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8/12/2019 Managerial Accounting Ch11(1)[1]
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Cornerstonesof Managerial Accounting 3e
MOWEN / HANSEN / HEITGERCOPYRIGHT 2009 South-Western/Cengage Learning
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Chapter Eleven
Flexible Budgets and OverheadAnalysis
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Learning Objectives
1. Prepare a flexible budget, and use itfor performance reporting.
2. Calculate the variable overheadvariances, and explain their meaning.
3. Calculate the fixed overheadvariances, and explain their meaning.
4. Prepare an activity-based flexiblebudget.
3
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OBJECTIVE
1
Prepare a flexiblebudget, and use it forperformance reporting.
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Performance Reports
Compare actual costs with budgetedcosts
Two ways:
Compare actual costs with budgetedcosts for the budgeted level of activity
Based on a static budget
Compare actual costs with the actuallevel of activity
Based on a flexible budget
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Static Budget
A budget for one particular level of activity Performance report will compare:
Direct materials, direct labor, and overheadcosts budgeted for the planned level of activity
with Actual costs for the actual level of activity
Resulting in unfavorable variances when actualproduction exceeds the planned level
To create a meaningful performance
report: Actual costs and expected costs must be
compared at the same level of activity
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Cornerstone 11-1
HOW TO Prepare a Performance ReportBased on a Static Budget (Using Budgeted
Production)
7
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Example
Information:From the Master Budget Actual Data for Quarter 1
Production for Quarter 1: 1,060 Production: 1,200 units
Materials:
1 plain t-shirt @ $3.005 ounces of ink @ $0.20
Labor: 0.12 hours @ $10.00
Variable overhead:
Maintenance: 0.12 hour @ $3.75
Materials cost: $4,380
Labor cost: $1,500
Maintenance cost: $535Power: 0.12 hour @ $1.25 Power cost: $170
Fixed overhead:
Grounds keeping: $1,200 per qtr Grounds keeping: $1,050
Depreciation: $600 per quarter Depreciation: $600
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Example
Required:
Prepare a performance report using a budget
based on expected production.
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Performance Report Example
Units produced 1,060Budgeted
The plan is to produce 1,060 units. All budgetedcosts will be based on 1,060 units.
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Performance Report Example
Units produced 1,060Budgeted
($3.00 t-shirt + $1.00 ink) x 1,060 units
Direct materials cost $4,240
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Performance Report Example
Units produced 1,060Budgeted
(0.12 hours x $10.00 per hour) x 1,060 units
Direct materials cost $4,240
Direct labor cost 1,272
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Performance Report Example
Units produced 1,060Budgeted
(0.12 hours x $3.75 per hour) x 1,060 units
Direct materials cost $4,240
Direct labor cost 1,272
Variable overhead:
Maintenance 477
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Performance Report Example
Units produced 1,060Budgeted
(0.12 hours x $1.25 per hour) x 1,060 units
Direct materials cost $4,240
Direct labor cost 1,272
Variable overhead:
Maintenance 477
Power 159
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Performance Report Example
Units produced 1,060Budgeted
Direct materials cost $4,240
Direct labor cost 1,272
Variable overhead:
Maintenance 477
Power 159
Fixed overhead:
Grounds keeping 1,200
Depreciation 600
Groundskeeping anddepreciation
are bothfixed costs.They will be$1,200 and
$600regardless of
the numberof units
produced.
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Performance Report Example
Units produced 1,060Budgeted
Direct materials cost $4,240
Direct labor cost 1,272
Variable overhead:
Maintenance 477
Power 159
Fixed overhead:
Grounds keeping 1,200
Depreciation 600
$7,948Total
Total budgeted costs for 1,060 units
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Performance Report Example
Units produced 1,060Budgeted
Direct materials cost $4,240
Direct labor cost 1,272
Variable overhead:
Maintenance 477
Power 159
Fixed overhead:
Grounds keeping 1,200
Depreciation 600
$7,948Total
Actual1,200
Variance140 F
140 moreunits wereproduced
thanoriginallybudgeted
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Performance Report Example
Units produced 1,060
Budgeted
Direct materials cost $4,240
Direct labor cost 1,272
Variable overhead:
Maintenance 477
Power 159
Fixed overhead:
Grounds keeping 1,200
Depreciation 600
$7,948Total
Actual
1,200
Variance
140 F
$4,830 $590 U
1,500 228 U
535 58 U
170 11 U
1,050 (150) F
Overall, actual costs exceeded budgeted costs by $737. Budgeted costs were
based on 1,060 units and 1,200 units were actually produced.
600 0
$8,685 $737 U
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Flexible Budget
Enables a firm to compete expected costs fora range of activity levels
Two types:
Before-the-factAllows 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-factCreated for the actual level of activity
Used to compute what costs should have been forthe actual level of activity
Expected costs are then compared with the actualcosts in order to assess performance
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Cornerstone 11-2
HOW TO Prepare a Flexible ProductionBudget
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Example
Levels of output: 1,000, 1,200 and 1,400
Materials (1 plain t-shirt @ $3.00 & 5 ounces of ink@ $0.20)
Labor: 0.12 hour @ $10.00 per hour
Variable overhead:
Maintenance: 0.12 hours @ $3.75 per hour
Power: 0.12 hours @ $1.25 per hour
Fixed overhead: Grounds keeping: $1,200 perquarter &Depreciation: $600 per quarter
Information:
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Example
Required:
Prepare a budget for three levels of output:
1,000, 1,200 and 1,400 units
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Flexible Budget
Variable:
1,200
Direct materials
1,400
$4.00
1,000Variable cost
per unitRange of Production (units)Production
costs
$3.00 t-shirt and $1.00 of ink
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Flexible Budget
Variable:
1,200
Direct materials
1,400
$4.00
1,000Variable cost
per unitRange of Production (units)Production
costs
$4,000 $5,600$4,800
$4 x # of units
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Flexible Budget
Variable:
1,200
Direct materials
1,400
$4.00
1,000Variable cost
per unitRange of Production (units)Production
costs
$4,000 $5,600$4,800
0.12 hours$10 per hour
Direct labor 1.20
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Flexible Budget
Variable:
1,200
Direct materials
1,400
$4.00
1,000Variable cost
per unitRange of Production (units)Production
costs
$4,000 $5,600$4,800
Direct labor 1.20 1,200 1,6801,440
$1.20# of units
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Flexible Budget
Variable:
1,200
Direct materials
1,400
$4.00
1,000Variable cost
per unitRange of Production (units)Production
costs
$4,000 $5,600$4,800
Direct labor 1.20 1,200 1,6801,440Variable overhead:
Maintenance 0.45 450 630540
0.12 hours
$3.75 per hour
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Flexible Budget
Variable:
1,200
Direct materials
1,400
$4.00
1,000Variable cost
per unitRange of Production (units)Production
costs
$4,000 $5,600$4,800
Direct labor 1.20 1,200 1,6801,440Variable overhead:
Maintenance 0.45 450 630540
0.12 hours$1.25 per hour
Power 0.15 150 210180
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Flexible Budget
Variable:
1,200
Direct materials
1,400
$4.00 $4,000 $5,600
Direct labor 1.20 1,200 1,680Variable overhead:
Maintenance 0.45 450 630
Power 0.15 150 210
1,000
$4,800
1,440
540180
$5.80$5,800
$6,960 $8,120Total variable costs
Variable costper unit
Range of Production (units)Productioncosts
Fixed overhead:
Grounds keepingDepreciation
1,200 1,200 1,200
600 600 600
Fixed costs do no change when levels of output change
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Flexible Budget cont inued
1,200 1,4001,000Variable cost
per unitRange of Production (units)Production
costs
Fixed overhead:
Grounds keeping
Depreciation
1,200 1,200 1,200
600 600 600$1,800$1,800
$9,920$8,760$7,600
Total fixed costs $1,800
Total production costs
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Cornerstone 11-3
HOW TO Prepare a Performance Reportusing a Flexible Budget
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Example
Budgeted Costs Actual Costs @ 1200 units
Direct Materials: $4 per unit Direct Materials: $4,830
Direct Labor: $1.20 per unitVariable overhead:
Maintenance: $0.45 per unit Maintenance cost: $535
Power: $0.15 per unit Power cost: $170Fixed overhead:
Grounds keeping: $1,200 per qtr Grounds keeping: $1,050
Depreciation: $600 per quarter Depreciation: $600
Direct Labor: $1,500
Information:
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Example
Required:
Prepare a performance report using budgeted
costs for the actual level of activity.
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Performance Report Example
Units produced 1,200BudgetedActual
1,200Variance
Budgeted costs are based on actual unitsproduced
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Performance Report Example
Units produced 1,200BudgetedActual
1,200Variance
Direct materials costs to produce 1,200 unitswere $30 higher than expected
Direct materials $4,830 $4,800 $ 30 U
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Performance Report Example
Units produced 1,200Budgeted
Direct materials cost $4,800
Direct labor cost 1,440
Variable overhead:Maintenance 540
Power 180
Fixed overhead:Grounds keeping $1,200
Depreciation 600
$7,948Total production costs
Actual1,200
Variance
$4,830 $30 U
1,500 60 U
535 (5) U
170 (10) U
$1,050 $(150) F
600 0
$8,685$ (75) F
$7,035Total variable costs $6,960 $ 75 U
Total fixed costs $1,650 $1,800 $(150) F
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OBJECTIVE 2
Calculate the variableoverhead variances andexplain their meaning.
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Total Overhead Variance
Difference between applied and actualoverhead
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
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Cornerstone 11-4
HOW TO Calculate the Total VariableOverhead Variance
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Example
Standard variable overhead rate (SVOR)$5.00 per direct labor hour
Actual variable overhead costs
Actual direct labor hours (AH) = 150 hours
Actual Variable Overhead Rate (AVOR) $4.70 perhour
Standard hours (SH) allowed per unit0.12 hour
Actual production 1,200 units
Information:
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Example
Required:
Calculate the total variable overhead variance.
T t l V i bl O h d
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Total Variable OverheadVariance
Actual Costs Applied Costs Total Variance =
(AHAVOR)
Actual HoursActual Variable Overhead Rate
T t l V i bl O h d
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Total Variable OverheadVariance
Actual Costs Applied Costs Total Variance =
(AHAVOR)
150 hours$4.70
$705
T t l V i bl O h d
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Total Variable OverheadVariance
Actual Costs Applied Costs Total Variance =
(AHAVOR)
Hours allowed for production (SH)
Standard Variable Overhead Rate (SVOR)
$705
(SHSVOR)
T t l V i bl O h d
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Total Variable OverheadVariance
Actual Costs Applied Costs Total Variance =
(AHAVOR)
144 hours$5.00
$705
(SHSVOR)
$720
Total Variable O erhead
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Total Variable OverheadVariance
Actual Costs Applied Costs Total Variance =
(AHAVOR)
This is a favorable variance since actual costs
were less than expected
$705
(SHSVOR)
$720 = $15
Variable Overhead Spending
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Variable Overhead SpendingVariance
Measures the aggregate effect of thedifferences betweenActual variable overhead (AVOR)
Standard variable overhead rate(SVOR)
Two ways to calculate: Three-pronged columnar approach
Formula approach (AVORSVOR) AH
Variable Overhead Efficiency
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Variable Overhead EfficiencyVariance
Measures the change in variableoverhead consumption that occursbecause of efficient (or inefficient)
use of direct labor Two ways to calculate:
Three-pronged columnar approach
Formula approach (AHSH) SVOR
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Cornerstone 11-5
HOW TO Calculate Variable OverheadVariances: Columnar and Formula
Approaches
50
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Example
Standard variable overhead rate (SVOR)$5.00 per direct labor hour
Actual variable overhead rate (AVOR)$4.70
Actual hours worked (AH) 150 hours
Number of tee shirts produced 1,200units
Hours allowed for production (SH) 144
hours
Information:
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Example
Required:
Calculate the variable overhead spending and
efficiency variances.
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Example
Columnar Approach
1. AH AVOR150 $4.70
$705
2. AHSVOR
150 $5.00
$750
3. SH SVOR144 $5.00
$720
SpendingVariance
(12)$45 F
This is a favorable variance since the actualvariable overhead rate was less than the
expected rate
E l
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Example
Columnar Approach
1. AH AVOR150 $4.70
$705
2. AHSVOR
150 $5.00
$750
3. SH SVOR144 $5.00
$720
SpendingVariance
(12)$45 F
EfficiencyVariance
(23)$30 U
This is an unfavorable variance since the actualhours exceeded budgeted hours
E l
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Example
Columnar Approach
1. AH AVOR150 $4.70
$705
2. AH x SVOR150 x $5.00
$750
3. SH x SVOR144 x $5.00
$720
SpendingVariance
(12)$45 F
EfficiencyVariance
(23)$30 U
Total Variance(13)$15 F
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E l
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Example
(AH - SH) SVOR
(150 - 144) $5.00
$30 Unfavorable
VOH efficiency variance
Formula Approach
C t 11 6
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Cornerstone 11-6
HOW TO Performance Report for theVariable Overhead Variances
58
E l
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Example
Standard variable overhead rate (SVOR)$5.00 per direct labor hour
Actual costs: Maintenance $535 & Power $170
Actual hours worked (AH) 150 hours
Number of t-shirts produced 1,200 units
Hours allowed for production (SH) 144hours
Variable overhead: Maintenance 0.12 hour @$3.75 & Power 0.12 hour @ $1.25
Information:
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Example
Required:
Prepare a performance report that shows the
variances on an item-by-item basis.
Performance Report
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Performance ReportFor the Quarter Ended March 31, 2010
Budget for
SpendingVariance
ActualHours
ActualCosts
CostFormula
$562.50$535$3.75
Cost
Maintenance
150 hours$3.75
Performance Report
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Performance ReportFor the Quarter Ended March 31, 2010
Budget for
SpendingVariance
ActualHours
ActualCosts
CostFormula
$562.50$535$3.75
Cost
Maintenance
$535 - $562.50
$27.50 F
Performance Report ( t i d)
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Performance Report (cont inued)For the Quarter Ended March 31, 2010
Budget for
SpendingVariance
ActualHours
$27.50 F$562.50
Cost
Maintenance
Budget forEfficiencyVariance
StandardHours
$540
144$3.75
Performance Report (cont inued)
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Performance Report (cont inued)For the Quarter Ended March 31, 2010
Budget for
SpendingVariance
ActualHours
$27.50 F$562.50
Cost
Maintenance
Budget forEfficiencyVariance
StandardHours
$540
$562.50 - $540
$22.50 U
Performance Report
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Performance ReportFor the Quarter Ended March 31, 2010
Budget for
SpendingVariance
ActualHours
ActualCosts
CostFormula
$562.50$535$3.75
Cost
Maintenance
$1.25150
$27.50 U
187.501701.25Power
Performance Report
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Performance ReportFor the Quarter Ended March 31, 2010
Budget for
SpendingVariance
ActualHours
ActualCosts
CostFormula
$562.50$535$3.75
Cost
Maintenance
$170 - $187.50
$27.50 F
187.501701.25Power 17.50 F
Performance Report (cont inued)
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Performance Report (cont inued)For the Quarter Ended March 31, 2010
Budget for
SpendingVariance
ActualHours
$27.50 F$562.50
Cost
Maintenance
Budget forEfficiencyVariance
StandardHours
$540 $22.50 U
7.50 U18017.50 F187.50Power
Performance Report
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Performance ReportFor the Quarter Ended March 31, 2010
Budget for
SpendingVariance
ActualHours
ActualCosts
CostFormula
$27.50 F$562.50$535$3.75
Cost
Maintenance
17.50 F187.501701.25Power
Total $5.00 $705 $750.00 $45.00 F
Performance Report (cont inued)
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Performance Report (cont inued)For the Quarter Ended March 31, 2010
Budget for
SpendingVariance
ActualHours
$27.50 F$562.50
Cost
Maintenance
17.50 F187.50Power
Total $750.00 $45.00 F
Budget forEfficiencyVariance
$22.50 U
StandardHours
$540
7.50 U180
$720 $30.00 U
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OBJECTIVE 3
Calculate the fixedoverhead variances, andexplain their meaning.
Total Fixed Overhead
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Variance
Difference between actual andapplied fixed overhead
When applied overhead = standard
fixed overhead ratestandard hoursallowed for the actual output
Broken down into:
Fixed Overhead Spending Variance Fixed Overhead Volume Variance
Cornerstone 11 7
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Cornerstone 11-7
HOW TO Calculate the Total FixedOverhead Variance
72
Example
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Example
Standard fixed overhead rate (SFOR)$10.00 per direct labor hour
Actual fixed overhead costs $1,650
Standard hours allowed per unit 0.12hours
Actual production 1,200 units
Information:
E l
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Example
Required:
Calculate the total fixed overhead
variance.
Total Fixed Overhead
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Variance
Actual Costs Applied Costs Total Variance =
AFOH
This is an unfavorable variance since actual
costs exceeded applied costs.
$1605
(SH X SFOR)
$1,440 = $210 U
Fixed Overhead Spending
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p gVariance
Difference betweenActual fixed overhead rate (AFOH)
Budgeted fixed overhead rate (BFOH)
Two ways to calculate: Three-pronged columnar approach
Formula approach
AFOHSFOH
Fixed Overhead Volume
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Variance
Difference between Budgeted fixed overhead (BFOH)
Applied fixed overhead (ApFOH)
Two ways to calculate: Three-pronged columnar approach
Formula approach
(SHpSH) SFOR
Cornerstone 11-8
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Cornerstone 11-8
HOW TO Calculate Fixed OverheadVariances: Columnar and Formula
Approaches
78
Example
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Example
Standard fixed overhead rate (SFOR)$10.00 per direct labor hour
Budgeted fixed overhead (BFOH) $1,800
Number of t-shirts produced 1,200 units
Hours allowed for production (SH) 144hours
Information:
E l
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Example
Required:
Calculate the fixed overhead spending
and volume variances.
Fi d O h d V i
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Fixed Overhead Variances
Columnar Approach
1. Actual FixedOverhead
$1,650
2. SH SFOR180 $10$1,800
3. SHpSFOR
144 $10$1,440
SpendingVariance
(12)$150 F
VolumeVariance
(23)$360 U
Total Variance(13)$210 U
Example
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Example
AFOH
BFOH
$1,650 - $1,800
$150 Favorable
Fixed Overhead (FOH)Volume Variance
Formula Approach
Example
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Example
(SHp SH) SFOR
(180144) $10.00
$360 Unfavorable
Formula Approach
Fixed Overhead (FOH)Efficiency Variance
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OBJECTIVE 4
Prepare an activity-based flexible budget.
Activity-Based Budgeting
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Activity Based Budgeting
A powerful planning and control tool
Can be used to emphasize costreduction through the elimination of
wasteful activities and improvingefficiency of necessary activities
Two types:
Static activity budgets
Activity-based flexible budget
Cornerstone 11-9
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Cornerstone 11 9
HOW TO Prepare Static Budget for anActivity
86
Example
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Example
Demand for purchase orders based onmaterials requirements: 15,000 purchaseorders
Resources needed:
Five purchasing agents, each capable of processing3,000 orders per year, salary, $40,000 each
Supplies projected to cost $1.00 per purchase order
Desks and computers: depreciation, $5,000 per year
Office space, rent, and utilities, $6,000
Information:
Example
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Example
Required:
Prepare a budget for the purchasing
activity.
Purchasing Budget
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Purchasing Budget
Salaries $200,000
5 agents$40,000 per agent per year
Purchasing Budget
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Purchasing Budget
Supplies
Depreciation
Salaries $200,000
5,000
15,000
$1.00 per purchase order15,000 purchase orders
Purchasing Budget
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Purchasing Budget
$226,000
6,000
Supplies
Depreciation
Salaries $200,000
Occupancy
Total
5,000
15,000
Cornerstone 11-10
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Cornerstone 11 10
HOW TO Prepare an Activity FlexibleBudget
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Example
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Example
The individual activities, drivers, their costformulas, and the output levels are theinputs needed to prepare the budget.
For example:
Activity: Maintenance
Driver: Machine hours
Fixed activity cost: $20,000 Variable activity rate: $5.50 per machine hour
Information:
Example
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Example
Required:
Prepare an activity-based flexible
budget.
Activity-Based Flexible
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Budget
$155,000$95,000$ 7.50$35,000
$20,000
Formula Level of Activity
Direct labor
Direct materials
Fixed
80,000$ 0
$100,000$ ---
Driver: Direct Labor Hours
Subtotal
$64,000$ 5.50MaintenanceMachining 2.00 47,000
Variable 10,000 20,000
$ 10 $200,000
--- 8 160,000$ 18 $180,000 $360,000
Driver: Machine Hours
$108,00015,000 31,000
Subtotal
Fixed Variable 8,000 16,000
Activity-Based Flexible
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Budget cont inued
$80,000 $197,000$177,500
$211,500
Formula Level of Activity
Inspections
Setups
Fixed
132,500
$ 45,000$ ----
Driver: Number of Setups
Subtotal
$226,000$ 1Purchasing
Variable 25 30
$ 1,800 $ 54,000
80,000 2,100 143,000$3,900
Driver: Number of Orders
$236,000Fixed Variable 15,000 30,000
Cornerstone 11-11
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HOW TO Prepare an Activity-Based PerformanceReport
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Example
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p
Information:
Actual ActivityLevel
$101,000 10,000
Actual Costs
$55,000
10,000
Maintenance
Direct labor $80,000
8,000Machining $29,0008,000
Inspections $125,5002525
Setups $46,500
Purchasing $220,000 15,000
Direct materials
Example
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Example
Required:
Prepare an activity-based performance
report.
Activity-Based PerformanceR t
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Report
Maintenance
Direct labor 80,000$100,000Direct materials
Machining
SetupsPurchasing
ActualCosts BudgetedCosts BudgetVariance
$101,00080,000
55,000 64,000
Inspections
Total
$ 1,000 U----
9,000 F29,000 31,000 2,000 F
125,500 132,500 7,000 F46,500 45,000 1,500 U
220,000 226,000 6,000 F
$657,000 $678,500 $21,500 F
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