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Chapter 11
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Learning Objective 1
Prepare a flexible budget and explain the advantages of the flexible budget approach over the static budget approach.
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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.
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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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To answer the question, we must the budget to the actual level of activity.
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To
Fixed
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Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 10,000 12,000
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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
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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
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
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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.
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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 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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Learning Objective 2
Prepare a performance report for both variable and fixed overhead costs using the flexible budget approach.
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Variances 0
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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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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
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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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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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Learning Objective 3
Use a flexible budget to prepare a variable overhead performance report containing only a spending variance.
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Spending Variance
AH = Actual hours AR = Actual variable overhead rate SR = Standard variable overhead rate
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$6,740
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Now, lets use the standard hours allowed, along with the actual hours, to compute the efficiency variance.
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Learning Objective 4
Use a flexible budget to prepare a variable overhead performance report containing both a spending and an efficiency variance.
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Spending Variance
Efficiency Variance
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$6,600
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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 = actual production for the Yoder EnterprisesAH (AR - SR) period=required 2,100 standard directlabor SR) Actual variable overhead incurred (AH hours. Actual variable overhead for the period = $10,950 (2,050 hours $5 per hour) was $10,950. Actual direct labor 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
McGraw-Hill/Irwin Copyright 2008, The McGraw-Hill Companies, Inc.
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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
McGraw-Hill/Irwin Copyright 2008, The McGraw-Hill Companies, Inc.
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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
McGraw-Hill/Irwin Copyright 2008, The McGraw-Hill Companies, Inc.
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$10,950
Spending variance $700 unfavorable
$10,500
Efficiency variance $250 favorable
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Activity-based costing can be used when multiple activity bases drive variable overhead costs.
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Learning Objective 5
Compute the predetermined overhead rate and apply overhead to products in a standard cost system.
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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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Learning Objective 6
Compute and interpret the fixed overhead budget and volume variances.
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Budget Variance
Volume Variance
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Lets calculate overhead rates. ColaCo applies overhead based on machine-hour activity.
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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
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$8,450
$9,000
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Now, lets use the standard hours allowed to compute the fixed overhead volume variance.
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$8,450
$9,000
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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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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
Budget variance Yoder Enterprises 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
McGraw-Hill/Irwin Copyright 2008, The McGraw-Hill Companies, Inc.
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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
Volume variance Yoder Enterprises actual production for = Budgeted fixed overhead (SH FR)
the period required 2,100 standard direct labor hours. = $14,450 (2,100 hours $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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$14,800
$14,450
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Lets look at a graph showing fixed overhead variances. We will use ColaCos numbers from the previous example.
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Activity
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Activity
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{ $550 { Favorable
Budget Variance
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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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