FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND
8-1 Effective planning of variable overhead costs involves:
1. Planning to undertake only those variable overhead activities that add value for customers using the product or service, and
2. Planning to use the drivers of costs in those activities in the most efficient way.
8-2 At the start of an accounting period, a larger percentage of fixed overhead costs are locked-in than is the case with variable overhead costs. When planning fixed overhead costs, a company must choose the appropriate level of capacity or investment that will benefit the company over a long time. This is a strategic ...view middle of the document...
Compute the rate per unit of each cost-allocation base used to allocate variable overhead costs to output produced.
8-5 Two factors affecting the spending variance for variable manufacturing overhead are:
a. Price changes of individual inputs (such as energy and indirect materials) included in variable overhead relative to budgeted prices.
b. Percentage change in the actual quantity used of individual items included in variable overhead cost pool, relative to the percentage change in the quantity of the cost driver of the variable overhead cost pool.
8-6 Possible reasons for a favorable variable-overhead efficiency variance are:
• Workers more skillful in using machines than budgeted,
• Production scheduler was able to schedule jobs better than budgeted, resulting in lower-than-budgeted machine-hours,
• Machines operated with fewer slowdowns than budgeted, and
• Machine time standards were overly lenient.
8-7 A direct materials efficiency variance indicates whether more or less direct materials were used than was budgeted for the actual output achieved. A variable manufacturing overhead efficiency variance indicates whether more or less of the chosen allocation base was used than was budgeted for the actual output achieved.
8-8 Steps in developing a budgeted fixed-overhead rate are
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 each cost-allocation base, and
4. Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to output produced.
8-9 The relationship for fixed-manufacturing overhead variances is:
There is never an efficiency variance for fixed overhead because managers cannot be more or less efficient in dealing with an amount that is fixed regardless of the output level. The result is that the flexible-budget variance amount is the same as the spending variance for fixed-manufacturing overhead.
8-10 For planning and control purposes, fixed overhead costs are a lump sum amount that is not controlled on a per-unit basis. In contrast, for inventory costing purposes, fixed overhead costs are allocated to products on a per-unit basis.
8-11 An important caveat is what change in selling price might have been necessary to attain the level of sales assumed in the denominator of the fixed manufacturing overhead rate. For example, the entry of a new low-price competitor may have reduced demand below the denominator level if the budgeted selling price was maintained. An unfavorable production-volume variance may be small relative to the selling-price variance had prices been dropped to attain the denominator level of unit sales.
8-12 A strong case can be made for writing off an unfavorable production-volume variance to cost of goods sold. The...