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Static budgets are prepared for a single, planned level of activity. Performance evaluation is difficult when actual activity differs from the planned level of activity.
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Flexible Budgets
May be prepared for any activity level in the relevant range. Show costs that should have been incurred at the actual level of activity, enabling apples to apples cost comparisons. Reveal variances related to cost control. Improve performance evaluation.
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U = Unfavorable variance CheeseCo was unable to achieve the budgeted level of activity.
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F = Favorable variance that occurs when actual costs are less than budgeted costs.
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Since cost variances are favorable, have we done a good job controlling costs?
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Actual activity is below budgeted activity. So, shouldnt variable costs be lower if actual activity is lower?
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To answer the question, we must the budget to the actual level of activity.
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To
Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range.
Fixed
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Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 10,000 12,000
Variable costs are expressed as a constant amount per hour. $40,000 10,000 hours is $4.00 per hour.
$ 12,000 2,000
Fixed costs $4.00 Depreciation Insurance Total fixed cost Total overhead costs
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Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 10,000 12,000
Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 10,000 $ 40,000 30,000 5,000 $ 75,000 $ 12,000 2,000 $ 14,000 $ 89,000 12,000
4.00 $ 32,000 3.00 24,000 Total fixed costs 0.50 4,000 do not change in 7.50 $ 60,000 $ 12,000 2,000 $ 14,000 $ 74,000
Quick Check
What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000.
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Quick Check
What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000.
Total overhead cost = $14,000 + $7.50 per hour v 12,000 hours = $14,000 + $90,000 = $104,000
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Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 10,000 $ 40,000 30,000 5,000 $ 75,000 $ 12,000 2,000 $ 14,000 $ 89,000 12,000 $ 48,000 36,000 6,000 $ 90,000 $ 12,000 2,000 $ 14,000 $ 104,000
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Variances 0
Quick Check
What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F
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Quick Check
What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F
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Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350
Variances 0 $ 2,000 U
$ 32,000
Quick Check
What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F
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Quick Check
What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F
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Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350
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ColaCos actual production for the period required 3,200 standard machine hours. Actual variable overhead incurred for the period was $6,740. Actual machine hours worked were 3,300. The standard variable overhead cost per machine hour is $2.00. Compute the variable overhead spending variance first using actual hours. Then use standard hours allowed to calculate the variable overhead efficiency variance.
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Spending Variance
$6, 40
Now, lets use the standard hours allowed, along with the actual hours, to compute the efficiency variance.
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Spending Variance
Efficiency Variance
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Quick Check
Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the spending variance? a. $450 U b. $450 F c. $700 F d. $700 U
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Quick Check
Spending variance = AH (AR - production for the Yoder Enterprises actual SR) period=required 2,100 standard directlabor SR) Actual variable overhead incurred (AH v
hours. Actual variable overhead for the period = $10,950 (2,050 hours v $5 was $10,950. Actual direct labor per hour) hours worked = $10,950 predetermined variable were 2,050. The $10,250 overhead rate is $5 per direct labor hour. What = $700 U was the spending variance? a. $450 U b. $450 F c. $700 F d. $700 U
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Quick Check
Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the efficiency variance? a. $450 U b. $450 F c. $250 F d. $250 U
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Quick Check
Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period Efficiency variance = SR (AH SH) was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable = $5 per hour (2,050 hours 2,100 hours) overhead rate is $5 per direct labor hour. What = efficiency variance? was the$250 F a. $450 U b. $450 F c. $250 F d. $250 U
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Activity-based costing can be used when multiple activity bases drive variable overhead costs.
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Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR):
Assigned Overhead = POHR Standard Activity Overhead from the flexible budget for the denominator level of activity Denominator level of activity
POHR
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The predetermined overhead rate can be broken down into fixed and variable components.
The variable component is useful for preparing and analyzing variable overhead variances. The fixed component is useful for preparing and analyzing fixed overhead variances.
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Budget Variance
Volume Variance
Lets calculate overhead rates. ColaCo applies overhead based on machine-hour activity.
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Rate = Total Variable Overhead Machine Hours This rate is constant at all levels of activity.
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Rate = Total Fixed Overhead Machine Hours This rate decreases when activity increases.
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The total POHR is the sum of the fixed and variable rates for a given activity level.
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ColaCos actual production required 3,200 standard machine hours. Actual fixed overhead was $8,450. The predetermined overhead rate is based on 3,000 machine hours.
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Overhead Variances
$8,450
$9,000
Now, lets use the standard hours allowed to compute the fixed overhead volume variance.
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$8,450
$9,000
Volume Variance
Results when standard hours allowed for actual output differs from the denominator activity.
Unfavorable when standard hours < denominator hours
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variable cost.
Unfavorable when standard hours < denominator hours
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Quick Check
Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance? a. $350 U b. $350 F c. $100 F d. $100 U
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Quick Check
actual production for the = Actual fixed 2,100 Budgeted fixed labor period requiredoverheadstandard directoverhead hours. Actual $14,450 = $14,800 fixed overhead for the period was $14,800. The budgeted fixed overhead = $350 U was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance? a. $350 U b. $350 F c. $100 F d. $100 U
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Quick Check
Yoder Enterprises actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance? a. $250 U b. $250 F c. $100 F d. $100 U
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Quick Check
Yoder Enterprises actual production for the period = Budgeted2,100 standard direct labor required fixed overhead (SH v FR) hours. = $14,450 (2,100 hours v $7 per hour) Actual fixed overhead for the period = $14,450 $14,700 was $14,800. The budgeted fixed overhead = $250 F was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance? a. $250 U b. $250 F c. $100 F d. $100 U
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Volume variance
$14,800
$14,450
Overhead Variances
Lets look at a graph showing fixed overhead variances. We will use ColaCos numbers from the previous example.
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{ $550 { Favorable
The sum of the overhead variances equals the under- or overapplied overhead cost for a period.
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End of Chapter 11
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