University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

327

Pages:

28
Author:

Vicente Shepherd

Chapter 9 Flexible Budgets and Overhead Analysis Part 4 Learning Objective LO5 To compute the predetermined overhead rate and apply overhead to products in a standard cost system Overhead Rates and Overhead Analysis Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR): Assigned Overhead = POHR × Standard Activity POHR = Overhead from the flexible budget for the denominator level of activity Denominator level of activity Overhead Rates and Overhead Analysis The predetermined overhead rate can be broken down into fixed and variable components. The variable component is useful for preparing and analyzing variable overhead variances. The fixed component is useful for preparing and analyzing fixed overhead variances. Normal versus Standard Cost Systems In a normal cost system, overhead is applied to work in process based on the actual number of hours worked in the period. In a standard cost system, overhead is applied to work in process based on the standard hours allowed for the output of the period. Fixed Overhead Variances The General Model Actual Fixed Overhead Incurred Budget Variance Fixed Overhead Budget DH × FR Fixed Overhead Applied SH × FR Volume Variance FR = Standard Fixed Overhead Rate SH = Standard Hours Allowed DH = Denominator Hours Overhead Rates and Overhead Analysis – Example ColaCo prepared this Machine Hours 3,000 4,000 Total Variable Overhead $ budget for overhead: Variable Overhead Rate 6,000 ? 8,000 ? Total Fixed Overhead $ Fixed Overhead Rate 9,000 ? 9,000 ? Let’s calculate overhead rates. ColaCo applies overhead based on machine-hour activity. Overhead Rates and Overhead Analysis – Example ColaCo prepared this Machine Hours 3,000 4,000 budget for overhead: Total Variable Overhead Variable Overhead Rate Total Fixed Overhead $ $ $ 6,000 8,000 2.00 2.00 Fixed Overhead Rate 9,000 ? 9,000 ? Rate = Total Variable Overhead ÷ Machine Hours This rate is constant at all levels of activity. Overhead Rates and Overhead Analysis – Example ColaCo prepared this Machine Hours 3,000 4,000 budget for overhead: Total Variable Overhead Variable Overhead Rate Total Fixed Overhead Fixed Overhead Rate $ $ $ $ 6,000 8,000 2.00 2.00 9,000 9,000 3.00 2.25 Rate = Total Fixed Overhead ÷ Machine Hours This rate decreases when activity increases. Overhead Rates and Overhead Analysis – Example ColaCo prepared this Machine Hours 3,000 4,000 budget for overhead: Total Variable Overhead Variable Overhead Rate Total Fixed Overhead Fixed Overhead Rate $ $ $ $ 6,000 8,000 2.00 2.00 9,000 9,000 3.00 2.25 The total POHR is the sum of the fixed and variable rates for a given activity level. Fixed Overhead Variances – Example ColaCo’s actual production required 3,200 standard machine hours. Actual fixed overhead was $8,450. The predetermined overhead rate is based on 3,000 machine hours. Learning Objective LO6 To compute and interpret the fixed overhead budget and volume variances Overhead Variances Now let’s turn our attention to calculating fixed overhead variances Fixed Overhead Variances – Example Actual Fixed Overhead Incurred Fixed Overhead Budget $8,450 $9,000 Budget variance $550 favorable Fixed Overhead Applied Fixed Overhead Variances – A Closer Look Budget Variance Results from spending more or less than expected for fixed overhead items. Now, let’s use the standard hours allowed to compute the fixed overhead volume variance. Fixed Overhead Variances – Example Actual Fixed Overhead Incurred Fixed Overhead Budget Fixed Overhead Applied SH × FR 3,200 hours × $3.00 per hour $8,450 $9,000 $9,600 Budget variance $550 favorable Volume variance $600 favorable Volume Variance – A Closer Look Volume Variance Results when standard hours allowed for actual output differs from the denominator activity. Unfavorable when standard hours < denominator hours Favorable when standard hours > denominator hours Volume Variance – A Closer Look Volume Variance Does not measure overor under spending Results when standard hours actualtreating output differs Itallowed resultsforfrom fixed from the denominator activity. overhead as if it were a variable cost. Unfavorable when standard hours < denominator hours Favorable when standard hours > denominator hours 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 U b. $350 F c. $100 F d. $100 U Quick Check  Budget variance Yoder Enterprises’ actual production for the = Actual fixed overhead Budgeteddirect fixed overhead period required 2,100 –standard labor hours. Actual fixed overhead for the period = $14,800 – $14,450 was $14,800. The budgeted fixed overhead = $350 U was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance? a. $350 U b. $350 F c. $100 F d. $100 U 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 volume variance? a. $250 U b. $250 F c. $100 F d. $100 U Quick Check  Volume variance Yoder= Enterprises’ production for the Budgeted fixedactual overhead – (SH × FR) period required 2,100 standard direct labor $14,450 – (2,100 hours × $7 per hour) hours.=Actual fixed overhead for the period = $14,450The – $14,700 was $14,800. budgeted fixed overhead = $250 F The predetermined fixed was $14,450. overhead rate was $7 per direct labor hour. What was the volume variance? a. $250 U b. $250 F c. $100 F d. $100 U Quick Check Summary Actual Fixed Overhead Incurred $14,800 Fixed Overhead Budget $14,450 Budget variance $350 unfavorable Fixed Overhead Applied SH × FR 2,100 hours × $7.00 per hour $14,700 Volume variance $250 favorable Overhead Variances Let’s look at a graph showing fixed overhead variances. We will use ColaCo’s numbers from the previous example. Fixed Overhead Variances Cost $9,000 budgeted fixed OH 3,000 Hours Expected Activity Activity Fixed Overhead Variances Cost { $550 Favorable Budget Variance $9,000 budgeted fixed OH $8,450 actual fixed OH 3,000 Hours Expected Activity Activity Fixed Overhead Variances Cost $600 Favorable Volume Variance { $550 { Favorable 3,200 machine hours × $3.00 fixed overhead rate $9,600 applied fixed OH $9,000 budgeted fixed OH $8,450 actual fixed OH Budget Variance 3,000 Hours Expected Activity Activity 3,200 Standard Hours Overhead Variances and Under- or Overapplied Overhead Cost In a standard cost system: Unfavorable variances are equivalent to underapplied overhead. Favorable variances are equivalent to overapplied overhead. The sum of the overhead variances equals the under- or over applied overhead cost for a period.