Flexible Budgets,

Overhead Cost Variances,

and
Management Control

© 2012 Pearson Prentice Hall. All rights reserved.

Planning and Overhead
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

© 2012 Pearson Prentice Hall. All rights reserved.

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

© 2012 Pearson Prentice Hall. All rights reserved.

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

© 2012 Pearson Prentice Hall. All rights reserved.

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

© 2012 Pearson Prentice Hall. All rights reserved.

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.

© 2012 Pearson Prentice Hall. All rights reserved.

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.

© 2012 Pearson Prentice Hall. All rights reserved.

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
flexible-budget variance = Actual Costs
Incurred - Flexible-budget
amount

(c) 2012 Pearson Prentice Hall. All rights reserved.

 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
Efficiency = variable overhead
cost-allocation base - variable overhead cost-
allocation based allowed
overhead cost
per unit of
Variance used for actual output for actual output cost-allocation base

(c) 2012 Pearson Prentice Hall. All rights reserved.

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
Spending = overhead cost
per unit of - overhead cost
per unit of
variable overhead
cost-allocation base
Variance cost-allocation base cost-allocation base used for actual output

(c) 2012 Pearson Prentice Hall. All rights reserved.

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.

© 2012 Pearson Prentice Hall. All rights reserved.

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
flexible-budget variance = Actual Costs
Incurred - Flexible-budget
amount

(c) 2012 Pearson Prentice Hall. All rights reserved.

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

(c) 2012 Pearson Prentice Hall. All rights reserved.

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.

© 2012 Pearson Prentice Hall. All rights reserved.

Variable Overhead
Variance Analysis Illustrated

© 2012 Pearson Prentice Hall. All rights reserved.

Fixed Overhead
Variance Analysis Illustrated

© 2012 Pearson Prentice Hall. All rights reserved.

Production-Volume Variance

© 2012 Pearson Prentice Hall. All rights reserved.

Integrated
Variance
Analysis
Illustrated

© 2012 Pearson Prentice Hall. All rights reserved.

© 2012 Pearson Prentice Hall. All rights reserved.