Kế toán, kiểm toán - Chapter 9: Flexible budgets and overhead analysis

Flexible Budgets and Overhead Analysis Chapter9Static Budgets and Performance ReportsHmm! Comparingstatic budgets withactual costs is likecomparing applesand oranges.Let’s look at CheeseCo. Static budgets are prepared for a single, planned level of activity. Performance evaluation is difficult when actual activity differs from the planned level of activity.StaticActualBudgetResultsVariancesMachine hours10,000 Variable costs Indirect labor40,000$ Indirect materials30,000 Power5,000 Fixed costs Depreciation12,000 Insurance2,000 Total overhead costs89,000$ Static Budgets and Performance ReportsCheeseCoStaticActualBudgetResultsVariancesMachine hours10,000 8,000 Variable costs Indirect labor40,000$ 34,000$ Indirect materials30,000 25,500 Power5,000 3,800 Fixed costs Depreciation12,000 12,000 Insurance2,000 2,050 Total overhead costs89,000$ 77,350$ Static Budgets and Performance ReportsCheeseCoStaticActualBudgetResultsVariancesMachine hours10,000 8,000 2,000 UVariable costs Indirect labor40,000$ 34,000$ Indirect materials30,000 25,500 Power5,000 3,800 Fixed costs Depreciation12,000 12,000 Insurance2,000 2,050 Total overhead costs89,000$ 77,350$ Static Budgets and Performance ReportsU = Unfavorable variance CheeseCo was unable to achieve the budgeted level of activity. CheeseCoStaticActualBudgetResultsVariancesMachine hours10,000 8,000 2,000 UVariable costs Indirect labor40,000$ 34,000$ $6,000 F Indirect materials30,000 25,500 Power5,000 3,800 Fixed costs Depreciation12,000 12,000 Insurance2,000 2,050 Total overhead costs89,000$ 77,350$ Static Budgets and Performance ReportsCheeseCoF = Favorable varianceActual cost is less than budgeted cost. StaticActualBudgetResultsVariancesMachine hours10,000 8,000 2,000 UVariable costs Indirect labor40,000$ 34,000$ $6,000 F Indirect materials30,000 25,500 4,500 F Power5,000 3,800 1,200 FFixed costs Depreciation12,000 12,000 0 Insurance2,000 2,050 50 UTotal overhead costs89,000$ 77,350$ $11,650 FStatic Budgets and Performance ReportsCheeseCoStaticActualBudgetResultsVariancesMachine hours10,000 8,000 2,000 UVariable costs Indirect labor40,000$ 34,000$ $6,000 F Indirect materials30,000 25,500 4,500 F Power5,000 3,800 1,200 FFixed costs Depreciation12,000 12,000 0 Insurance2,000 2,050 50 UTotal overhead costs89,000$ 77,350$ $11,650 FStatic Budgets and Performance ReportsSince cost variances are favorable, havewe done a good job controlling costs?CheeseCoStatic Budgets and Performance ReportsI don’t think Ican answer thequestion usinga static budget.Actual activity is belowbudgeted activity. So, shouldn’t variable costsbe lower if actual activityis lower?The relevant question is . . . “How much of the favorable cost variance isdue to lower activity, and how much is due to good cost control?”To answer the question,we mustthe budget to theactual level of activity. Static Budgets and Performance ReportsFlexible BudgetsImprove performance evaluation.May be prepared for any activity level in the relevant range.Show revenues and expensesthat should have occurred at theactual level of activity. Reveal variances due to good costcontrol or lack of cost control.Flexible Budgets Central Concept If you can tell me what your activity wasfor the period, I will tell you what your costs and revenue should have been.Preparing a Flexible Budget To a budget we need to know that:Total variable costs changein direct proportion to changes in activity.Total fixed costs remainunchanged within therelevant range. FixedVariablePreparing a Flexible Budget Let’s prepare budgets for CheeseCo.CostTotal Flexible BudgetsFormulaFixed8,00010,00012,000Per HourCostHoursHoursHoursMachine hours8,000 10,000 12,000 Variable costs Indirect labor4.00 32,000$ Indirect material3.00 24,000 Power0.50 4,000 Total variable cost7.50$ 60,000$ Fixed costs Depreciation12,000$ Insurance2,000 Total fixed costTotal overhead costsPreparing a Flexible BudgetFixed costs areexpressed as atotal amount.Variable costs are expressed as a constant amount per hour.$40,000 ÷ 10,000 hours is$4.00 per hour.CheeseCoCostTotal Flexible BudgetsFormulaFixed8,00010,00012,000Per HourCostHoursHoursHoursMachine hours8,000 10,000 12,000 Variable costs Indirect labor4.00 32,000$ Indirect material3.00 24,000 Power0.50 4,000 Total variable cost7.50$ 60,000$ Fixed costs Depreciation12,000$ Insurance2,000 Total fixed costTotal overhead costsPreparing a Flexible Budget $4.00 per hour × 8,000 hours = $32,000 CheeseCoPreparing a Flexible BudgetCostTotal Flexible BudgetsFormulaFixed8,00010,00012,000Per HourCostHoursHoursHoursMachine hours8,000 10,000 12,000 Variable costs Indirect labor4.00 32,000$ Indirect material3.00 24,000 Power0.50 4,000 Total variable cost7.50$ 60,000$ Fixed costs Depreciation12,000$ 12,000$ Insurance2,000 2,000 Total fixed cost14,000$ Total overhead costs74,000$ ? CheeseCoQuick Check  What should be the total overhead costs for the Flexible Budget at 10,000 hours?a. $92,500.b. $74,000.c. $89,000.d. $94,000.Quick Check  What should be the total overhead costs for the Flexible Budget at 10,000 hours?a. $92,500.b. $74,000.c. $89,000.d. $94,000.Total overhead cost = $14,000 + $7.50 per hour  10,000 hours = $14,000 + $75,000 = $89,000Preparing a Flexible BudgetCostTotal Flexible BudgetsFormulaFixed8,00010,00012,000Per HourCostHoursHoursHoursMachine hours8,000 10,000 12,000 Variable costs Indirect labor4.00 32,000$ 40,000$ Indirect material3.00 24,000 30,000 Power0.50 4,000 5,000 Total variable cost7.50$ 60,000$ 75,000$ Fixed costs Depreciation12,000$ 12,000$ 12,000$ Insurance2,000 2,000 2,000 Total fixed cost14,000$ 14,000$ Total overhead costs74,000$ 89,000$ CheeseCoTotal fixed costsdo not change inthe relevant range.Quick Check  What should be the total overhead costs for the Flexible Budget at 12,000 hours?a. $92,500.b. $89,000.c. $106,800.d. $104,000.Quick Check  What should be the total overhead costs for the Flexible Budget at 12,000 hours?a. $92,500.b. $89,000.c. $106,800.d. $104,000.Total overhead cost = $14,000 + $7.50 per hour  12,000 hours = $14,000 + $90,000 = $104,000Preparing a Flexible BudgetCostTotal Flexible BudgetsFormulaFixed8,00010,00012,000Per HourCostHoursHoursHoursMachine hours8,000 10,000 12,000 Variable costs Indirect labor4.00 32,000$ 40,000$ 48,000$ Indirect material3.00 24,000 30,000 36,000 Power0.50 4,000 5,000 6,000 Total variable cost7.50$ 60,000$ 75,000$ 90,000$ Fixed costs Depreciation12,000$ 12,000$ 12,000$ 12,000$ Insurance2,000 2,000 2,000 2,000 Total fixed cost14,000$ 14,000$ 14,000$ Total overhead costs74,000$ 89,000$ 104,000$ CheeseCo Let’s prepare a  budget performance report for CheeseCo.Flexible BudgetPerformance ReportCostTotalFormulaFixedFlexibleActualPer HourCostsBudgetResultsVariancesMachine hours8,000 8,000 0Variable costs Indirect labor4.00$ 34,000$ Indirect material3.00 25,500 Power0.50 3,800 Total variable costs7.50$ 63,300$ Fixed Expenses Depreciation12,000$ 12,000$ Insurance2,000 2,050 Total fixed costs 14,050$ Total overhead costs 77,350$ Flexible BudgetPerformance ReportFlexible budget is prepared for thesame activity level (8,000 hours) as actually achieved.CheeseCoCostTotalFormulaFixedFlexibleActualPer HourCostsBudgetResultsVariancesMachine hours8,000 8,000 0Variable costs Indirect labor4.00$ 34,000$ Indirect material3.00 25,500 Power0.50 3,800 Total variable costs7.50$ 63,300$ Fixed Expenses Depreciation12,000$ 12,000$ Insurance2,000 2,050 Total fixed costs 14,050$ Total overhead costs 77,350$ Flexible BudgetPerformance ReportCheeseCoQuick Check  What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results?a. $2,000 Ub. $2,000 Fc. $6,000 Ud. $6,000 FQuick Check  What is the variance for indirect labor when the flexible budget for 8,000 hours is compared to the actual results?a. $2,000 Ub. $2,000 Fc. $6,000 Ud. $6,000 FCostTotalFormulaFixedFlexibleActualPer HourCostsBudgetResultsVariancesMachine hours8,000 8,000 0Variable costs Indirect labor4.00$ 32,000$ 34,000$ $ 2,000 U Indirect material3.00 24,000 Power0.50 4,000 Total variable costs7.50$ 60,000$ Fixed Expenses Depreciation12,000$ 12,000$ Insurance2,000 2,000 Total fixed costs14,000$ Total overhead costs74,000$ Flexible BudgetPerformance ReportCheeseCoQuick Check  What is the variance for indirect materials when the flexible budget for 8,000 hours is compared to the actual results?a. $1,500 Ub. $1,500 Fc. $4,500 Ud. $4,500 FQuick Check  What is the variance for indirect materials when the flexible budget for 8,000 hours is compared to the actual results?a. $1,500 Ub. $1,500 Fc. $4,500 Ud. $4,500 FCostTotalFormulaFixedFlexibleActualPer HourCostsBudgetResultsVariancesMachine hours8,000 8,000 0Variable costs Indirect labor4.00$ 32,000$ 34,000$ $ 2,000 U Indirect material3.00 24,000 25,500 1,500 U Power0.50 4,000 Total variable costs7.50$ 60,000$ Fixed Expenses Depreciation12,000$ 12,000$ Insurance2,000 2,000 Total fixed costs14,000$ Total overhead costs74,000$ Flexible BudgetPerformance ReportCheeseCoQuick Check  What is the variance for depreciation when the flexible budget for 8,000 hours is compared to the actual results?a. $0b. $1,000 Fc. $2,000 Ud. $2,000 FQuick Check  What is the variance for depreciation when the flexible budget for 8,000 hours is compared to the actual results?a. $0b. $1,000 Fc. $2,000 Ud. $2,000 FCostTotalFormulaFixedFlexibleActualPer HourCostsBudgetResultsVariancesMachine hours8,000 8,000 0Variable costs Indirect labor4.00$ 32,000$ 34,000$ $ 2,000 U Indirect material3.00 24,000 25,500 1,500 U Power0.50 4,000 3,800 200 FTotal variable costs7.50$ 60,000$ 63,300$ $ 3,300 UFixed Expenses Depreciation12,000$ 12,000$ 12,000$ 0 Insurance2,000 2,000 2,050 50 UTotal fixed costs14,000$ 14,050$ 50 UTotal overhead costs74,000$ 77,350$ $ 3,350 UFlexible BudgetPerformance ReportCheeseCoRemember the question: “How much of the total variance is due to activityand how much is due tocost control?”Flexible BudgetPerformance ReportStaticActualBudgetResultsVariancesMachine hours10,000 8,000 2,000 UVariable costs Indirect labor40,000$ 34,000$ $6,000 F Indirect materials30,000 25,500 4,500 F Power5,000 3,800 1,200 FFixed costs Depreciation12,000 12,000 0 Insurance2,000 2,050 50 UTotal overhead costs89,000$ 77,350$ $11,650 FStatic Budgets and Performance How much of the $11,650 is due to activity and how much is due to cost control?Flexible BudgetPerformance ReportDifference between original static budgetand actual overhead = $11,650 F.Overhead Variance AnalysisLet’s place the flexible budget for 8,000 hours here.Flexible BudgetPerformance ReportThis $15,000F variance is due to lower activity. Overhead Variance AnalysisActivityThis $3,350U flexiblebudget variance is dueto poor cost control.Cost controlFlexible BudgetPerformance ReportWhat causesthe costcontrol variance? There are two primaryreasons for unfavorablevariable overhead variances:1. Spending too much for resources.2. Using the resources inefficiently.Overhead Rates and Overhead AnalysisOverhead from theflexible budget for thedenominator level of activityPOHR = Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR):Assigned Overhead = POHR × Standard ActivityDenominator level of activityOverhead Rates and Overhead Analysis – ExampleLet’s look at overhead rates in a  budget for ColaCo. ColaCo prepared this budget for overhead:Overhead Rates and Overhead Analysis – ExampleTotalVariableTotalFixedMachineVariableOverheadFixedOverheadHoursOverheadRateOverheadRate2,000 4,000$ ?9,000$ ?4,000 8,000 ?9,000 ?ColaCo applies overhead basedon machine hour activity.Let’s calculate overhead rates.Overhead Rates and Overhead Analysis – ExampleRate = Total Variable Overhead ÷ Machine Hours ColaCo prepared this budget for overhead:This rate is constant at all levels of activity.TotalVariableTotalFixedMachineVariableOverheadFixedOverheadHoursOverheadRateOverheadRate2,000 4,000$ 2.00$ 9,000$ ?4,000 8,000 2.00 9,000 ?TotalVariableTotalFixedMachineVariableOverheadFixedOverheadHoursOverheadRateOverheadRate2,000 4,000$ 2.00$ 9,000$ 4.50$ 4,000 8,000 2.00 9,000 2.25 Overhead Rates and Overhead Analysis – ExampleRate = Total Fixed Overhead ÷ Machine Hours ColaCo prepared this budget for overhead:This rate decreases when activity increases. TotalVariableTotalFixedMachineVariableOverheadFixedOverheadHoursOverheadRateOverheadRate2,000 4,000$ 2.00$ 9,000$ 4.50$ 4,000 8,000 2.00 9,000 2.25 Overhead Rates and Overhead Analysis – ExampleThe total POHR is the sum ofthe fixed and variable ratesfor a given activity level. ColaCo prepared this budget for overhead:Overhead VariancesLet’s use the overhead rates, to determine variable and fixed overhead variances. ColaCo’s actual production for the period required 3,200 standard machine hours. Actual variable overhead incurred for the period was $6,740. Actual machine hours worked were 3,300. Compute the variable overhead spending and efficiency variances.Variable Overhead Variances – ExampleVariable Overhead Variances AH × SR AH × ARSpending variance = AH(AR - SR)Efficiency variance = SR(AH - SH) SH × SR Spending VarianceEfficiencyVariance Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at  Incurred Actual Hours Standard Hours 3,300 hours 3,200 hours × × $2.00 per hour $2.00 per hour Variable Overhead Variances – Example Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at  Incurred Actual Hours Standard Hours $6,740$6,600$6,400Spending variance$140 unfavorableEfficiency variance$200 unfavorable$340 unfavorable flexible budget total varianceQuick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the spending variance?a. $450 Ub. $450 Fc. $700 Fd. $700 UQuick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the spending variance?a. $450 Ub. $450 Fc. $700 Fd. $700 USpending variance = AH (AR - SR) = Actual variable overhead incurred - AHSR = $10,950 - 2,050 hours$5 per hour = $10,950 - $10,250 = $700 UQuick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the efficiency variance?a. $450 Ub. $450 Fc. $250 Fd. $250 UQuick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the efficiency variance?a. $450 Ub. $450 Fc. $250 Fd. $250 UEfficiency variance = SR (AH - SH) = $5 per hour (2,050 hours - 2,100 hours) = $250 F 2,050 hours 2,100 hours × × $5 per hour $5 per hour Variable Overhead Variances – Example Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at  Incurred Actual Hours Standard Hours $10,950$10,250$10,500Spending variance$700 unfavorableEfficiency variance$250 favorable$450 unfavorable flexible budget total varianceVariable Overhead Variances – A Closer LookSpending VarianceEfficiency VarianceResults from paying moreor less than expected foroverhead items and from excessive usage ofoverhead items.Controlled bymanaging theoverhead cost driver.Overhead VariancesNow let’s turn our attention to fixed overhead. Overhead Rates and Overhead Analysis – Example ColaCo prepared this budget for overhead:What is ColaCo’s fixed overhead rate for an estimated activity of 3,000 machine hours?TotalVariableTotalFixedMachineVariableOverheadFixedOverheadHoursOverheadRateOverheadRate2,000 4,000$ 2.00$ 9,000$ 4.50$ 4,000 8,000 2.00 9,000 2.25 Overhead Rates and Overhead Analysis – Example ColaCo prepared this budget for overhead:What is ColaCo’s fixed overhead rate for an estimated activity of 3,000 machine hours? Fixed Overhead Rate  FR = $9,000 ÷ 3,000 machine hours FR = $3.00 per machine hourTotalVariableTotalFixedMachineVariableOverheadFixedOverheadHoursOverheadRateOverheadRate2,000 4,000$ 2.00$ 9,000$ 4.50$ 4,000 8,000 2.00 9,000 2.25 ColaCo’s actual production required 3,200 standard machine hours. Actual fixed overhead was $8,450. Compute the fixed overhead budget and volume variances.Fixed Overhead Variances – ExampleFixed Overhead VariancesBudget VarianceVolumeVarianceFR = Standard Fixed Overhead RateSH = Standard Hours Allowed SH × FR  Actual Fixed Fixed Fixed Overhead Overhead Overhead  Incurred Budget Applied 3,200 hours × $3.00 per hour Budget variance$550 favorableFixed Overhead Variances – Example$8,450$9,000$9,600  Actual Fixed Fixed Fixed Overhead Overhead Overhead  Incurred Budget Applied Volume variance$600 favorable SH × FR Quick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance?a. $350 Ub. $350 Fc. $100 Fd. $100 UQuick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance?a. $350 Ub. $350 Fc. $100 Fd. $100 UBudget variance = Actual fixed overhead - Budgeted fixed overhead = $14,800 - $14,450 = $350 UQuick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance?a. $250 Ub. $250 Fc. $100 Fd. $100 UQuick Check  Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance?a. $250 Ub. $250 Fc. $100 Fd. $100 UVolume variance = Budgeted fixed overhead - SH  FR = $14,450 - 2,100 hours  $7 per hour = $14,450 - $14,700 = $250 F 2,100 hours × $7.00 per hour Budget variance$350 unfavorableFixed Overhead Variances – Example$14,800$14,450$14,700  Actual Fixed Fixed Fixed Overhead Overhead Overhead  Incurred Budget Applied Volume variance$250 favorable SH × FR Fixed Overhead Variances –A Closer LookBudget VarianceVolume VarianceResults from paying moreor less than expected foroverhead items.Results from operatingat an activity leveldifferent from thedenominator activity.Overhead VariancesLet’s look at a graph showing fixed overhead variances. We will use ColaCo’s numbers from the previous example. Fixed Overhead VariancesVolumeCost$9,000 budgeted fixed OH3,000 Hours ExpectedActivityFixed overheadapplied to products{Fixed Overhead Variances$8,450 actual fixed OHVolumeCost3,000 Hours ExpectedActivity$9,000 budgeted fixed OHFixed overheadapplied to products$550FavorableBudget Variance{$8,450 actual fixed OH{Fixed Overhead Variances$8,450 actual fixed OH3,200 machine hours × $3.00 fixed overhead rate$600FavorableVolume Variance$9,600 applied fixed OH3,200 StandardHoursVolumeCost3,000 Hours ExpectedActivity$9,000 budgeted fixed OHFixed overheadapplied to products{{Fixed Overhead Variances$8,450 actual fixed OH3,200 machine hours × $3.00 fixed overhead rate$600FavorableVolume Variance$9,600 applied fixed OH3,200 StandardHoursVolumeCost3,000 Hours ExpectedActivity$9,000 budgeted fixed OHFixed overheadapplied to products{$550FavorableBudget Variance{$8,450 actual fixed OHResults when standard hoursallowed for actual output differsfrom the denominator activity.Volume Variance – A Closer LookVolumeVarianceFavorablewhen standard hours> denominator hoursUnfavorablewhen standard hours denominator hoursUnfavorablewhen standard hours< denominator hoursDoes not measure over- or under spendingOccurs only because actualactivity differs from thedenominator activityOverhead Variances and Under- or Overapplied Overhead CostFavorablevariances are equivalentto overapplied overhead.Unfavorablevariances are equivalentto underapplied overhead.In a standardcost system:The sum of the overhead variancesequals the under- or overappliedoverhead cost for a period.End of Chapter 9