CHAPTER 8

Flexible Budgets,
Overhead Cost Variances,
and
Management Control
 Planning and Overhead
 Variable Overhead: as efficiently as possible,
plan only essential activities
 Fixed Overhead: as efficiently as possible,
plan only essential activities, especially since
fixed costs are predetermined well before the
budget period begins

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-2
 Standard Costing
 Traces direct costs to output by multiplying
the standard prices or rate by the standard
quantities of inputs allowed for actual outputs
produced
 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

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-3
 A Roadmap: Variable Overhead
Flexible Budget: Allocated:
Actual Costs
Budgeted Input Budgeted
Incurred: Actual Inputs
Allowed for Input Allowed for
Actual Input X
Actual Output Actual Output
X Budgeted Rate
X X
Actual Rate
Budgeted Rate Budgeted Rate

Spending Efficiency Never a

Variance Variance Variance

Flexible-Budget Never a
Variance Variance

Total Variable Overhead Variance

Over/Under Allocated Variable Overhead

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-4
 A Roadmap: Fixed Overhead
Same Budgeted Flexible Budget: Allocated:
Lump Sum Same Budgeted Budgeted
Actual Costs (as in Static Lump Sum (as in Input Allowed for
Incurred Budget) Static Budget) Actual Output
Regardless of Regardless of X
Output Level Output Level Budgeted Rate
Production-
Spending Never a Volume
Variance Variance Variance

Production-
Flexible-Budget
Volume
Variance
Variance

Total Fixed Overhead Variance

Over/Under Allocated Fixed Overhead

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-5
 Overhead Variances
 Overhead is the most difficult cost to manage,
and is the least understood
 Overhead variances involve taking
differences between equations as the
analysis moves back and forth between
actual results and budgeted amounts

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-6
 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

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-7
 The Details:
Variable OH Variances
 Variable Overhead Flexible-Budget Variance
measures the difference between actual variable
overhead costs incurred and flexible-budget variable
overhead amounts

Variable Overhead Actual Costs Flexible-budget

flexible-budget variance = incurred - amount

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-8
 The Details:
Variable OH Variances
 Variable Overhead Efficiency Variance is the
difference between actual quantity of the cost-
allocation base used and budgeted quantity of the
cost per unit of the cost-allocation base

{ }X
Variable Actual quantity of Budgeted quantity of Budgeted variable
Overhead variable overhead variable overhead cost- overhead cost
Efficiency = cost-allocation base - allocation base allowed per unit of
Variance used for actual output for actual output cost-allocation base

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-9
 The Details:
Variable OH Variances
 Variable Overhead Spending Variance is the
difference between actual 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

{ }X
Variable Actual variable Budgeted variable Actual quantity of
Overhead overhead cost overhead cost variable overhead
Spending = per unit of - per unit of cost-allocation base
Variance cost-allocation base cost-allocation base used for actual output

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-10
 Developing Budgeted Fixed Overhead
Cost Rates
1. Choose the period to be used 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

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-11
 The Details:
Fixed OH Variances
 Fixed Overhead Flexible-Budget Variance is the
difference between actual fixed overhead costs and
fixed overhead costs in the flexible budget
 This is the same amount for the Fixed Overhead
Spending Variance

Fixed Overhead Actual Costs Flexible-budget

flexible-budget variance = incurred - amount

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-12
 The Details:
Fixed OH Variances
 Production-Volume Variance is the difference between
budgeted fixed overhead and fixed overhead allocated
on the basis of actual output produced
 This variance is also known as the Denominator-Level
Variance or the Output-Level Overhead Variance

Production-Volume Budgeted Fixed Overhead allocated using

Variance = Fixed Overhead - budgeted input allowed for
actual output units produced

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-13
 Production-Volume Variance
 Interpretation of this variance is difficult due to the nature
of the costs involved and how they are budgeted
 Fixed costs are by definition somewhat inflexible. While
market conditions may cause production to flex up or
down, the associated fixed costs remain the same
 Fixed costs may be set years in advance, and may be
difficult to change quickly
 Contradiction: Despite this, examination of the fixed
overhead budget formulae reveals that it is budgeted
similar to a variable cost

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-14
 Exercise 8-20:

 The Principles Corporation is a manufacturer

of centrifuges. Fixed and variable
manufacturing overheads are allocated to
each centrifuge using budgeted assembly-
hours. Budgeted assembly time is 2 hours
per unit. The following table shows the
budgeted amounts and actual results related
to overhead for June 2014.

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-15
 Required:
 Prepare an analysis of all variable
manufacturing overhead and fixed
manufacturing overhead variances using the
columnar approach in Exhibit 8-4 (page 326).
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 8-16