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Accounting 6310
Chapter 13 – Overhead and Marketing Variances
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?
Flexible Budget for Several Levels900 units 1000
units1100 units
Variable Costs
$5 unit 4,500 5,000 5,500
Fixed costs
10,000 10,000 10,000
Total costs
14,500 15,000 15,500
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.
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.
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.
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
Variable OH Variances
• Actual Var. OH SR x AH SR x SH
• |__________________| |_____________|
• Spending Variance Efficiency Variance
• |_________________________________|
• Total Variable OH Variance
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
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
Fixed OH Variances
• Actual Fixed Flexible• Overhead Budget SR x SH• |__________________| |_____________|• Spending Variance Production Volume
Variance• |_________________________________|• Total Fixed OH Variance
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.
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)
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
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
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)
Marketing Variances
• AP x AQ SP x AQ SP x SQ
• |__________________| |_____________|
• Price Variance Quantity Variance
• |_________________________________|
• Total Marketing Variance
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
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.
Homework
• P13-5 – Oneida Metal
• P13-12 – Wine Distributors
• DUE WEDNESDAY, MARCH 18
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