ACCT 3131 Ch 8 Flexible Budgets, Overhead Cost Variances, and Management Control
Terms in this set (24)
How do managers plan for variable overhead costs?
*Plan to handle only the variable overhead activities that add value for customers using the product or service
*Plan to use the drivers of these activities in the most efficient way
How does the planning of fixed overhead costs differ from the planning of variable overhead costs?
At the start of the accounting period, a large percentage of fixed overhead costs are locked-in, whereas ongoing operating decisions determine the variable overhead costs.
When planning fixed overhead costs, a company must choose the appropriate level of capacity or investment that will benefit the company over a long time.
How does standard costing differ from actual costing?
direct costs = [standard prices] x [standard inputs allowed for actual outputs]
indirect costs = [standard-indirect cost-allocation rate] x [standard quantity of cost allocation base allowed for actual output]
direct costs = [actual prices] x [standard inputs allowed for actual output]
indirect costs = [actual indirect rate] x [actual inputs used]
What are the steps in developing a budgeted variable overhead cost-allocation rate?
1. Choose the period to be used for the budget
2. Select the cost-allocation bases to use in allocating variable OH costs to the output produced
3. Identify the variable OH costs associated with each cost-allocation base
4. Compute the rate per unit of each cost-allocation base used to allocate variable OH costs to output produced
What are the factors that affect the spending variance for variable manufacturing overhead?
1. Price changes of individual inputs included in variable OH relative to budgeted prices
2. Percentage change in the actual quantity used of individual items included in variable OH cost pool, relative to the percentage change in the quantity of the cost driver of the variable OH pool
Assume variable manufacturing OH is allocated using machine hours. Give 3 possible reasons for a favorable variable OH efficiency variance.
1. Workers are more skillful using machines than budgeted
2. Production scheduler was able to schedule jobs better than budgeted, resulting in lower than budgeted machine hours
3. Machines operated with fewer slow downs than budgeted
4. Machine time standards were overly lenient
Describe the difference between a direct materials efficiency variance and a variable manufacturing OH efficiency variance
*DM efficiency variance indicates whether more or less direct materials were used than was budgeted for actual output achieved
*Variable MOH efficiency variance indicates whether more or less of the chosen allocation base was used than was budgeted for the actual output achieved
What are the steps in developing a budgeted fixed OH rate?
1. Choose the period to use for the budget
2. Select the cost allocation base to use in allocating fixed OH costs to output produced
3. Identify the fixed OH costs associated with each cost allocation base
4. Compute the rate per unit of each cost allocation base used to allocate fixed OH costs to output produced
Why is the flexible budget variance the same amount as the spending variance for fixed manufacturing OH?
*There is never an efficiency variance for fixed OH because managers cannot be more or less efficient with fixed amount regardless of the output level
*This results in the flexible budget variance amount being the same for the spending variance for fixed MOH
Explain how the analysis of fixed MOH costs differs for:
a) Planning and control
b) Inventory costing for financial reporting
a) for planning and control purposes--fixed OH costs are a lump sum amount that is not controlled on a per-unit basis
b)for inventory costing purposes--fixed OH costs are allocated to products on a per unit basis
Provide one caveat that will affect whether a production-volume-variance is a good measure of the economic cost of unused capacity.
*What the change in selling price might have been necessary to attain the level of sales assumed in the denominator of the fixed MOH rate
*example: the entry of a new low-price competitor may have reduced demand below the denominator level, if the budgeted selling price was maintained
*an unfavorable PVV may be small relative to the selling price variance had prices been dropped to attain the denominator level of unit sales
"The production-volume-variance should always be written off to COGS". Do you agree? Explain.
*Strong case for writing off unfavorable PVV to COGS
*the alternative is prorating among inventories and COGS, but this would "penalize" the units produced (and in inventory) for the cost of unused capacity, i.e. for the units not produced
*But, if we take the view that the denominator level is a "soft" number--an estimate, never expected to be reached exactly--then it makes more sense to prorate the PVV--whether variable or not--among the inventory stock and COGS
*prorating a favorable variance is also more conservative
----it results in lower operating income than if the variance had all been written off to COGS
*Also, prorating dampens the efficacy of any steps taken by company management to manage operating income through manipulation of the PVV
*in Summary--a PVV need not always be written off to COGS
What are the variance in a 4-variance analysis?
*the 4 variances are:
1. VMOH Spending Variance
2. VMOH Efficiency Variance
3. FMOH Spending Variance
4. FMOH Production Volume Variance
"Overhead variances should be viewed as interdependent rather than independent". Give an example.
*Inter-dependencies among variances could arise for the spending and efficiency variances
-----ex: if the chose allocation base for the variable OH efficiency variance is only one of several cost drivers, the variable OH spending variance will include the effect of the other cost drivers
-----ex: inter-dependencies can be induced when there are mis-classifications of costs as fixed when they are variable and vice versa
Describe how flexible-budget variance analysis can be used in the control of cost activity areas.
*By isolating spending and efficiency variances at different levels in the cost hierarchy
----ex: an analysis of batch costs can show the price and efficiency variances from being able to use longer production runs in each batch relative to the batch size assumed in the flexible budget
VMOH Spending Variance
Actual - Mid
[AO x ADQ x AVOR] - [AO x ADQ x BVOR]
*spending more or less on indirect costs (energy, rent)
VMOH Efficiency Variance
Mid - Flexible Budget
[AO x ADQ x BVOR] - [AO x SDQ x BVOR]
*difference in efficiency for our cost driver
Flex Budget - Allocated
[AO x SDQ x BVOR] - [AO x SDQ x BVOR]
Allocated - Static
[AO x SDQ x BVOR] - [BO x SDQ x BVOR]
difference between PVV and OIVV = SVV
FMOH Spending variance
Actual - Mid
*Mid=Flex=Static for FMOH
[ADQ X AFOR] - [BDQ X BFOR]
FMOH Efficiency Variance
[BDQ X BFOR] - [BDQ X BFOR]
Flex - Allocated
[BDQ X BFOR] - [SDQ X BFOR]
FMOH Spending Var - FMOH Eff. Var
(= to the FMOH spending variance)
FMOH Over/Under allocated (total variance
Actual - Allocated
Actual < Allocated--overallocated
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