PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Appendix 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System

10A-2 Learning Objective 4 (Appendix 10A) Compute and interpret the fixed overhead budget and volume variances.

10A-3 Budget variance Fixed Overhead Budget Variance Budget variance Budgeted fixed overhead Actual fixed overhead =– Actual Fixed Overhead Fixed Overhead Applied Budgeted Fixed Overhead

10A-4 Volume variance Fixed Overhead Volume Variance Volume variance Fixed overhead applied to work in process Budgeted fixed overhead =– Actual Fixed Overhead Fixed Overhead Applied Budgeted Fixed Overhead

10A-5 FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output SH × FPOHR DH × FPOHR Fixed Overhead Volume Variance Volume variance FPOHR × (DH – SH) = Actual Fixed Overhead Fixed Overhead Applied Budgeted Fixed Overhead Volume variance

10A-6 Computing Fixed Overhead Variances

10A-7 Computing Fixed Overhead Variances

10A-8 Predetermined Overhead Rates Predetermined overhead rate Estimated total manufacturing overhead cost Estimated total amount of the allocation base = Predetermined overhead rate $360,000 90,000 Machine-hours = Predetermined overhead rate = $4.00 per machine-hour

10A-9 Predetermined Overhead Rates Variable component of the predetermined overhead rate $90,000 90,000 Machine-hours = Variable component of the predetermined overhead rate = $1.00 per machine-hour Fixed component of the predetermined overhead rate $270,000 90,000 Machine-hours = Fixed component of the predetermined overhead rate = $3.00 per machine-hour

10A-10 Applying Manufacturing Overhead Overhead applied Predetermined overhead rate Standard hours allowed for the actual output =× Overhead applied $4.00 per machine-hour 84,000 machine-hours=× Overhead applied $336,000=

10A-11 Computing the Budget Variance Budget variance Budgeted fixed overhead Actual fixed overhead =– Budget variance = $280,000 – $270,000 Budget variance = $10,000 Unfavorable

10A-12 Computing the Volume Variance Volume variance Fixed overhead applied to work in process Budgeted fixed overhead =– Volume variance = $18,000 Unfavorable Volume variance = $270,000 – $3.00 per machine-hour ( × $84,000 machine-hours )

10A-13 Computing the Volume Variance FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output Volume variance FPOHR × (DH – SH) = Volume variance = $3.00 per machine-hour ( × 90,000 mach-hours – 84,000 mach-hours ) Volume variance = 18,000 Unfavorable

10A-14 A Pictorial View of the Variances Fixed Overhead Applied to Work in Process Actual Fixed Overhead Budgeted Fixed Overhead 252, , ,000 Total variance, $28,000 unfavorable Budget variance, $10,000 unfavorable Volume variance, $18,000 unfavorable

10A-15 Fixed Overhead Variances – A Graphic Approach Let’s look at a graph showing fixed overhead variances. We will use ColaCo’s numbers from the previous example.

10A-16 Graphic Analysis of Fixed Overhead Variances Machine-hours (000) Budget $270, Denominator hours 0 0 Fixed overhead applied at $3.00 per standard hour

10A-17 Graphic Analysis of Fixed Overhead Variances Actual $280,000 Machine-hours (000) Budget $270, Denominator hours 0 0 Fixed overhead applied at $3.00 per standard hour Budget Variance 10,000 U {

10A-18 Applied $252,000 Machine-hours (000) Budget $270,000 Graphic Analysis of Fixed Overhead Variances Standard hours Fixed overhead applied at $3.00 per standard hour Denominator hours Budget Variance 10,000 U Volume Variance 18,000 U { { Actual $280,000

10A-19 Reconciling Overhead Variances and Underapplied or Overapplied Overhead In a standard cost system: Unfavorable variances are equivalent to underapplied overhead. Favorable variances are equivalent to overapplied overhead. The sum of the overhead variances equals the under- or overapplied overhead cost for the period.

10A-20 Reconciling Overhead Variances and Underapplied or Overapplied Overhead

10A-21 Computing the Variable Overhead Variances Variable manufacturing overhead rate variance VMRV = (AH × AR) – (AH × SR) = $100,000 – (88,000 hours × $1.00 per hour) = $12,000 unfavorable

10A-22 Computing the Variable Overhead Variances Variable manufacturing overhead efficiency variance VMEV = (AH × SR) – (SH × SR) = $88,000 – (84,000 hours × $1.00 per hour) = $4,000 unfavorable

10A-23 Computing the Sum of All Variances

10A-24 End of Appendix 10A