Home > Accounting > MA – Flexible Budgets, Overhead Cost Variances, and Management Control

MA – Flexible Budgets, Overhead Cost Variances, and Management Control

TERMS

 

Denominator level  The denominator in the budgeted fixed overhead rate computation.

 

Denominator-level variance  (also production-volume variance)  The difference between budgeted fixed overhead and fixed overhead allocated on the basis of actual output produced.

 

Fixed overhead flexible-budget variance  The difference between actual fixed overhead costs and fixed overhead costs in the flexible budget.

 

Fixed overhead spending variance  Same as fixed overhead flexible-budget variance.  The difference between actual fixed overhead costs and fixed overhead costs in the flexible budget.

 

Production-denominator level  The denominator in the budgeted manufacturing fixed overhead rate computation.

 

Standard costing  Costing system that traces direct costs to output produced by multiplying the standard prices or rates by the standard quantities of inputs allowed for actual outputs produced and allocates overhead costs on the basis of the standard overhead cost rates times the standard quantities of the allocation bases allowed for the actual outputs produced.

 

Total-overhead variance  The sum of the flexible-budget variance and the production-volume (PV) variance.

 

Variable overhead efficiency variance  The difference between the actual quantity of variable overhead cost-allocation base used and budgeted quantity of variable overhead cost-allocation base that should have been used to produce actual output, multiplied by actual quantity of variable overhead cost-allocation base used for actual output.

 

Variable overhead flexible-budget variance  The difference between actual variable overhead costs incurred and flexible-budget variable overhead amounts.

 

Variable overhead spending variance  The difference between actual variable overhead cost per unit and budgeted variable overhead cost per unit of the cost-allocation base, multiplied by actual quantity of variable overhead cost-allocation base used for actual output.

 

NOTES

 

Developing budgeted variable overhead cost rates:

  1. Choose the Period to Be Used for the Budget
  2. Select the Cost-Allocation Bases to Use in Allocating Variable Overhead Costs to Output Produced
  3. Identify the Variable Overhead Costs Associated with Each Cost-Allocation Base
  4. Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Variable Overhead Costs to Output Produced

 

Journal Entries – Variable Overhead Costs and Variances:

 

Variable Overhead Control 

            A/P (etc.)    

Work-in-Process Control        

            Variable Overhead Allocated     

Variable Overhead Allocated

Variable Overhead Efficiency Variance

            Variable Overhead Control  

            Variable Overhead Spending Variance 

Cost of Goods Sold   

Variable Overhead Spending Variance 

            Variable Overhead Efficiency Variance

 

Developing budgeted fixed overhead rates:

  1. Choose the Period to Use for the Budget
  2. Select the Cost-Allocation Bases to Use in Allocating Fixed Overhead Costs to Output Produced
  3. Identify the Fixed Overhead Costs Associated with Each Cost-Allocation Base
  4. Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Fixed Overhead Costs to Output Produced 

Journal Entries – Fixed Overhead Costs and Variances:

 

Fixed Overhead Control

            Salaries Payable, Acc. Deprec., etc.

Work-in-Process Control

            Fixed Overhead Allocated

Fixed Overhead Allocated

Fixed Overhead Spending Variance

Fixed Overhead Production-Volume Variance 

            Fixed Overhead Control 

Cost of Goods Sold 

            Fixed Overhead Spending Variance

 

Flexible Budget and Variance Analysis for variable Setup Overhead Costs:

  1. Using Budgeted Batch Size, Calculate the Number of Batches That Should Have Been Used to Produce Actual Output
  2. Using Budgeted Setup-Hours per Batch, Calculate the Number of Setup-Hours That Should Have Been Used
  3. Using Budgeted Variable Cost per Setup-Hour, Calculate the Flexible Budget for Variable Setup Overhead Costs

Flexible Budget and Variance Analysis for Fixed Setup Overhead Costs:

  1. Choose the Period to Use for the Budget
  2. Select the Cost-Allocation base to Use in Allocating Fixed Overhead Costs to Output Produced
  3. Identify the Fixed Overhead Costs Associated with the Cost-Allocation Base
  4. Compute the Rate per Unit of the Cost-Allocation Base Used to Allocate Fixed Overhead Costs to Output Produced

Flexible budgets in ABC systems can be used to give insight into why variance occurs in overhead activity costs.

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