FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND
Effective planning of variable overhead costs involves:
1. Planning to undertake only those variable overhead activities that add value for customers using the product or service, and
2. Planning to use the drivers of costs in those activities in the most efficient way.
At the start of an accounting period, a larger percentage of fixed overhead costs are locked-in than is the case with variable overhead costs. When planning fixed overhead costs, a company must choose the appropriate level of capacity or investment that will benefit the company over a long time. This is a strategic decision.
The key differences are how direct costs are traced to a cost object and how indirect costs are allocated to a cost object:
× Actual inputs used
Actual indirect rate
× Actual inputs used
× Standard inputs allowed for actual output
Standard indirect cost-allocation rate
× Standard quantity of cost-allocation base
allowed for actual output
Steps in developing a budgeted variable-overhead cost rate are: 1. Choose the period to be used for the budget,
2. Select the cost-allocation bases to use in allocating variable overhead costs to the output produced,
3. Identify the variable overhead costs associated with each cost-allocation base, and 4. Compute the rate per unit of each cost-allocation base used to allocate variable overhead costs to output produced.
Two factors affecting the spending variance for variable manufacturing overhead are: a. Price changes of individual inputs (such as energy and indirect materials) included in variable overhead relative to budgeted prices.
b. Percentage change in the actual quantity used of individual items included in variable overhead cost pool, relative to the percentage change in the quantity of the cost driver of the variable overhead cost pool.
Possible reasons for a favorable variable-overhead efficiency variance are: • Workers more skillful in using machines than budgeted,
• Production scheduler was able to schedule jobs better than budgeted, resulting in lower-than-budgeted machine-hours,
• Machines operated with fewer slowdowns than budgeted, and • Machine time standards were overly lenient.
A direct materials efficiency variance indicates whether more or less direct materials were used than was budgeted for the actual output achieved. A variable manufacturing overhead efficiency variance indicates whether more or less of the chosen allocation base was used than was budgeted for the actual output achieved.
Steps in developing a budgeted fixed-overhead rate are
1. Choose the period to use for the budget,
2. Select the cost-allocation base to use in allocating fixed overhead costs to output produced,
3. Identify the fixed-overhead costs associated with each cost-allocation base, and 4. Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to output produced.
The relationship for fixed-manufacturing overhead variances is: Flexible-budget variance
(never a variance)
There is never an efficiency variance for fixed overhead because managers cannot be more or less efficient in dealing with an amount that is fixed regardless of the output level. The result is that the flexible-budget variance amount is the same as the spending variance for fixedmanufacturing overhead. 8-10 For planning and control purposes, fixed overhead costs are a lump sum amount that is not controlled on a per-unit basis. In contrast, for inventory costing purposes, fixed overhead costs are allocated to products on a per-unit basis.
8-11 An important caveat is what change in selling price might have been necessary to attain the level of sales assumed in the denominator of...
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