© 2012 Pearson Prentice Hall. All rights reserved. FLEXIBLE BUDGETS AND OVERHEAD COST VARIANCES

© 2012 Pearson Prentice Hall. All rights reserved.

FLEXIBLE BUDGETS AND OVERHEAD COST VARIANCES


Class Announcements

Assignment #2 due February 10th (MyAccounting Lab); available on-line

Midterm – February 17th (in-class) Accounting Case Competition at SMU

March 6-7 (Halifax); one team of two-four 3rd and 4th year; please let [email protected] know of interest by January 31st

NEXT CLASS – Case: Body Glove; available on-line


Case Approach & Selection

Context In what business that they are in Who are the people involved Timeframe for resolution

Issue(s) Identification Main Issue(s) (high priority) – often

identified Sub-Issue(s) (low priority)

Approaches to the Issues


Cases 2014

Date Case/ProblemsFeb. 3 Case: Body Glove

10 Case: Uncle Grumps17 Case: George Burns Poultry Farms

March 5 Case: Belanger & Sequin Limited12 Case: Holloway Consulting Services17 Case: Subway24 Case: Amos Police Force31 Case: Charley’s Steakhouse


Class Objectives

1. Determining the flexible overhead costs (variance and fixed)

2. Calculating and interpreting variable overhead variances

3. Calculating and interpreting fixed overhead variances


Flexible Budget: Overhead

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.

Variable overhead—as efficiently as possible, plan only essential activities

Fixed overhead—as efficiently as possible, plan only essential activities, especially because fixed costs are predetermined well before the budget period begins; consider long term capacity


Flexible Budget: Variable Overhead Variance Analysis Illustrated


Flexible Budget: 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 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.

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.


Flexible Budget: Fixed Overhead Variance Analysis Illustrated


Flexible Budget: Fixed OH Variances Fixed overhead flexible-budget

variance (spending variance) is the difference between actual fixed overhead costs and fixed overhead costs in the flexible budget.

Production-volume variance is the difference between budgeted fixed overhead and fixed overhead allocated on the basis of actual output produced. (denominator-level variance or the output-level overhead variance)


Flexible Budget: 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.


Class Objectives - Revisited

1. Determining the flexible overhead costs (variance and fixed)

2. Calculating and interpreting variable overhead variances

3. Calculating and interpreting fixed overhead variances

4. NEXT CLASS – Case: Body Glove; available on-line

Documents

© 2012 Pearson Prentice Hall. All rights reserved. FLEXIBLE BUDGETS AND OVERHEAD COST VARIANCES