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Learning Objectives
Distinguish between the productcosting and control purposes of
standard costs for manufacturing
(factory) overhead
Calculate and properly interpret
standard cost variances for overhead
using flexible budgets
Record overhead costs and associated
standard cost variances
Apply standard costs to service
15-2
Learning Objectives
(continued)
Analyze overhead variances in a
traditional activity-based cost (ABC)
system
Understand decision rules that can be
used to guide the varianceinvestigation decision
Formulate the variance-investigation
decision under uncertainty (Appendix)
15-3
Manufacturing (Factory)
Overhead Costs: Examples
Fixed
Overhead
Variable
Overhead
Energy
Energy costs
costs
Indirect
Indirect materials
materials
Indirect
Indirect labor
labor
Equipment
Equipment repair
repair
and
and maintenance
maintenance
Factory managers
salaries
Plant and equipment
depreciation
Plant security guards
Insurance and property
taxes for factory
building and equipment
15-4
Activity
Variable (e.g.,
DLHs)
15-6
15-7
15-8
15-9
15-10
15-11
Efficiency
Variance
Reflects
efficiency or
inefficiency in the
use of the
selected activity
measure; does not
reflect overhead
control.
15-12
Product Costing:
Standard Fixed OH
Applied = SQ SP
Control Budget
(Lump Sum)
Activity Variable
(e.g., DLHs)
15-13
15-15
15-16
15-18
15-19
Production Volume
Variance
Results from operating
at a level other than
the denominator
volume level. Arises
because of the
product-costing
purpose of fixed
overhead. Not of direct
interest for control
purposes.
15-21
15-23
15-24
15-25
15-26
15-27
Disposition of Standard
Manufacturing Cost Variances
15-28
$37,000
15,600
4,680
1,490
$4,350
10,350
7,020
10,650
26,400
15-29
15-30
15-32
Computing non-manufacturing
efficiency variances requires some
assumed relationship between input
and output activity
Examples
15-33
Input
Output
Mailing
Labor hours
Personnel
Labor hours
Food service
Labor hours
Consulting
Billable hours
Customer revenues
Nursing
Labor hours
Check Processing
Computer hours
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15-35
Traditional Financial-Performance
Report (Exhibit 15.12)
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15-37
15-38
How do I know
which variances
to investigate?
Larger
variances, in
dollar amount
or as a
percentage of
the standard,
15-42
Control
Charts
Display variations in a
process and help to
analyze the variations
over time
Distinguish between
random variations
and variations that
should be investigated
15-45
15-46
Random
Nonrandom
I
Where:
I=
cost of an investigation
Do not
investigate
none
L
C = the cost to correct a variance
L = present value of losses by not
correcting the variance
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15-48
Chapter Summary
We distinguished between the
product-costing and control purposes
of standard costs for manufacturing
(factory) overhead costs:
For variable overhead costs, we saw that
these two purposes are the same (see
Exhibit 15.1)
For fixed overhead costs, these purposes
are different (see Exhibit 15.3)
15-50
Chapter Summary
(continued)
For product-costing purposes, we
defined the total overhead variance
for the period as the difference
between the actual overhead costs
incurred and the overhead costs
applied to production using the
overhead application rate
We saw that this total variance is also
referred to as the total over- or underapplied overhead for the period
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