Week 6 – Chapter 7 OVERHEAD VARIANCE

ANALYSIS

FNSACC507A Provide Management Accounting Information

In this part of the lesson you will learn…

1.  What responsibility accounting is all about. 2.  How to calculate and analyse factory

overhead variances.

By the end of this lesson, you need to know how to…

1.  Determine the amount of over- or under-applied overhead and be able to clearly state whether the amount is either over- or under-applied.

2.  Analyse the over- or under-applied overhead into a spending variance and a capacity variance.

Overview 1.  What is goal congruence? 2.  What is responsibility accounting? 3.  Responsibility centres 4.  Overhead variance analysis

1.  Performance evaluation 2.  Variances 3.  Overhead SPENDING variances 4.  Overhead CAPACITY variances

1. What is goal congruence? = an organisational planning process that:

�  logically groups business activities; �  establishes lines of management authority and

responsibility; and �  establishes corporate policy

enabling both the company and the employee to realise their objectives.

2. Responsibility accounting What is responsibility accounting?

It is: * a management accounting system (MAS) * that attempts to encourage & measure

GOAL CONGRUENCE.

2. Responsibility accounting NOTE TO STUDENTS:

Before moving on to the next slide, please open the following document and have it next to you as you

work through the slides for this lesson:

WEEK 6_FNSACC507A_Management Accounting_LESSON 6_Learning Material_Responsibility

Accounting

This document is a diagrammatic summary of CHAPTER 7.

A key output of this MAS is a performance report which should:

�  address the various levels of management

�  emphasise factors over which they have control

�  be developed on the basis of the organisation's operational structure.

2. Responsibility accounting

2. Responsibility accounting � These performance reports are used to

evaluate actual performance against budget for each responsibility centre.

� This comparison gives rise to a variance which represents the difference between the budgeted figure and the actual figure.

2. Responsibility accounting � A performance reports need to be both timely

and accurate so that any corrective action can be taken in time.

� Variances indicate areas that require further investigation by the sub-unit manager.

� A well-designed performance report provides detailed information allowing the manager to analyse performance and identify responsibility.

Responsibility accounting (the planning cycle)

PERFORMANCE REPORT BUDGET

Comparison of ACTUAL results to BUDGET à VARIANCE

3. Responsibility centres � Each division, branch or other sub-unit within an

organisation is known as a responsibility centre. � The manager of each responsibility centre has

both the authority and responsibility to make decisions relating to its activity and is therefore held accountable for its performance.

Responsibility centres may include: §  Cost centres §  Revenue centres §  Profit centres §  Investment centres

Responsibility centres

REVENUE CENTRE COST CENTRE"

FUNCTION

PRODUCT

GEOGRAPHY

A quick look at how an organisation could be structured…

COST CENTRE"

3. Responsibility centres � We are going to focus on how responsibility

accounting applies to cost centres. � We are going to discuss the control of

manufacturing or production costs using responsibility accounting procedures with a major emphasis on factory overhead.

� A cost centre is an organisational sub-unit where the manager is responsible for the costs incurred in that sub-unit.

� e.g. the repairs and maintenance department in a factory.

4. Overhead variance analysis

Performance evaluation is achieved by…

1. Using flexible budgeting techniques to recast the budget based on actual volume achieved. 2. Comparing actual performance with the flexible budget (based on actual volume). 3. Calculating and analysing any variances.

Variances � You get two (2) types of variances:

Favourable variances (F) where actual costs < budgeted costs = over-applied overhead cost

Unfavourable variances (U) where actual costs > budgeted costs = under-applied overhead cost

Variances These variances may be broken down further into two (2) separate variances:

à Spending variance à Capacity variance

Overhead SPENDING variance �  This variance represents the difference between

�  the actual costs incurred; and �  the flexible budget for these costs based upon the actual activity

used to allocate overhead. �  This variance is the result of having spent more

or less than was budgeted at the activity level worked.

�  The supervisor or foreman in the production department is the person responsible for this variance.

Overhead CAPACITY variance �  This variance is the result of production at an activity

level different from Normal Manufacturing Capacity.

�  If production is below Normal Manufacturing Capacity �  the fixed costs are under-absorbed (under-applied) and hence �  an unfavourable capacity variance results.

�  If production exceeds Normal Manufacturing Capacity �  the fixed costs are over-absorbed (over-applied) and hence �  a favourable capacity variance results.

Worked Examples

OVERHEAD VARIANCE ANALYSIS Big Byte Ltd

iPhone Connect

Worked Examples  NOTE TO STUDENTS:

Before moving on to the next slide, please open and work through the following document now:

WEEK 6_FNSACC507A_Management

Accounting_WORKED EXAMPLES_Overhead Analysis

This week’s homework � Read chapter 7 à Responsibility accounting &

overhead variance analysis (p.364 to p.380) � Complete homework questions (chapter 5)

(ref. STUDENT ONLINE STUDY GUIDE)

You are now ready to start the next lesson on:

CHAPTER 8

Break-Even Analysis