Accounting 6310

1. Accounting 6310 Chapter 13 – Overhead and Marketing Variances

2. Predetermined Overhead Rates • Budgeted overhead = Predetermined OH • Budgeted cost driver Rate • Budgeted cost driver? What volume should be used? • Expected volume? Based on next year’s projected volume • Normal volume? Long-run average production • Some other volume?

3. Flexible Budget for Several Levels

4. Predetermined OH Rates • Variable OH: $4,500/900 = $5 • $5,000/1,000 = $5 • $5,500/1,100 = $5 • It makes no difference which level of output we choose to set variable OH rate. It is $5 for all of the levels.

5. Predetermined OH Rates • Fixed OH: $10,000/900 = $11.11 • $10,000/1,000 = $10 • $10,000/1,100 = $9.09 • It DOES make a difference which level of output we choose to set the fixed OH rate. The OH rate varies from $11.11 to $9.09 based on the level of units we choose to set the rate. This chosen level is called the DENOMINATOR LEVEL.

6. Predetermined OH Rates • If we choose to use 900 units to set our OH rate, we will have the higher $11.11 OH rate. • More overhead will be allocated than the other two levels. • We are more likely to have overallocated OH with a higher rate.

7. Variable Overhead • Flexible budget rates = standard rate • Predetermined OH rate • Flexible budget variances • Spending variance • Difference in actual cost and predetermined variable overhead rate multiplied by the actual cost driver • Efficiency variance • Difference in actual cost driver and STANDARD cost driver multiplied by the predetermined variable overhead rate • Causes

8. Variable OH Variances • Actual Var. OH SR x AH SR x SH • |__________________| |_____________| • Spending Variance Efficiency Variance • |_________________________________| • Total Variable OH Variance

9. Fixed Overhead • Flexible budget rates - based on denominator level • Fixed spending variance • Difference in actual amount spent and budgeted amount (FROM THE FLEXIBLE BUDGET) • Controllable variance

10. Fixed Overhead • Production-volume variance • Difference in flexible budget and predetermined fixed overhead rate x standard activity • Depends on denominator level chosen • This is part of the sales volume variance • Deemed an “uncontrollable” variance • Causes

11. Fixed OH Variances • Actual Fixed Flexible • Overhead Budget SR x SH • |__________________| |_____________| • Spending Variance Production Volume Variance • |_________________________________| • Total Fixed OH Variance

12. Variances • Efficiency variance – we are assuming that variable overhead varies linearly with the cost driver. If this is not the case, this variance will be inaccurate. • Production volume variance – If the production manager is responsible for this variance, this may cause overproduction. Better to put sales in charge of this variance.

13. Marketing Variances • For revenues, the opposite holds true. • FAVORABLE: Actual > Standard • UNFAVORABLE: Actual < Standard • Marketing Variances • Price variance (Difference in sales prices) • Quantity variance (Difference in sales volumes) • Mix variance (Results from selling a different proportion of products than planned) • Sales variance (Difference in volume sold)

14. Marketing Variances • Price – • Result of this variance lets management know how successful their price strategy was • Did they have to lower their price to sell products? Or were customers willing to pay a price premium? • Person who sets prices is responsible

15. Marketing Variances • Quantity – • Mix – details consumer preferences for products, especially when the products are substitutes • Favorable (unfavorable) if consumers shift to a higher (lower) priced (CM) product • Must evaluate why customers chose one product over another • Marketing probably responsible

16. Marketing Variances • Quantity: • Sales (volume) Variance: • This variance tells us whether we sold more units than planned. • Favorable variance results if we sold more volume than planned. • Person responsible for generating demand for overall product is responsible (probably marketing)

17. Marketing Variances • AP x AQ SP x AQ SP x SQ • |__________________| |_____________| • Price Variance Quantity Variance • |_________________________________| • Total Marketing Variance

18. Marketing Variances • Quantity Variance: • Mix variance = (Actual mix % - Standard mix %) x Actual units of all products sold x Standard price • Sales variance = (Actual units of all products sold – standard units of all products sold) x standard mix % x Standard Price

19. Sales Volume Variance • Sales volume variance can be broken down into: • Change in market share due to market share: • Tells us how much of our change in profits is due to increases or decreases in our hold on the market • Our managers should be able to control this variance. • Change in market share due to industry volume: • Tells us how much of our increased (decreased) sales is due to a bigger (smaller) overall market for our products • Our managers generally cannot control the overall industry volume.

20. Homework • P13-5 – Oneida Metal • P13-12 – Wine Distributors • DUE THURSDAY, MARCH 6