Chapter 08 Flexible Budgets, Standard Costs, and Variance Analysis
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I. Appendix 8A: predetermined overhead rates and
overhead analysis in a standard costing system (Slide
#1 is the title slide)
Learning Objective 8-7: Compute and interpret the
fixed overhead budget and volume variances.
A. Fixed manufacturing overhead variances
i. Budget variance
1. The equation for computing the budget
variance is shown on this slide. It is simply
the difference between the actual fixed
manufacturing overhead and the budgeted
fixed manufacturing overhead for the
period.
ii. Volume variance
1. The equation for computing the volume
variance is shown on this slide. It is the
difference between the budgeted fixed
overhead and the fixed overhead applied to
work in process.
2. The volume variance can also be computed
as shown on this slide. The equation on the
prior slide and this equation result in
identical answers.
3. Both variance computations will be
demonstrated in the forthcoming example.
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Chapter 08 Flexible Budgets, Standard Costs, and Variance Analysis
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B. ColaCo: computing fixed overhead variances
i. The background data needed for this example are
shown in these two slides.
ii. Predetermined overhead rates
1. The predetermined overhead rate ($4.00) is
computed as shown on this slide.
2. This rate can be broken down into a variable
component ($1.00) and a fixed component
($3.00).
a. The fixed component of the
predetermined overhead rate will be
used to compute the volume variance.
3. The total overhead applied to work in
process ($336,000) is computed as shown on
this slide.
a. Notice, the standard hours allowed
for the actual level of output is used
to apply overhead to work in process.
b. In the job-order costing chapter, we
used the actual level of activity to
apply overhead costs to work in
process.
c. The different approach arises because
we are using a standard cost system
in this chapter and the job-order
costing chapter uses a normal costing
system.
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Chapter 08 Flexible Budgets, Standard Costs, and Variance Analysis
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iii. Computing the budget variance
1. The budget variance of $10,000 U is
computed as shown. It is simply the
difference between the actual fixed overhead
($280,000) and the budgeted fixed overhead
($270,000).
a. The variance is labeled as Unfavorable
because the company actually incurred
more cost than the budget projected.
iv. Computing the volume variance
1. The volume variance of $18,000 U is
computed as shown.
a. The fixed overhead applied to work in
process ($252,000) is computed by
multiplying the fixed component of the
predetermined overhead rate ($3.00)
by the standard machine hours allowed
for the actual output (84,000 hours).
2. The volume variance of $18,000 U can also
be computed using the equation shown on
this slide.
a. Because the standard hours allowed is
less than the denominator volume, it
presumably signals inefficient usage of
facilities. Therefore, the variance is
labeled as unfavorable.
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Chapter 08 Flexible Budgets, Standard Costs, and Variance Analysis
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v. A pictorial view of the variances
1. This slide offers a pictorial view of the
computation of the fixed overhead volume
and budget variances.
C. ColaCo: a graphic analysis of the variances
i. The vertical axis is used to graph fixed overhead
cost.
1. The first cost that ColaCo would plot on this
axis is $270,000 of budgeted fixed overhead.
ii. The horizontal axis is used to graph the volume of
activity.
1. The first activity level that ColaCo would
plot is its denominator activity level of
90,000 machine hours.
iii. The linear manner in which fixed overhead is
applied to products is depicted by drawing a
straight line from the origin to the intersection of
the budgeted fixed overhead ($270,000) and the
denominator activity (90,000 machine hours).
1. The slope of this line indicates that fixed
overhead is applied at a rate of $3 per
machine hour.
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Chapter 08 Flexible Budgets, Standard Costs, and Variance Analysis
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iv. Next, plot the actual amount of fixed overhead
costs on the vertical axis ($280,000).
1. The difference between the budgeted
amount of fixed overhead and the actual
amount ($10,000) is the budget variance.
v. Finally, identify the standard hours allowed for
the actual level of output (84,000 hours). Draw a
vertical line from this activity level until it
intersects the sloped line that depicts the fixed
overhead applied to products. From this point, draw
a horizontal line that intersects the vertical axis.
This dollar amount ($252,000) represents the fixed
overhead applied.
1. The difference between the budgeted fixed
overhead and the fixed overhead applied
($18,000) is the volume variance.
D. ColaCo: reconciling overhead variances and
underapplied or overapplied overhead
i. In a standard cost system, the sum of the overhead
variances equals the underapplied or overapplied
overhead cost for the period.
ii. This slide shows how ColaCo’s underapplied or
overapplied is computed.
1. The manufacturing overhead is $44,000
underapplied.
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iii. Computing the variable overhead variances
1. ColaCo’s variable overhead rate variance
($12,000 U) is computed as shown on this
slide.
2. ColaCo’s variable overhead efficiency
variance ($4,000 U) is computed as shown
on this slide.
iv. Computing the sum of all variances.
1. The sum of the variable and fixed overhead
variances ($44,000 U) is shown on this
slide.
2. Notice, the sum of the variances equals the
amount of ColaCo’s underapplied overhead.
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