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Flexible Budgets/Variances
II
Chapter Eight
Developing Budgeted VariableOverhead Allocation Rates
Step 1:Choose the time period used to compute the budget..
Webb Co. uses a twelve-month budget period.
Step 2:Select the cost-allocation base.
Webb budgets 57,600 machine-hours for a budgeted output of 144,000 jackets in year 2008,
or 0.40 MH per jacket.
Developing Budgeted VariableOverhead Allocation Rates
Step 3:Determine the variable overhead costs..
Webb’s budgeted variablemanufacturing costs for 2008 are $1,728,000.
Step 4:Compute the spending rate per unit of
the allocation base. $1,728,0000 ÷ 57,600 MH = $30/MH
Developing Budgeted VariableOverhead Allocation Rates
What is the budgeted variable overheadcost rate per output unit (jacket)?
0.40 MH allowed per output unit × $30budgeted variable overhead cost rate per MH
(input) = $12 per jacket (output)
Variable Overhead Data For April 2008
Cost Item/Allocation BaseActual Result
Flexible- Budget Amount
1. Output units (jackets) 10,000 10,000
2. Machine-hours 4,500 4,000
3. Machine-hours per output unit 0.45 0.40
4. Variable manufacturing overhead costs
$130,500 $120,000
5. Variable manufacturing overhead costs per machine-hour
$29.00 $30.00
6. Variable manufacturing overhead costs per output unit
$13.05 $12.00
Variable Overhead Variance Analysis
Developing Budgeted FixedOverhead Allocation Rates
Step 1:Choose the time period used to compute the budget..
The budget period is typically twelve months.Step 2:
Select the cost-allocation base.Webb budgets 57,600 machine-hours for a budgetedoutput of 144,000 jackets in year 2008, or 0.40MH
per jacket.
Developing Budgeted FixedOverhead Allocation Rates
Step 3:Determine the fixed overhead costs.
Webb’s manufacturing budget for 2008 is $3,312,000, or $276,000 per month
Step 4:Compute the rate per unit of the allocation base. $3,312,000 ÷ 57,600 = $57.50 per machine hour
Developing Budgeted FixedOverhead Allocation Rates
What is the budgeted fixed overhead cost rateper output unit (jacket)?
0.40 hours allowed per output unit
$57.50 budgeted fixed overhead cost rate/machine hour
$23 per jacket (output unit)
×
=
Fixed Overhead Variance Analysis
Journal Entries For Variable Overhead
1. Variable Overhead Control 130,500
Accounts Payable and various other accounts 130,500
To record actual variable overhead costs incurred.
2. Work-in-Process Control 120,000
Variable Overhead Allocated 120,000
To record variable overhead cost allocated
Journal Entries For Variable Overhead (cont.)
3. Variable Overhead Allocated 120,000 Variable Overhead Efficiency Variance 15,000
Variable Overhead Control 130,500Variable Overhead Spending Variance 4,500
To record variances for the accounting period.
Cost of Goods Sold 10,500Variable Overhead Spending Variance 4,500
Variable Overhead Efficiency Variance 15,000
Journal Entries For Fixed Overhead
1. Fixed Overhead Control 285,000
Salaries Payable, Accumulated Depreciation
and various other accounts 285,000
To record actual fixed overhead costs incurred.
2. Work-in-Process Control 230,000
Fixed Overhead Allocated 230,000
To record fixed overhead costs allocated,
Journal Entries For Fixed Overhead (cont.)3. Fixed Overhead Allocated 230,000
Fixed Overhead Spending Variance 9,000
Fixed Overhead Production-Volume Variance 46,000
Fixed Overhead Control 285,000
To record variances for the accounting period.
Cost of Goods Sold 9,000
Fixed Overhead Spending Variance 9,000
Cost of Goods Sold 46,000
Fixed Overhead Production Volume Variance 46,000
Static/Flexible Budgets in Standard Cost Format
Flexible Budget
Volume Variances
Static Budget
Units Sold 10,000 2,000 U 12,000
Sales @ $120 each $1,200,000 $240,000 U $1,440,000
Standard Cost of Sales
Direct Material @ $60 -600,000 120,000 F -720,000
Direct Labor @ $16 -160,000 32,000 F -192,000
Variable Manufacturing Overhead @ $12 -120,000 24,000 F -144,000
Fixed Manufacturing Overhead @ $23 -230,000 46,000 F -276,000
Total Standard Cost @ $111 -1,110,000 222,000 F -1,332,000
Gross Margin 90,000 18,000 U $108,000
Production Volume Variance -46,000 46,000 U
Operating Income $44,000 64,000 U $108,000
Sales Volume Variance Analyzed
Sales-volume variance$64,000 U
Operating-income volume variance
$18,000
Production-volume variance
$46,000 U
Level 2
Level 3
Actual Results/Flexible Budgets in Standard Cost Format
Actual Results
Variances Flexible Budget
Units Sold 10,000 10,000
Sales @ $125/$120 each $1,250,000 $50,000 $1,200,000
Standard Cost of Sales
Direct Material @ $60 -600,000 -600,000
Direct Labor @ $16 -160,000 -160,000
Variable Manufacturing Overhead @ $12 -120,000 -120,000
Fixed Manufacturing Overhead @ $23 -230,000 -230,000
Total Standard Cost @ $111 -1,110,000 -1,110,000
Gross Margin 140,000 50,000 90,000
Production Volume Variance -46,000 -46,000
Other Variances -79,100 -79,100
Operating Income $14,900 -29,100 $44,000