Flexible Budgets/Variances

II

Chapter Eight

Developing Budgeted VariableOverhead Allocation Rates

Step 1:Choose the time period used to compute the budget..

Webb Co. uses a twelve-month budget period.

Step 2:Select the cost-allocation base.

Webb budgets 57,600 machine-hours for a budgeted output of 144,000 jackets in year 2008,

or 0.40 MH per jacket.

Developing Budgeted VariableOverhead Allocation Rates

Step 3:Determine the variable overhead costs..

Webb’s budgeted variablemanufacturing costs for 2008 are $1,728,000.

Step 4:Compute the spending rate per unit of

the allocation base. $1,728,0000 ÷ 57,600 MH = $30/MH

Developing Budgeted VariableOverhead Allocation Rates

What is the budgeted variable overheadcost rate per output unit (jacket)?

0.40 MH allowed per output unit × $30budgeted variable overhead cost rate per MH

(input) = $12 per jacket (output)

Variable Overhead Data For April 2008

Cost Item/Allocation BaseActual Result

Flexible- Budget Amount

1. Output units (jackets) 10,000 10,000

2. Machine-hours 4,500 4,000

3. Machine-hours per output unit 0.45 0.40

4. Variable manufacturing overhead costs

$130,500 $120,000

5. Variable manufacturing overhead costs per machine-hour

$29.00 $30.00

6. Variable manufacturing overhead costs per output unit

$13.05 $12.00

Variable Overhead Variance Analysis

Developing Budgeted FixedOverhead Allocation Rates

Step 1:Choose the time period used to compute the budget..

The budget period is typically twelve months.Step 2:

Select the cost-allocation base.Webb budgets 57,600 machine-hours for a budgetedoutput of 144,000 jackets in year 2008, or 0.40MH

per jacket.

Developing Budgeted FixedOverhead Allocation Rates

Step 3:Determine the fixed overhead costs.

Webb’s manufacturing budget for 2008 is $3,312,000, or $276,000 per month

Step 4:Compute the rate per unit of the allocation base. $3,312,000 ÷ 57,600 = $57.50 per machine hour

Developing Budgeted FixedOverhead Allocation Rates

What is the budgeted fixed overhead cost rateper output unit (jacket)?

0.40 hours allowed per output unit

$57.50 budgeted fixed overhead cost rate/machine hour

$23 per jacket (output unit)

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Fixed Overhead Variance Analysis

Journal Entries For Variable Overhead

1. Variable Overhead Control 130,500

Accounts Payable and various other accounts 130,500

To record actual variable overhead costs incurred.

2. Work-in-Process Control 120,000

Variable Overhead Allocated 120,000

To record variable overhead cost allocated

Journal Entries For Variable Overhead (cont.)

3. Variable Overhead Allocated 120,000 Variable Overhead Efficiency Variance 15,000

Variable Overhead Control 130,500Variable Overhead Spending Variance 4,500

To record variances for the accounting period.

Cost of Goods Sold 10,500Variable Overhead Spending Variance 4,500

Variable Overhead Efficiency Variance 15,000

Journal Entries For Fixed Overhead

1. Fixed Overhead Control 285,000

Salaries Payable, Accumulated Depreciation

and various other accounts 285,000

To record actual fixed overhead costs incurred.

2. Work-in-Process Control 230,000

Fixed Overhead Allocated 230,000

To record fixed overhead costs allocated,

Journal Entries For Fixed Overhead (cont.)3. Fixed Overhead Allocated 230,000

Fixed Overhead Spending Variance 9,000

Fixed Overhead Production-Volume Variance 46,000

Fixed Overhead Control 285,000

To record variances for the accounting period.

Cost of Goods Sold 9,000

Fixed Overhead Spending Variance 9,000

Cost of Goods Sold 46,000

Fixed Overhead Production Volume Variance 46,000

Static/Flexible Budgets in Standard Cost Format

Flexible Budget

Volume Variances

Static Budget

Units Sold 10,000 2,000 U 12,000

Sales @ $120 each $1,200,000 $240,000 U $1,440,000

Standard Cost of Sales

Direct Material @ $60 -600,000 120,000 F -720,000

Direct Labor @ $16 -160,000 32,000 F -192,000

Variable Manufacturing Overhead @ $12 -120,000 24,000 F -144,000

Fixed Manufacturing Overhead @ $23 -230,000 46,000 F -276,000

Total Standard Cost @ $111 -1,110,000 222,000 F -1,332,000

Gross Margin 90,000 18,000 U $108,000

Production Volume Variance -46,000 46,000 U

Operating Income $44,000 64,000 U $108,000

Sales Volume Variance Analyzed

Sales-volume variance$64,000 U

Operating-income volume variance

$18,000

Production-volume variance

$46,000 U

Level 2

Level 3

Actual Results/Flexible Budgets in Standard Cost Format

Actual Results

Variances Flexible Budget

Units Sold 10,000 10,000

Sales @ $125/$120 each $1,250,000 $50,000 $1,200,000

Standard Cost of Sales

Direct Material @ $60 -600,000 -600,000

Direct Labor @ $16 -160,000 -160,000

Variable Manufacturing Overhead @ $12 -120,000 -120,000

Fixed Manufacturing Overhead @ $23 -230,000 -230,000

Total Standard Cost @ $111 -1,110,000 -1,110,000

Gross Margin 140,000 50,000 90,000

Production Volume Variance -46,000 -46,000

Other Variances -79,100 -79,100

Operating Income $14,900 -29,100 $44,000