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

© 2012 Pearson Prentice Hall. All rights reserved. Class Announcements  Assignment #2 due February 10 th (MyAccounting Lab); available on-line  Midterm – February 17 th (in-class)  Accounting Case Competition at SMU March 6- 7 (Halifax); one team of two-four 3 rd and 4 th year; please let know of interest by January  NEXT CLASS – Case: Body Glove; available on-line

© 2012 Pearson Prentice Hall. All rights reserved. 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

© 2012 Pearson Prentice Hall. All rights reserved. Cases 2014

© 2012 Pearson Prentice Hall. All rights reserved. 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

© 2012 Pearson Prentice Hall. All rights reserved. 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

© 2012 Pearson Prentice Hall. All rights reserved. Flexible Budget: Variable Overhead Variance Analysis Illustrated

© 2012 Pearson Prentice Hall. All rights reserved. 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.

© 2012 Pearson Prentice Hall. All rights reserved. Flexible Budget: Fixed Overhead Variance Analysis Illustrated

© 2012 Pearson Prentice Hall. All rights reserved. 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)

© 2012 Pearson Prentice Hall. All rights reserved. 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.

© 2012 Pearson Prentice Hall. All rights reserved. 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