Chapter 8 Cost

What are the steps in developing a budgeted fixed overhead​ rate?

1. Choose the period to be used for the budget. 2. Select the cost-allocation bases to use in allocating fixed overhead costs to the output produced. 3. Identify the fixed overhead costs associated with each cost-allocation base. 4. Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to output produced.

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 overhead costs to the output produced. 3. Identify the variable overhead costs associated with each cost-allocation base. 4. Compute the rate per unit of each cost-allocation base used to allocate variable overhead costs to output produced.

Assume variable manufacturing overhead is allocated using​ machine-hours. Give three possible reasons for a favorable variable overhead efficiency variance.

1. Machine time standards were overly lenient. 2. Machines operated with fewer slowdowns than budgeted. 3. Workers more skillful in using machines than budgeted.

What are the factors that affect the spending variance for variable manufacturing​ overhead?

1. Price changes of individual inputs​ (such as energy and indirect​ materials) included in variable overhead relative to budgeted prices. 2. Percentage change in the actual quantity used of individual items included in variable overhead cost​ pool, relative to the percentage change in the quantity of the cost driver of the variable overhead cost pool.

Describe the difference between a direct materials efficiency variance and a variable manufacturing overhead efficiency variance.

A direct materials efficiency variance indicates whether more or less direct materials were used than was budgeted for the actual output achieved. A variable manufacturing overhead efficiency variance indicates whether more or less of the chosen allocation base was used than was budgeted for the actual output achieved.

How does the planning of fixed overhead costs differ from the planning of variable overhead costs?

At the start of an accounting period, a larger percentage of fixed overhead costs are locked-in than is the case with 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. This is a strategic decision.

Why is the flexible-budget variance the same amount as the spending variance for fixed manufacturing overhead?.

Flexible-budget variance Efficiency variance (never a variance) Spending variance There is never an efficiency variance for fixed overhead because managers cannot be more or less efficient in dealing with an amount that is fixed regardless of the output level. The result is that the flexible-budget variance amount is the same as the spending variance for fixed-manufacturing overhead.

Explain how the analysis of fixed manufacturing overhead costs differs for​ (a) planning and control on the one hand and​ (b) inventory costing for financial reporting on the other hand.

For planning and control​ purposes, fixed overhead costs are [a lump sum amount that is not controlled on a per-unit basis]. In​ contrast, for inventory costing​ purposes, fixed overhead costs are [allocated to products on a per-unit basis]

How do managers plan for variable overhead​ costs?

Planning to undertake only those variable overhead activities that add value for customers using the product or​ service, and to use the cost drivers in those activities in the most efficient way.

How does standard costing differ from actual​ costing?

Standard​ costing: Standard prices x Standard inputs allowed for actual output = Direct costs Standard indirect cost-allocation rate x Standard qty of cost-allocation base allowed for actual output = Indirect costs Actual​ costing:Actual prices x Actual inputs used = Direct costs Actual indirect rate x Actual inputs used = Indirect costs

Why is the​ flexible-budget variance the same amount as the spending variance for fixed manufacturing​ overhead?

There is [never] an efficiency variance for fixed overhead because managers [cannot be more or less efficient] in dealing with an amount that is fixed regardless of the output level.

Each of the following statements is correct regarding overhead variances except: a. Actual overhead greater than applied overhead is unfavorable. b. The efficiency overhead variance ignores the standard variable overhead rate. c. Variable overhead rates are not a factor in the production-volume variance calculation. d. Favorable spending and efficiency variances imply that the flexible budget variance must be favorable.

b. The efficiency overhead variance ignores the standard variable overhead rate. The efficiency variance multiplies the standard variable overhead rate by the difference between actual and standard direct labor hours.

As part of her annual review of her company's budgets versus actuals, Mary Gerard isolates unfavorable variances with the hope of getting a better understanding of what caused them and how to avoid them next year. The variable overhead efficiency variance was the most unfavorable over the previous year, which Gerard will specifically be able to trace to: a. Actual overhead costs below applied overhead costs. b. Actual production units below budgeted production units. c. Standard direct labor hours below actual direct labor hours. d. The standard variable overhead rate below the actual variable overhead rate.

c. Standard direct labor hours below actual direct labor hours. The variable overhead efficiency variance is calculated as the difference between actual direct labor hours used versus standard (budgeted) direct labor hours allowed, multiplied by the standard variable overhead rate. If standard hours are below actual hours, this would mean more hours were used than expected and would therefore cause an unfavorable variance.