CHAPTER 05
FLEXIBLE BUDGETS, OVERHEAD COST
VARIANCES, AND MANAGEMENT
CONTROL
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CHAPTER 05
CASE STUDY RERIEW
Overhead Cost Variances Force Macy’s to
Shop for Changes in Strategy
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LEARNING OBJECTIVE
• Explain the similarities and differences in planning
variable and fixed overhead costs;
• Develop budgeted variable and fixed overhead cost
rates;
• Compute the variable overhead flexible-budget variance,
the variable overhead efficiency variance and the
variable overhead spending variance;
• Compute the fixed overhead flexible-budget variance,
the fixed overhead spending variance and the fixed
overhead production-volume variance;
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LEARNING OBJECTIVE
• Show how the 4-variance analysis approach reconciles
the actual overhead incurred with the overhead amounts
allocated during the period;
• Explain the relationship between the sales-volume
variance and the production-volume variance;
• Calculate variances in activity-based costing;
• Examine the use of overhead variances in
nonmanufacturing settings;
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CHAPTER CONTENT
5.1. Planning of Variable and Fixed Overhead Cost;
5.2. Standard Costing;
5.3. Variable Overhead Cost Variances;
5.4. Fixed Overhead Cost Variances;
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CHAPTER CONTENT
5.5. Integrated Analysis of Overhead Cost Variances;
5.6. Production-Volume Variance and Sales-Volume
Variance;
5.7. Overhead Variances in Nonmanufacturing Settings.
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5.1. Planning of Variable and
Fixed Overhead Cost
To effectively plan variable overhead costs, managers
should focus on activities that add value and eliminate
those that do not.
Fixed overhead planning is similar ~ plan only for
essential activities and plan to be as efficient as
possible.
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5.2. Standard Costing
Standard Costing is the
costing system.
Traces direct costs to output by
multiplying the standard prices or rate by
the standard quantities of inputs allowed
for actual outputs produced.
Allocates overhead costs on the basis of
the standard overhead-cost rates times
the standard quantities of the allocation
bases allowed for the actual outputs
produced.
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5.2. Standard Costing
5.2.1. Developing Budgeted Variable Overhead Cost Rates:
• Choose the period to be used for the budget.
Step
1
• Select the cost-allocation bases to use in
Step allocating variable overhead costs to output.
2
• Identify the variable overhead costs associated
Step with each cost-allocation base.
3
• Compute the rate/unit of cost-allocation base used
Step to allocate variable overhead costs to output.
4
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5.2. Standard Costing
5.2.1. Developing Budgeted Variable Overhead Cost Rates:
Budget variable Budget input Budget variable
overhead cost rate allowad per overhead rate
per output unit output unit per input unit
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5.2. Standard Costing
5.2.2. Developing Budgeted Fixed Overhead rates-intro:
Fixed overhead costs are, by definition, a lump sum of
costs that remain unchanged for a given period despite
potentially wide changes in activity within the relevant range.
These costs are fixed in the sense that, unlike variable costs,
fixed costs do not automatically increase or decrease with
the level of activity within the relevant range.
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5.2. Standard Costing
5.2.2. Developing Budgeted Fixed Overhead Cost Rates:
• Choose the period to be used for the budget.
Step
1
• Select the cost-allocation bases to use in
Step allocating fixed overhead costs to output.
2
• Identify the fixed overhead costs associated with
Step each cost-allocation base.
3
• Compute the rate per unit of cost-allocation base
Step used to allocate fixed overhead costs to output.
4
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5.2. Standard Costing
5.2.2. Developing Budgeted Variable Overhead Cost Rates:
Budget fixed
OVHC rate per = Budget total
Cost in fixed / Budget total
Total quantity
unit of cost allocation base OVHC pool of cost allocation
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5.3.Variable Overhead Cost
Variances
5.3.1. Flexible-Budget Analysis:
Variable overhead flexible-budget variance measures the
difference between actual variable overhead costs incurred
and flexible-budget variable overhead amounts.
Variable Overhead
flexible-budget variance = Actual Costs
Incurred - Flexible-budget
amount
This variance can be further broken down into the Variable
Overhead Efficiency Variance and the Variable Overhead
Spending Variance.
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5.3.Variable Overhead Cost
Variances
5.3.2. Variable Overhead Efficiency Variance:
Variable overhead efficiency variance is the difference
between:
the actual quantity of the variable overhead cost-allocation
base used and;
the budgeted quantity of the variable overhead cost-
allocation base allowed for the actual output X the budgeted
variable overhead cost per unit of the cost-allocation base.
Variable Actual quantity of Budgeted quantity of Budgeted variable
Overhead
Efficiency = variable overhead
cost-allocation base - variable overhead cost-
allocation base allowed X overhead cost
per unit of
Variance used for actual output for actual output cost-allocation base
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5.3.Variable Overhead Cost
Variances
5.3.3. Variable Overhead Spending Variance:
Variable overhead spending variance is the difference
between:
Actual and budgeted variable overhead cost per unit of the
cost-allocation base, multiplied by;
Actual quantity of variable overhead cost-allocation base
used.
Actual variable Budgeted variable Actual quantity of
= overhead cost
per unit of - overhead cost
per unit of X variable overhead
cost-allocation base
cost-allocation base cost-allocation base
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5.3.Variable Overhead Cost
Variances
5.3.3. Variable Overhead Spending Variance:
Variable Overhead Variance Analysis Illustrated
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5.4. Fixed Overhead Cost
Variances
Fixed overhead flexible-budget variance is the difference
between actual fixed overhead costs and fixed overhead
costs in the flexible budget.
The Fixed Overhead Spending Variance is the same
variance as the Fixed Overhead Flexible-Budget
Variance.
Fixed Overhead
flexible-budget variance = Actual Costs
Incurred - Flexible-budget
amount
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5.4. Fixed Overhead Cost
Variances
5.4.1. Production-Volume Variance:
Production-volume variance is the difference between
budgeted fixed overhead and fixed overhead allocated on
the basis of actual output produced.
This variance is also known as the denominator-level
variance.
Production-Volume
Variance = Budgeted
Fixed Overhead - Fixed Overhead allocated
for actual output units
produced
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5.4. Fixed Overhead Cost
Variances
5.4.2. Interpreting the Production-Volume Variance:
Interpretation of this variance is difficult due to the nature of
the costs involved and how they are budgeted;
Fixed costs are by definition somewhat inflexible. While
market conditions may cause production to flex up or down,
the associated fixed costs remain the same;
Fixed costs may be set years in advance, and may be
difficult to change quickly;
Contradiction: Despite this, examination of the fixed
overhead budget formulae reveals that it is budgeted similar
to a variable cost.
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5.4. Fixed Overhead Cost
Variances
Fixed Overhead Variance Analysis Illustrated
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5.5. Integrated Analysis of
Overhead Cost Variances
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5.5. Integrated Analysis of
Overhead Cost Variances
5.5.1. 4-Variance analysis:
SPENDING EFFICIENCY PRODUCTION-
VARIANCE VARIANCE VOLUME VARIANCE
VARIABLE
YES YES NEVER A VARIANCE
OVERHEAD
FIXED NEVER A
YES YES
OVERHEAD VARIANCE
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5.5. Integrated Analysis of
Overhead Cost Variances
5.5.2. Combined Variance Analysis:
Detailed 4-variance analyses are most common in large,
complex businesses, because it is impossible for
managers at large companies;
When a single total overhead cost category is used, it
can still be analyzed in depth.
The accounting for 3-variance analysis is simpler than
for 4-variance analysis, but some information is lost.
In particular, the 3-variance analysis combines the
variable and fixed overhead spending variances into a
single total overhead spending variance.
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5.6. Production-Volume Variance,
Sales-Volume Variance
The static budget variance: the difference between the
static budget and the actual results.
The sales-volume variance: the difference between the
flexible budget and the static budget.
The sales-volume variance consists of two
components: The operating-income volume variance
and the production-volume variance.
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5.7. Overhead Variances in
Nonmanufacturing Settings
Nonmanufacturing companies can benefit from
overhead variances just as manufacturing companies
can.
Variance analysis can be used to examine overhead
costs and make decisions about pricing, managing costs
and the mix of products.
Output measures will be different and can be passenger-
miles flown, patient days provided, rooms-days
occupied, ton-miles of freight hauled, etc.
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Terms to learn
TERMS TO LEARN Vietnamese
Total-overhead variance Tổng cộng C/L CP SXC
Variable overhead efficiency
C/L hiệu suất BP SXC
variance
Variable overhead flexible-budget C/L dự toán linh hoạt BP
variance SXC
Variable overhead spending C/L hiệu quả sử dụng
variance BP SXC
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Chapter Summary
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Self- Preparation
Chapter 9 Text book of Management
Information Study Manual IAEW 6-31, 6-32 (P. 146-
P.147)
Chapter 9 Text book of Management
Information Question Bank IAEW (P. 57- P.70)
Exercise: Chapter 7 Text book of Cost Accounting A
Managerial Emphasis 8-21,8-22,8-23, P. 130.
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CONTROL
Multiple Choices
1) Compared to variable overhead costs planning, fixed
overhead costs planning have an additional strategic
issue of ________.
A) eliminating activities that do not add value;
B) increasing the linearity between total costs and volume of
production;
C) choosing the appropriate level of investment;
D) identifying essential value-adding activities.
C
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Multiple Choices
2) Effective planning of variable overhead costs means
that a company performs those variable overhead costs
that primarily ________.
A) increase the planned variable overhead budgets;
B) add value for the customer using the products or services;
C) increase the linearity between total costs and volume of
production;
D) identify the product advertising requirements.
B
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Multiple Choices
3) Which of the following statements is true of variable
overhead costs?
A) All the decisions determining the level of variable overhead
costs are made at the start of a budget period;
B) Planning of variable overhead costs includes choosing the
appropriate level of capacity;
C) Activities which add value are of least relevance while
planning variable overhead costs;
D) The level of variable overhead costs incurred in a period is
mainly determined by day-to-day operating decisions.
D
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Multiple Choices
4) Fixed overhead costs include ________.
A) the cost of sales commissions;
B) property taxes paid on plant facilities;
C) energy costs;
D) indirect materials.
B
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