Managerial Accounting Ch.11 Budgeting and Analysis of Overhead Costs
What do the sales price and sales volume variances tell you?
Together, the sales-price and sales-volume variances explain the variance between actual and budgeted sales revenue.
Formula Flexible Budget
Total Budgeted Overhead Cost = ( Budgeted variable cost per activity unit x total activity units) + Budgeted fixed overhead costs per month
What does an unfavorable spending variance mean?
Total actual cost of overhead is greater than expected
Sales Volume Variance
BSP (ASV-BSV)
Overhead Application in a Normal Costing System
Based on actual hours
Advantages of Flexible Budgets
1. Revenues and expenses are what they should have been at the actual level of activity 2. Flexible budgets can be prepared for any level of activity within relevant range 3. Reveal variances due to good cost control or lack of cost control 4. Improve performance evaluation
Important Issues when choosing an activity measure for overhead budgeting and application
1. Variable overhead and the activity measure should vary in a similar pattern. 2. Identify Variable overhead cost drivers ex: Machine hours, labor hours, process time 3. Dollar measures should be avoided as they are subject to price-level changes
Flexible Budget
A budget that is valid for a range of activity
Static Budget
A budget that is valid for only one planned activity level. Drawback: When actual activity differs from predicted activity levels, it is hard to evaluate performance for overhead
Applied fixed overhead
AFOH= PFOHR x Standard Allowed
Spending Variance
AQ (AVR-SVR)
Sales Price Variance
ASV (ASP-BSP)
Possible causes of an unfavorable spending variance
An unfavorable spending variance could result from paying a higher-than-expected price per unit for variable-overhead items. Or the variance could result from using more of the variable-overhead items than expected.
PFOHR
Budgeted Fixed Overhead / Planned Activity in Hours
What does the budget variance result from?
Results from paying more or less than expected for overhead items.
What does the volume variance result from?
Results from the inability to operate at the activity level planned for the period. Has no significance for cost control
Efficiency Variance
SVR (AQ-SQ)
Overhead application in a standard costing system
Standard hours allowed, given actual output
What is the fixed overhead budget variance?
The budget variance is the difference between the actual fixed overhead costs incurred and the budgeted fixed overhead.
What does the variable overhead efficiency variance mean?
The variable overhead efficiency variance is a function of the cost driver selected. It does not reflect overhead control.
Overhead Cost Performance Report
The variable-overhead spending and efficiency variances and the fixed-overhead budget variance can be computed for each overhead cost item in the flexible budget. When these itemized variances are presented along with actual and budgeted costs for each overhead item, the result is an overhead cost performance report. The overhead cost performance report will include only spending and efficiency variances for the variable items, and only a budget variance for the fixed items.
What is the fixed overhead volume variance?
The volume variance is the difference between the budgeted fixed overhead and the applied fixed overhead.
Activity Based Flexible Budget
Under the more accurate product-costing method called activity-based costing, several cost drivers are identified. Costs that may appear fixed with respect to a single volume-based cost driver, such as machine hours, may be variable with respect to some other cost driver. The activity-based costing approach also can be used as the basis for a flexible budget for planning and cost management purposes. An activity-based flexible budget should be prepared with different cost formulas based on the different cost drivers.
How to close variances
Variances are closed directly to the cost of goods sold account. When actual overhead is greater than applied overhead, a debit balance remains in manufacturing overhead. That balance is closed by crediting manufacturing overhead and debiting cost of goods sold. When applied overhead is greater than actual overhead, a credit balance remains in manufacturing overhead. That balance is closed by debiting manufacturing overhead and crediting cost of goods sold.
When do flexible budgets use input or output measures?
When there is one product it does not matter. When there are multiple products that require different levels of input, it is more useful to use standard input measures.
