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McGraw-Hill/Irwin
Learning
Objective
1
McGraw-Hill/Irwin
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.
1-3
Flexible Budgets
Consider
the following
example from
the Cheese
Company . . .
Hmm! Comparing
static budgets
with actual costs
is like comparing
apples and oranges.
1-4
10,000
$ 40,000
30,000
5,000
Actual
Results
Variances
8,000
2,000 U
U = Unfavorable variance
Cheese Company was
unable to achieve the
budgeted level of activity.
12,000
2,000
$ 89,000
1-5
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
Fixed costs
we
done a good
Depreciation
Insurance
2,000
2,000
$ 89,000
$ 77,300
0
0
$11,700 F
1-6
I do know that
actual activity is below
budgeted activity which
is unfavorable.
But shouldnt variable costs
be lower if actual activity
is below budgeted activity?
1-7
Flexible Budgets
Central Concept
1-9
1-10
Learning
Objective
2
McGraw-Hill/Irwin
1-12
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
1-13
Total
Fixed
Cost
Flexible Budgets
8,000
10,000
12,000
Hours
Hours
Hours
10,000
12,000
Variable8,000
costs are
expressed
as
a constant amount per hour.
4.00
3.00
0.50
7.50
$ 32,000
24,000
Fixed
4,000 costs are expressed as a
total amount that does not
$ 60,000
$12,000
2,000
1-14
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
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
1-15
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
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
1-16
Total
Fixed
Cost
Machine hours
Variable costs
IndirectThere
labor is no
Note:
material
inIndirect
the
fixed
costs.
Power
Total variable cost
$
Fixed costs
Depreciation
Insurance
Total fixed cost
Total overhead costs
4.00
flex
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
1-17
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 cost
$ per
7.50
$ 60,000
overhead
activity
$ 40,000
30,000
5,000
Budgeted
$ 75,000
$ 48,000
36,000
6,000
fixed
$ 90,000
units
$12,000
2,000
$ 12,000
2,000
$ 14,000
$ 74,000
overhead cost
$ 12,000
2,000
$ 14,000
$ 89,000
$ 12,000
2,000
$ 14,000
$ 104,000
1-18
Flexible Budget
Performance Report
1-19
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
0
$ 34,000
25,500
3,800
$ 63,300
$12,000
2,000
$ 12,000
2,000
$ 14,000
$ 77,300
1-20
Flexible Budget
Performance Report
Total
FlexibleVariable
budget
is
Cost
Fixed
prepared
Per for
HourtheCosts
same activity level
Machine hours
(8,000 hours) as
Variable costs
actually$achieved.
Indirect labor
4.00
Indirect material
Power
Total variable costs $
Fixed Expenses
Depreciation
Insurance
Total fixed costs
Total overhead costs
3.00
0.50
7.50
$12,000
2,000
Flexible
Budget
Actual
Results
8,000
8,000
Variances
0
$ 34,000
25,500
3,800
$ 63,300
$ 12,000
2,000
$ 14,000
$ 77,300
1-21
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
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
2,000
$ 14,000
$ 77,300
0
0
0
$ 3,300 U
Variances
0
1-22
Flexible Budget
Performance Report
Variable Total
Cost
Fixed
labor
and Costs
Per Hour
Indirect
indirect material have
Machine hours
unfavorable variances
Variable costs
because
costs
Indirect
labor actual
$ 4.00
are
more than3.00
the
Indirect
material
Power
flexible budget 0.50
costs.
Total variable costs $
Fixed Expenses
Depreciation
Insurance
Total fixed costs
Total overhead costs
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
2,000
$ 14,000
$ 77,300
0
0
0
$ 3,300 U
Variances
0
1-23
Flexible Budget
Performance Report
Variable
Cost
Per Hour
Total
Fixed
Costs
Machine hours
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
2,000
$ 14,000
$ 77,300
0
0
0
$ 3,300 U
Variances
0
1-24
Learning
Objective
3
McGraw-Hill/Irwin
Overhead Application in a
Standard Costing System
Normal Costing
Manufacturing Overhead
Actual
Applied
overhead
overhead:
Work-in-Process Inventory
Applied
overhead:
Actual hours
x
Predetermined
overhead rate
Difference lies in the
quantity of hours used.
Actual hours
x
Predetermined
overhead rate
Standard Costing
Manufacturing Overhead
Actual
Applied
overhead
overhead:
Standard
allowed hours
x
Predetermined
overhead rate
Work-in-Process Inventory
Applied
overhead:
Standard
allowed hours
x
Predetermined
overhead rate
1-26
Overhead Application in a
Standard Costing System
Budgeted
Overhead
Planned
Monthly Activity
Predetermined
Overhead Rate
1-27
Learning
Objective
4
McGraw-Hill/Irwin
Learning
Objective
5
McGraw-Hill/Irwin
1-31
Flexible Budget
for Variable
Overhead at
Actual Hours
AH AR
AH
SVR
Spending
Variance
AH
AR
SVR
SH
Flexible Budget
for Variable
Overhead at
Standard Hours
SH
SVR
Efficiency
Variance
Flexible Budget
for Variable
Overhead at
Actual Hours
AH AR
Spending
Variance
Flexible Budget
for Variable
Overhead at
Standard Hours
AH
SVR
SH
SVR
Efficiency
Variance
1-33
Total budgeted
overhead cost
Budgeted variable
overhead cost per
activity unit
Total budgeted
overhead cost
Total
x activity
units
$2.00 per
machine
hour
=
+
Budgeted fixed
overhead cost
Total
machine
hours
$9,000
1-35
Flexible Budget
for Variable
Overhead at
Actual Hours
3,300 hours
Flexible Budget
for Variable
Overhead at
Standard Hours
3,200 hours
$6,740
$6,600
$6,400
Spending variance
$140 unfavorable
Efficiency variance
$200 unfavorable
1-36
Flexible Budget
for Variable
Overhead at
Actual Hours
3,300 hours
Flexible Budget
for Variable
Overhead at
Standard Hours
3,200 hours
$6,740
$6,600
$6,400
Efficiency Variance
A function of the
selected cost driver.
It does not reflect
overhead control.
1-38
Fixed Overhead
1-39
Fixed
Overhead
Budget
Fixed
Overhead
Applied
SH
PFOHR
Budget
Variance
Volume
Variance
1-40
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
1-41
PFOHR
$9,000
3,000 machine hours
PFOHR
PFOHR
1-42
1-43
Fixed
Overhead
Budget
Fixed
Overhead
Applied
3,200 hours
$8,450
Budget variance
$550 favorable
$9,000
$9,600
Volume variance
$600 (neither favorable
nor unfavorable)
1-44
Volume Variance
1-46
3,000 Hours
Planned
Activity
Volume
3,200
Standard
Hours
1-47
Learning
Objective
6
McGraw-Hill/Irwin
Fixed costs:
Indirect labor:
Inspection
Production supervisor
Set up
Depreciation:
Equipment
Insurance
Property taxes
Total fixed cost
Total overhead cost
1-49
Learning
Objective
7
McGraw-Hill/Irwin
Total
Fixed
Cost
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable cost
4.00
3.00
0.50
7.50
Fixed costs
Depreciation
$12,000
The
Cheese Co. flexible
Insurance
2,000
budget
is
based
on
a
single
Total fixed cost
costoverhead
driver,costs
machine hours
Total
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
1-51
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
If costs
different cost drivers are identified for the
Fixed
Depreciation
$ 12,000
$ 12,000
$ 12,000
different
variable costs,$12,000
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
1-52
Learning
Objective
8
McGraw-Hill/Irwin
Work-in-Process Inventory
Applied
overhead:
Standard
allowed hours
x
Predetermined
overhead rate
1-54
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)
1-55
Learning
Objective
9
McGraw-Hill/Irwin
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
1-57
1-58
End of Chapter 11
Im here to
your
budget. Are you ready to
ante up?
1-59