1. Copyright © 2003 Pearson Education Canada Inc. Slide 7-91 Chapter 8 Flexible Budgets, Variances, and Management Control: II

2. Copyright © 2003 Pearson Education Canada Inc. Slide 7-92 Overhead Costs Overhead costs are significant for most organizations Variable Overhead Recall that variable overhead is allocated to products and services using a budgeted variable overhead rate Separate into efficiency and spending variances Fixed Overhead Recall that fixed overhead is allocated to products and services using a budgeted fixed overhead rate Separate into spending and production volume variances Pages 277 - 278

3. Copyright © 2003 Pearson Education Canada Inc. Slide 7-93 Variable Overhead Cost Variances Variable overhead efficiency variance =(actual units of the allocation base - budgeted units of the allocation base) x budgeted variable overhead allocation rate =(4,500 - 4,000) x $30 = $15,000 U Variable overhead spending variance = (actual variable overhead rate - budgeted variable overhead rate) x actual units of the allocation base =($29.00 - $30.00) x 4,500 = $4,500 F Pages 279 - 282

4. Copyright © 2003 Pearson Education Canada Inc. Slide 7-94 Variable Overhead Variances Pages 279 - 282 Flexible Budget Variance $10,500 U Spending Variance $4,500 F Efficiency Variance $15,000 U Variable Overhead

5. Copyright © 2003 Pearson Education Canada Inc. Slide 7-95 Fixed Overhead Cost Variances Fixed overhead spending variance = Actual fixed overhead costs – Static budgeted fixed overhead costs =$285,000 - $276,000 = $9,000 U Production volume variance =Budgeted fixed overhead - [ (Budgeted fixed overhead allocation base allowed for actual output units) x (Budgeted fixed overhead rate) ] =$276,000 - [ (0.40 x 10,000) x $57.50 ] =$276,000 - $230,000 =$46,000 U Pages 283 - 287

6. Copyright © 2003 Pearson Education Canada Inc. Slide 7-96 Overhead Cost Variances Variable Overhead Pages 289 - 290 Fixed Overhead How the Cost is Planned and Controlled How Costs are Allocated to Products $ Volume $ $ $