Download actual level of activity

Cornerstones of Managerial
Accounting 2e
Chapter Ten
Flexible Budgets and Overhead
Analysis
Mowen/Hansen
Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation.
Thomson, the Star logo, and South-Western are trademarks used herein under
license.
1
Objective # 1
Prepare a flexible budget, and
use it for performance reporting.
2
Performance Reports
•
Compare actual costs with budgeted
costs
•
Two ways:
◦
Compare actual costs with budgeted costs
for the budgeted level of activity
∙ Based on a static budget
◦ Compare actual costs with the actual
level of activity
∙
Based on a flexible budget
3
Static Budget
•
•
A budget for one particular level of activity
Performance report will compare:
◦
◦
•
Direct materials, direct labor, and overhead costs
budgeted for the planned level of activity with
Actual costs for the actual level of activity
∙ Resulting in unfavorable variances when
actual production exceeds the planned level
To create a meaningful performance report:
◦
Actual costs and expected costs must be compared
at the same level of activity
4
Flexible Budget
•
Enables a firm to compute expected costs for a
range of activity levels
Two types:
•
◦
◦
Before-the-fact -- Allows managers to see the
expected outcomes for a range of activity levels
∙ Used to generate financial results for a number of
plausible scenarios
After-the-fact -- Created for the actual level of activity
∙ Used to compute what costs should have been for
the actual level of activity
∙ Expected costs are then compared with the actual
costs in order to assess performance
5
Objective # 2
Calculate the variable overhead
variances and explain their
meaning
6
Total Overhead Variance
•
Difference between applied and actual
overhead
Broken down into:
•
◦
Total Variable Overhead Variance
∙
◦
Broken further into:
▫ Variable Overhead Spending Variance
▫ Variable Overhead Efficiency Variance
Total Fixed Overhead Variance
∙
Broken further into:
▫ Fixed Overhead Spending Variance
▫ Fixed Overhead Volume Variance
7
Total Variable Overhead Variance
Actual Costs – Applied Costs = Total Variance
(AH X AVOR) – (SH X SVOR)
Actual Hours x Actual Variable Overhead Rate
Hours allowed for production (SH)
x
Standard Variable Overhead Rate (SVOR)
8
Variable Overhead Spending Variance
•
Measures the aggregate effect of the
differences between
◦
◦
•
Actual variable overhead rate (AVOR)
Standard variable overhead rate (SVOR)
Two ways to calculate:
◦
◦
Three-pronged columnar approach
Formula approach
∙
(AVOR – SVOR)AH
9
Variable Overhead Efficiency Variance
•
Measures the change in variable overhead
consumption that occurs because of
efficient (or inefficient) use of direct labor
Two ways to calculate:
•
◦
◦
Three-pronged columnar approach
Formula approach
∙
(AH – SH)SVOR
10
Example
Formula Approach:
VOH spending variance
(AVOR – SVOR)AH
11
Example
Formula Approach:
VOH efficiency variance
(AH – SH) SVOR
12
Objective # 3
Calculate the fixed overhead
variances, and explain their
meaning
13
Total Fixed Overhead Variance
•
Difference between actual and applied fixed
overhead
•
•
When applied overhead = standard fixed overhead rate x
standard hours allowed for the actual output
Broken down into:
◦
◦
Fixed Overhead Spending Variance
Fixed Overhead Volume Variance
14
Fixed Overhead Spending Variance
•
Difference between
◦
◦
•
Actual fixed overhead rate (AFOH)
Budgeted fixed overhead rate (BFOH)
Two ways to calculate:
◦
◦
Three-pronged columnar approach
Formula approach
∙
AFOH – SFOH
15
Fixed Overhead Volume Variance
•
Difference between
◦
◦
•
Budgeted fixed overhead (BFOH)
Applied fixed overhead (ApFOH)
Two ways to calculate:
◦
◦
Three-pronged columnar approach
Formula approach
∙
(SHp – SH)SFOR
16
Example
Information:
•
•
•
•
Standard fixed overhead rate (SFOR)
$10.00 per direct labor hour
Budgeted fixed overhead (BFOH) $1,800
Number of tee shirts produced 1,200 units
Hours allowed for production (SH) 144 hours
17
Example
Formulas:
Fixed Overhead (FOH)
Volume Variance
AFOH – BFOH
18
Example
Formulas:
Fixed Overhead (FOH)
Efficiency Variance
(SHp - SH) SFOR
19
Objective # 4
Prepare an activity-based
flexible budget.
20
Activity-Based Budgeting
•
•
A powerful planning and control tool
Can be used to emphasize cost
reduction through the elimination of
wasteful activities and improving
efficiency of necessary activities
Two types:
•
◦
◦
Static activity budgets
Activity-based flexible budget
21