This is a strategic decision. 8-3 The key differences are how direct costs are traced to a cost object and how indirect costs are allocated to a cost object: Direct costs Indirect costs Actual Costing Actual prices x Actual inputs used Actual indirect rate Standard Costing Standard prices x Standard inputs allowed for actual output Standard indirect cost-allocation rate x Standard quantity of cost-allocation base allowed for actual output 8-4 Steps in developing a budgeted variable-overhead cost rate are: 1 . Choose the period to be used for the budget, .
Select the cost-allocation bases to use in allocating variable overhead costs to the output produced, 3. Identify the variable overhead costs associated with each cost-allocation base, and 4. Compute the rate per unit of each cost-allocation base used to allocate variable overhead costs to output produced. 8-5 Two factors affecting the spending variance for variable manufacturing overhead are: a. Price changes of individual inputs (such as energy and indirect materials) included in variable overhead relative to budgeted prices. B.
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Percentage change in the actual quantity used of individual items included n variable overhead cost pool, relative to the percentage change in the quantity of the cost driver of the variable overhead cost pool. 8-6 Possible reasons for a favorable variable-overhead efficiency variance are: ; Workers more skillful in using machines than budgeted, ; Production scheduler Was able to schedule jobs better than budgeted, resulting in lower-than-budgeted machine-hours, ; Machines operated with fewer slowdowns than budgeted, and ; Machine time standards were overly lenient. -7 A direct materials efficiency variance indicates whether more or less direct trials were used than was budgeted for the actual output achieved. A variable manufacturing overhead efficiency variance indicates whether more or less Of the chosen allocation base was used than was budgeted for the actual output achieved. 8-8 Steps in developing a budgeted fixed-overhead rate are 1 Choose the period to use for the budget, 2. Select the cost-allocation base to use in allocating fixed overhead costs to output produced, 3. Identify the fixed-overhead costs associated with each cost-allocation base, and 4.
Compute the rate per unit of each cost-allocation base used to allocate iced overhead costs to output produced. 8-9 The relationship for fixed-manufacturing overhead variances is: Flexible- budget variance Efficiency variance (never a variance) Spending variance There is never an efficiency variance for fixed overhead because managers cannot be more or less efficient in dealing with an amount that is fixed regardless of the output level. The result is that the flexible-budget variance amount is the same as the spending variance for fixed factoring overhead. -10 For planning and control purposes, fixed overhead costs are a lump sum amount that is not controlled on a per-unit basis. In contrast, for inventory costing purposes, fixed overhead costs are allocated to products on a per-unit basis. 8-11 An important caveat is what change in selling price might have been necessary to attain the level of sales assumed in the denominator of the fixed manufacturing overhead rate. For example, the entry of a new low-price competitor may have reduced demand below the denominator level if the budgeted selling price was maintained.
An unfavorable productiveness variance may be small relative to the selling-price variance had prices been dropped to attain the denominator level of unit sales. -12 A strong case can be made for writing off an unfavorable production- volume variance to cost of goods sold. The alternative is prorating it among inventories and cost of goods sold, but this would “penalize” the units produced (and in inventory) for the cost Of unused capacity, I. E. , for the units not produced. But, if we take the view that the denominator level is a ‘Soft” number-??I. E. It is only an estimate, and it is never expected to be reached exactly, then it makes more sense to prorate the production volume variance-??whether favorable or not-??among the inventory stock and cost of odds sold. Prorating a favorable variance is also more conservative: it results in a lower operating income than if the favorable variance had all been written off to cost of goods sold. Finally, prorating also dampens the efficacy of any steps taken by company management to manage operating income through manipulation of the production volume variance.
In sum, a production-volume variance need not always be written off to cost of goods sold. 8-13 The four variances are: ; Variable manufacturing overhead costs -?? spending variance – efficiency variance ; Fixed manufacturing overhead costs spending variance – production-volume variance 8-14 Interdependencies among the variances could arise for the spending and efficiency variances. For example, if the chosen allocation base for the variable overhead efficiency variance is only one of several cost drivers, the variable overhead spending variance will include the effect of the other cost drivers.
As a second example, interdependencies can be induced when there are misclassification of costs as fixed when they are variable, and vice versa. 8-15 Flexible-budget variance analysis can be used in the control of costs in n activity area by isolating spending and efficiency variances at different levels in the cost hierarchy. For example, an analysis of batch costs can show the price and efficiency variances from being able to use longer production runs in each batch relative to the batch size assumed in the flexible budget. 8-16 (20 min. ) Variable manufacturing overhead, variance analysis.