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Chapter 17

Flexible Budgets. Overhead Cost Management. Chapter 17. Flexible overhead budgets. Basic formula. Flexible overhead budgets. Overhead cost variances. Used for control and evaluation of overhead costs Variable overhead variances Variable overhead spending variance

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Chapter 17

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  1. Flexible Budgets Overhead Cost Management Chapter 17

  2. Flexible overhead budgets • Basic formula

  3. Flexible overhead budgets

  4. Overhead cost variances • Used for control and evaluation of overhead costs • Variable overhead variances • Variable overhead spending variance • Variable overhead efficiency variance • Fixed overhead • Fixed overhead budget variance • Fixed overhead volume variance

  5. Variable overhead variances Actual variable overhead Actual activity X variable OH rate Standard activity X variable OH rate Variable overhead spending variance Variable overhead efficiency variance

  6. Fixed overhead variances Actual fixed overhead Budgeted fixed overhead Fixed overhead applied to WIP Fixed overhead budget variance Fixed overhead volume variance

  7. Variable overhead variances $2,785.00 14,270 hours X $0.19 = $2,711.30 14,000 hours X $0.19 = $2,660.00 $73.70 unfavorable Variable overhead spending variance $51.30 unfavorable Variable overhead efficiency variance

  8. Variable overhead variances • VOH spending variance • Total VOH cost is greater than the amount that should have been incurred at the actual hours worked • VOH efficiency variance • Number of hours worked is greater than the amount that should have been worked for the output achieved

  9. Fixed overhead variances $2,840.00 $2,400.00 14,000 hours X $0.15 $2,100.00 $440.00 unfavorable Fixed overhead budget variance $300.00 unfavorable Fixed overhead volume variance

  10. Fixed overhead variances • FOH budget variance • Actual FOH cost is greater than the amount budgeted • FOH volume variance • Volume of output was less than planned

  11. Backflush Costing • In a Just-in-Time environment • Products made to order • No inventories • All costs charged to CoGS • If there are inventories • Percentage of DM, DL and OH in each inventory is determined • Inventory accounts are adjusted accordingly and CoGS is reduced

  12. Proration of Variances • At end of period • Variances are pro-rated to inventory accounts and CoGS • Raw Materials inventory only receives a proration of the material price variance • All other inventories and CoGS receive prorations of all variances

  13. Sales-related Variances • Revenue budget variance • Difference between actual and budgeted revenue • Sales price variance • Actual sales volume * difference between actual and budgeted sales price • Sales volume variance • Budgeted sales price * difference between actual and budgeted sales volume

  14. Sales-related variances

  15. Sales-related variances

  16. Sales-related variances

  17. Sales-related variances

  18. Sales-related variances • Sales mix variance Difference between actual and budgeted sales proportion for the specific product Budgeted sales price for the specific product Total unit sales for all products * *

  19. Sales-related variances

  20. Sales-related variances • Sales quantity variance Difference between actual and budgeted unit sales volume for all products Budgeted sales proportion for the specific product Budgeted sales price for the specific product * *

  21. Sales-related variances

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