Manerial accounting 11e garrison noreen brewer chap011

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11th Edition Chapter 11 McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Flexible Budgets and Overhead Analysis Chapter Eleven McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc Static Budgets and Performance Reports Static budgets are prepared for a single, planned level of activity Hmm! Comparing static budgets with actual costs is like comparing apples and oranges Performance evaluation is difficult when actual activity differs from the planned level of activity McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Flexible Budgets May be prepared for any activity level in the relevant range Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons Reveal variances related to cost control Improve performance evaluation Let’s look at CheeseCo McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Static Budgets and Performance Reports CheeseCo Static Budget Machine hours Variable costs Indirect labor Indirect materials Power Fixed costs Depreciation Insurance Total overhead costs McGraw-Hill/Irwin Actual Results Variances 10,000 $ 40,000 30,000 5,000 12,000 2,000 $ 89,000 Copyright © 2006 The McGraw-Hill Companies, Inc Static Budgets and Performance Reports CheeseCo Static Budget Machine hours Variable costs Indirect labor Indirect materials Power Fixed costs Depreciation Insurance Total overhead costs McGraw-Hill/Irwin Actual Results 10,000 8,000 $ 40,000 30,000 5,000 $ 34,000 25,500 3,800 12,000 2,000 12,000 2,050 $ 89,000 $ 77,350 Variances Copyright © 2006 The McGraw-Hill Companies, Inc Static Budgets and Performance Reports CheeseCo Static Budget Machine hours 10,000 Actual Results Variances 8,000 2,000 U Variable costs U = Unfavorable variance Indirect labor $ 40,000 $ 34,000 CheeseCo was30,000 unable to achieve Indirect materials 25,500 level of activity Power the budgeted 5,000 3,800 Fixed costs Depreciation Insurance Total overhead costs McGraw-Hill/Irwin $6,000 F 4,500 F 1,200 F 12,000 2,000 12,000 2,050 50 U $ 89,000 $ 77,350 $11,650 F Copyright © 2006 The McGraw-Hill Companies, Inc Static Budgets and Performance Reports CheeseCo Static Budget Machine hours Variable costs Indirect labor Indirect materials Power Actual Results Variances 10,000 8,000 2,000 U $ 40,000 30,000 5,000 $ 34,000 25,500 3,800 $6,000 F 4,500 F 1,200 F F = Favorable variance that occurs when Fixed costs actual costs are less than budgeted12,000 costs Depreciation 12,000 Insurance 2,000 2,050 Total overhead costs McGraw-Hill/Irwin $ 89,000 $ 77,350 50 U $11,650 F Copyright © 2006 The McGraw-Hill Companies, Inc Static Budgets and Performance Reports CheeseCo Static Budget Machine hours Variable costs Indirect labor Indirect materials Power Actual Results Variances 10,000 8,000 2,000 U $ 40,000 30,000 5,000 $ 34,000 25,500 3,800 $6,000 F 4,500 F 1,200 F Since cost variances are favorable, have Fixed costs we done a good job controlling costs? Depreciation 12,000 12,000 Insurance 2,000 2,050 Total overhead costs McGraw-Hill/Irwin $ 89,000 $ 77,350 50 U $11,650 F Copyright © 2006 The McGraw-Hill Companies, Inc Static Budgets and Performance Reports I don’t think I can answer the question using a static budget McGraw-Hill/Irwin Actual activity is below budgeted activity So, shouldn’t variable costs be lower if actual activity is lower? Copyright © 2006 The McGraw-Hill Companies, Inc Fixed Overhead Variances – A Closer Look Budget Variance Results from spending more or less than expected for fixed overhead items McGraw-Hill/Irwin Now, Now,let’s let’suse usethe the standard standardhours hoursallowed allowed to tocompute computethe thefixed fixed overhead overheadvolume volume variance variance Copyright © 2006 The McGraw-Hill Companies, Inc Fixed Overhead Variances – Example Actual Fixed Overhead Fixed Overhead Fixed Overhead Incurred Budget Applied SH × FR 3,200 hours × $3.00 per hour $8,450 $9,000 $9,600 Budget variance $550 favorable McGraw-Hill/Irwin Volume variance $600 favorable Copyright © 2006 The McGraw-Hill Companies, Inc Volume Variance – A Closer Look Volume Variance Results when standard hours allowed for actual output differs from the denominator activity Unfavorable when standard hours < denominator hours McGraw-Hill/Irwin Favorable when standard hours > denominator hours Copyright © 2006 The McGraw-Hill Companies, Inc Volume Variance – A Closer Look Volume Variance Does not measure overor under spending Results when standard hours actualtreating output differs Itallowed resultsforfrom fixed from the denominator activity overhead as if it were a variable cost Unfavorable when standard hours < denominator hours McGraw-Hill/Irwin Favorable when standard hours > denominator hours Copyright © 2006 The McGraw-Hill Companies, Inc Quick Check  Yoder Yoder Enterprises’ Enterprises’ actual actual production production for for the the period period required required 2,100 2,100 standard standard direct direct labor labor hours hours Actual Actual fixed fixed overhead overhead for for the the period period was was $14,800 $14,800 The The budgeted budgeted fixed fixed overhead overhead was was $14,450 $14,450 The The predetermined predetermined fixed fixed overhead overhead rate rate was was $7 $7 per per direct direct labor labor hour hour What What was was the the budget budget variance? variance? a a $350 $350 U U b b $350 $350 FF c c $100 $100 FF d d $100 $100 U U McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Quick Check  Budget Yodervariance Enterprises’ Yoder Enterprises’ actual actual production production for for the the period required 2,100 labor = Actual fixed overhead – Budgeteddirect fixed overhead period required 2,100 standard standard direct labor hours Actual fixed hours Actual fixed overhead overhead for for the the period period = $14,800 – $14,450 was was $14,800 $14,800 The The budgeted budgeted fixed fixed overhead overhead $350 U was The was= $14,450 $14,450 The predetermined predetermined fixed fixed overhead overhead rate rate was was $7 $7 per per direct direct labor labor hour hour What What was was the the budget budget variance? variance? a a $350 $350 U U b b $350 $350 FF c c $100 $100 FF d d $100 $100 U U McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Quick Check  Yoder Yoder Enterprises’ Enterprises’ actual actual production production for for the the period period required required 2,100 2,100 standard standard direct direct labor labor hours hours Actual Actual fixed fixed overhead overhead for for the the period period was was $14,800 $14,800 The The budgeted budgeted fixed fixed overhead overhead was was $14,450 $14,450 The The predetermined predetermined fixed fixed overhead overhead rate rate was was $7 $7 per per direct direct labor labor hour hour What What was was the the volume volume variance? variance? a a $250 $250 U U b b $250 $250 FF c c $100 $100 FF d d $100 $100 U U McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Quick Check  Volume variance Yoder Yoder Enterprises’ Enterprises’ actual actual production production for for the the = Budgeted fixed overhead – (SH × FR) period period required required 2,100 2,100 standard standard direct direct labor labor $14,450 – (2,100 hours × $7 hour) hours fixed overhead for the period hours.=Actual Actual fixed overhead forper the period = $14,450The – $14,700 was budgeted was $14,800 $14,800 The budgeted fixed fixed overhead overhead = $250 F The was was $14,450 $14,450 The predetermined predetermined fixed fixed overhead overhead rate rate was was $7 $7 per per direct direct labor labor hour hour What What was was the the volume volume variance? variance? a a $250 $250 U U b b $250 $250 FF c c $100 $100 FF d d $100 $100 U U McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Quick Check Summary Actual Fixed Overhead Fixed Overhead Fixed Overhead Incurred Budget Applied SH × FR 2,100 hours × $7.00 per hour $14,800 $14,450 Budget variance $350 unfavorable McGraw-Hill/Irwin $14,700 Volume variance $250 favorable Copyright © 2006 The McGraw-Hill Companies, Inc Overhead Variances Let’s look at a graph showing fixed overhead variances We will use ColaCo’s numbers from the previous example McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Fixed Overhead Variances Cost $9,000 budgeted fixed OH d a e h ts r c e u v d o o r d p e Fix d to e i l p ap 3,000 Hours Expected Activity McGraw-Hill/Irwin Activity Copyright © 2006 The McGraw-Hill Companies, Inc Fixed Overhead Variances Cost { $550 Favorable Budget Variance McGraw-Hill/Irwin $9,000 budgeted fixed OH $8,450 actual fixed OH d a e h ts r c e u v d o o r d p e Fix d to e i l p ap 3,000 Hours Expected Activity Activity Copyright © 2006 The McGraw-Hill Companies, Inc Fixed Overhead Variances Cost $600 Favorable Volume Variance { $550 { Favorable Budget Variance McGraw-Hill/Irwin 3,200 machine hours × $3.00 fixed overhead rate $9,600 applied fixed OH $9,000 budgeted fixed OH $8,450 actual fixed OH d a e h ts r c e u v d o o r d p e Fix d to e i l p ap 3,000 Hours Expected Activity Activity 3,200 Standard Hours Copyright © 2006 The McGraw-Hill Companies, Inc Overhead Variances and Under- or Overapplied Overhead Cost In a standard cost system: Unfavorable variances are equivalent to underapplied overhead Favorable variances are equivalent to overapplied overhead The sum of the overhead variances equals the under- or overapplied overhead cost for a period McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc End of Chapter 11 McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc
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