard Variable Overhead Rate = Standard Hours Allowed 1118 Variable Overhead Variances Actual Variable Overhead Flexible Budget for Variable Overhead at Flexible Budget for Variable Overhead at Incurred AH × AR Actual Hours AH × SVR Standard Hours SH × SVR Spending Variance Efficiency Variance Spending variance = AH(AR - SVR) Efficiency variance = SVR(AH - SH) 1119 Fixed Overhead Variances Actual Fixed Overhead Fixed Overhead Fixed Overhead Incurred Budget Applied SH × PFOHR Budget Variance Volume Variance PFOHR = Predetermined Fixed Overhead Rate SH = Standard Hours Allowed 1120 Fixed Overhead Recall that fixed overhead costs are applied to products and services using a predetermined fixed overhead rate (PFOHR): Applied Fixed Overhead = PFOHR × Standard Hours PFOHR = Budgeted Fixed Overhead Planned Activity in Hours 1121 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 1122 Overhead Cost Performance Report Variable costs: Indirect material: Wax Plastic wrap Paper products Misc supplies Indirect labor: Maintenance J anitorial 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 1123 Activity-Based Flexible Budget Variable Cost Per Hour Machine hours Total Fixed Cost 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 Fixed costs Depreciation $12,000 $ 12,000 The Cheese Co.’s flexible Insurance 2,000 2,000 budget is based on a single $ 14,000 Total fixed cost Total costoverhead driver,costs machine hours $ 74,000 $ 12,000 2,000 $ 14,000 $ 89,000 $ 12,000 2,000 $ 14,000 $ 104,000 Variable costs Indirect labor Indirect material Power Total variable cost $ 4.00 3.00 0.50 7.50 1124 Activity-Based Flexible Budget Variable Cost Per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost $ 4.00 3.00 0.50 7.50 Total Fixed Cost 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 Fixed If costs different cost drivers are identified for the Depreciation $12,000 $ 12,000 $ 12,000 $ 12,000 different variable costs, an activity-based flexible Insurance 2,000 2,000 2,000 2,000 budget should be prepared $with different cost$ 14,000 Total fixed cost 14,000 $ 14,000 Total overhead costs $ 74,000 drivers $ 89,000 $ 104,000 formulas based on the different 1125 Standard Costs and Product Costing Standard Costing Manufacturing Overhead Work-in-Process Inventory Actual Applied Applied overhead overhead: overhead: Standard allowed hours x Predetermined overhead rate Standard allowed hours x Predetermined overhead rate 1126 Standard Costs and Product Costing 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) 1127 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Materials price- SP) variance AQ(AP Labor rate variance AQ =Variable Actual overhead Quantity AP =spending Actual Price variance Standard Quantity × Standard Price Quantity Variance Materials quantity variance SP(AQ - SQ) Labor efficiency variance SP = Standard Price Variable overhead SQ = Standard Quantity efficiency variance 1128 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 ASV(ASP - BSP) ASV = Actual Sales Volume ASP = Actual Sales Price Sales Volume Variance BSP(ASV - BSV) BSP = Budgeted Sales Price BSV = Budgeted Sales Volume 1129 ... Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Materials price- SP) variance AQ(AP Labor rate variance AQ =Variable Actual overhead Quantity AP =spending... =spending Actual Price variance Standard Quantity × Standard Price Quantity Variance Materials quantity variance SP(AQ - SQ) Labor efficiency variance SP = Standard Price Variable overhead SQ = Standard... overhead allowed hours greater than greater than x Applied Actual Predetermined overhead overhead overhead rate Balance (1) Balance (2) Balance (2) Balance (1) 11? ?27 A General Model for Variance Analysis