1. Chapter 13 – Overhead and Marketing Variances
Accounting 6310
Chapter 13 – Overhead and Marketing Variances

2. Predetermined Overhead Rates
Budgeted overhead = Predetermined OH
Budgeted cost driver Rate
Budgeted cost driver? What volume should be used?
Expected volume? Based on next year’s projected volume
Normal volume? Long-run average production
Some other volume?

3. Flexible Budget for Several Levels
900 units
1000 units
1100 units
Variable Costs
$5 unit
4,500
5,000
5,500
Fixed costs
10,000
Total costs
14,500
15,000
15,500

4. Predetermined OH Rates
Variable OH: $4,500/900 = $5
$5,000/1,000 = $5
$5,500/1,100 = $5
It makes no difference which level of output we choose to set variable OH rate. It is $5 for all of the levels.

5. Predetermined OH Rates
Fixed OH: $10,000/900 = $11.11
$10,000/1,000 = $10
$10,000/1,100 = $9.09
It DOES make a difference which level of output we choose to set the fixed OH rate. The OH rate varies from $11.11 to $9.09 based on the level of units we choose to set the rate. This chosen level is called the DENOMINATOR LEVEL.

6. Predetermined OH Rates
If we choose to use 900 units to set our OH rate, we will have the higher $11.11 OH rate.
More overhead will be allocated than the other two levels.
We are more likely to have overallocated OH with a higher rate.

7. Variable Overhead Flexible budget rates = standard rate
Predetermined OH rate
Flexible budget variances
Spending variance
Difference in actual cost and predetermined variable overhead rate multiplied by the actual cost driver
Efficiency variance
Difference in actual cost driver and STANDARD cost driver multiplied by the predetermined variable overhead rate
Causes

8. Variable OH Variances Actual Var. OH SR x AH SR x SH
|__________________| |_____________|
Spending Variance Efficiency Variance
|_________________________________|
Total Variable OH Variance 12

9. Fixed Overhead Flexible budget rates - based on denominator level
Fixed spending variance
Difference in actual amount spent and budgeted amount (FROM THE FLEXIBLE BUDGET)
Controllable variance

10. Fixed Overhead Production-volume variance Causes
Difference in flexible budget and predetermined fixed overhead rate x standard activity
Depends on denominator level chosen
This is part of the sales volume variance
Deemed an “uncontrollable” variance
Causes

11. Fixed OH Variances Actual Fixed Flexible Overhead Budget SR x SH
|__________________| |_____________|
Spending Variance Production Volume Variance
|_________________________________|
Total Fixed OH Variance 12

12. Variances
Efficiency variance – we are assuming that variable overhead varies linearly with the cost driver. If this is not the case, this variance will be inaccurate.
Production volume variance – If the production manager is responsible for this variance, this may cause overproduction. Better to put sales in charge of this variance.

13. Marketing Variances Marketing Variances
For revenues, the opposite holds true.
FAVORABLE: Actual > Standard
UNFAVORABLE: Actual < Standard
Marketing Variances
Price variance (Difference in sales prices)
Quantity variance (Difference in sales volumes)
Mix variance (Results from selling a different proportion of products than planned)
Sales variance (Difference in volume sold) 7

14. Marketing Variances Price –
Result of this variance lets management know how successful their price strategy was
Did they have to lower their price to sell products? Or were customers willing to pay a price premium?
Person who sets prices is responsible

15. Marketing Variances Quantity –
Mix – details consumer preferences for products, especially when the products are substitutes
Favorable (unfavorable) if consumers shift to a higher (lower) priced (CM) product
Must evaluate why customers chose one product over another
Marketing probably responsible

16. Marketing Variances Quantity: Sales (volume) Variance:
This variance tells us whether we sold more units than planned.
Favorable variance results if we sold more volume than planned.
Person responsible for generating demand for overall product is responsible (probably marketing)

17. Marketing Variances AP x AQ SP x AQ SP x SQ
|__________________| |_____________|
Price Variance Quantity Variance
|_________________________________|
Total Marketing Variance 12

18. Marketing Variances Quantity Variance:
Mix variance = (Actual mix % - Standard mix %) x Actual units of all products sold x Standard price
Sales variance = (Actual units of all products sold – standard units of all products sold) x standard mix % x Standard Price

19. Sales Volume Variance Sales volume variance can be broken down into:
Change in market share due to market share:
Tells us how much of our change in profits is due to increases or decreases in our hold on the market
Our managers should be able to control this variance.
Change in market share due to industry volume:
Tells us how much of our increased (decreased) sales is due to a bigger (smaller) overall market for our products
Our managers generally cannot control the overall industry volume.

20. Homework P13-5 – Oneida Metal P13-12 – Wine Distributors
DUE WEDNESDAY, MARCH 18