Management Accounting Cost Analysis Summary
Subject: MAC-4 * Course: IBMS – 1 Dear mate, This summary provides you with a general overview of the theory covered in MAC-4. It is based on the “Cost Accounting” book by C. Horngren (Pierson International Edition, 13th Ed. . It is NOT a substitution of the book, but may be used as a complementary to it. For success on the exam, we advise you to go through the book and use this summary as a guide to make it easier for you. Good luck studying! Sincerely, The StudyMates team Table of Contents Topic 1: The accountant’s role in the Organization4 I. Management Accounting, Cost Accounting and Financial Accounting4 II. Strategic decisions and Management Accounting4 III. Organization structure and the Management Accountant6 Topic 2: Introduction to Cost Terms and Purposes8 I.
Costs and Cost Terminology:8 II. Direct costs and Indirect costs8 III. Variable and Fixed Costs:9 IV. Types of Inventory, Inventoriable costs, and Period cots:9 Topic 3: Cost-Volume-Profit Analysis11 I. Essentials of CVP Analysis:11 II. Breakeven Point and target income:11 III. Sensitivity Analysis:12 IV. Sales Mixes:12 Topic 4: Job Costing13 I. Concepts of Costing Systems:13 II. Job costing – 7 steps:13 III. Budgeted Indirect costs and end-of-accounting-year adjustments14 Topic 5: Activity-Based Costing and Activity-Based Management15 I. Under- and over-costing:15
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II. Simple Costing System using a Single Indirect-cost Pool:15 III. Refining a costing system:15 IV. Activity-based costing systems:16 V. Using ABC systems for improving cost management and Profitability:16 Topic 6: Master Budget and Responsibility Accounting18 I. Budgets and Budgeting Cycle:18 II. Advantages of Budgets:18 III. Steps in developing and Operating Budget:19 IV. Budgeting and Responsibility Accounting:20 V. Responsibility and controllability:20 Topic 7: Flexible Budgets, Direct-cost variances, and Management Control21 I. Use of variances:21 II.
Static Budgets and Static-budget Variances:21 III. Flexible Budgets:22 Topic 8: Flexible Budgets, Overhead cost variances, and Management control25 I. Planning of Variable and Fixed Overhead costs:25 II. Variable overhead cost variances:25 III. Developing budgeted Fixed Overhead rates:26 IV. Integrated Analysis of Overhead Cost Variances:26 References:27 Topic 1: The accountant’s role in the Organization Study Objective: * Understand how cost accounting supports management accounting * Find out how management accounting affects strategic decisions * Look into a company’s value chain Understand how management accounting fits into an organization’s structure Summary: I. Management Accounting, Cost Accounting and Financial Accounting * Management accounting – it measures, analyses, and reports financial and nonfinancial information that helps managers make decisions to fulfil the goals of an organization. Managers use management accounting information to choose, communicate, and implement strategy. * Financial accounting – it focuses on reporting to external parties such as investors, government agencies, banks and suppliers.
It measures and records business transactions and provides financial statements that are based on generally accepted accounting principles. * Cost accounting – it measures, analyses, and reports financial and nonfinancial information relating to the cost of acquiring or using resources in an organization. II. Strategic decisions and Management Accounting * Strategy – specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. * Strategic cost management – focuses specifically on the cost dimension within the overall strategy Value chain – it is the sequence of business functions in which customer usefulness is added to products or services. There are six business functions: R&D, design, production, marketing, distribution, and customer service: * Supply chain – describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same organization or in other organizations. * Key success factors: * Cost and efficiency – companies face continuous pressure to reduce the cost of the products or services they sell. Quality – customers expect high levels of quality. Total quality management (TQM) is a philosophy in which management improves operations throughout the value chain to deliver products and services that exceed customer expectations. * Time – new-product development time is the time it takes for new products to be created and brought to market.
* Innovation – a constant flow of innovative products or services is the basis for on-going company success. * Five-step decision making process: 1. Identify the problem and uncertainties 2. Obtain information . Make predictions about the future 4. Make decisions by choosing among alternatives 5. Implement the decision, evaluate performance, and learn. * Key management accounting guidelines: * Cost-benefit approach – should be used in making these decisions: Resources should be spent if the expected benefits to the company exceed the expected costs. III. Organization structure and the Management Accountant * Line management – such as production, marketing, and distribution management, is directly responsible for attaining the goals of the organization. Staff management – such as management accountants and information technology and human-resource management, exists to provide advice and assistance to line management. A plant manager (a line function) may be responsible for investing in new equipment. A management accountant (a staff function) works as business partner of the plant manager by preparing detailed operating-cost comparisons of alternative pieces of equipment. * Chief financial officer (CFO) – also called the finance director in many countries – is the executive responsible for overseeing the financial operations of the organization.
The responsibilities of the CFO include: controllership, treasury, risk management, taxation, investor relations, and internal audit. Topic 2: Introduction to Cost Terms and Purposes Study Objectives: * Learn to make difference between direct and indirect costs * What are fixed and variable costs * Learn about the three categories of inventories commonly found in manufacturing companies * Distinguish between inventoriable costs and period costs * Understand why product costs are calculated differently for different purposes Summary: I. Costs and Cost Terminology: Cost – sacrificed resource to achieve a specific objective * Actual cost – this is the cost incurred (a historical or past cost) * Budgeted cost – this is cost that is a predicted or forecasted (a future cost) * Cost object – this is anything for which a measurement of cost is desired. * Cost accumulation – this is the collection of cost data in some organized way by means of an accounting system II. Direct costs and Indirect costs * Direct costs – they are related to the particular cost object and can be traced to it in an economically feasible (cost-effective) way Indirect costs – they cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner. * Overview: * Cost Assignment – a general term that includes gathering accumulated costs to a cost object. It could be: * Cost Tracing – assigning accumulated costs with a direct relationship to the cost object * Cost Allocation – assigning accumulated costs with an indirect relationship to a cost object III.
Variable and Fixed Costs: * Variable cost – it changes in total in proportion to changes in the related level of total activity or volume. For example, if we are producing BMW X5, the number of steering wheels will increase proportionately to the number of BMW X5s we produce. * Fixed cost – remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume * Cost driver – this is a variable, such as the level of activity or volume that causally affects costs over a given time span. Relevant range – this is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. * Unit cost – it is also called average cost. It is computed by dividing total costs by the number of units. The units might be expressed in various ways. IV. Types of Inventory, Inventoriable costs, and Period cots: * Types of inventory – (1) Direct materials inventory – direct materials in stock; (2) Work-in-process inventory – goods partially worked on but not yet completed; (3) Finished goods inventory – goods completed but not yet sold. Classification of Manufacturing Costs- (1) Direct material costs (DMc) – the acquisition costs of all materials that eventually become part of the cost object; (2) Direct manufacturing labour costs (DLc) – the compensation of all manufacturing labour that can be traced to the cost object in an economically feasible way; (3) Indirect manufacturing costs (OH) – all manufacturing costs that are related to the cost object but cannot be traced to that cost object in an economically feasible way. Inventoriable costs – all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold only when the product is sold. For example, all manufacturing costs are inventoriable costs for manufacturing-sector companies.
* Period costs – all costs in the income statement other than cost of goods sold. Period costs are treated as expenses of the accounting period in which they are incurred because they are expected to benefit revenues in that period and are not expected to benefit revenues in future periods. Prime costs – these are all direct manufacturing costs: Prime costs = DMc + DLc * Conversion costs – these are all manufacturing costs other than direct material costs: Conversion costs = DLC + OH * Overtime premium – the wage rate paid to workers in excess of their straight-time wage rates. It is usually considered to be a part of indirect costs or overhead. * Idle time – wages paid for unproductive time caused by lack of orders, machine breakdowns, material shortages, poor scheduling, and the like. * The Manufacturing Environment: Topic 3: Cost-Volume-Profit Analysis Study Objectives: * Learn what is CVP analysis Be able to determine Break Even point * How is CVP analysis involved in decision making and how sensitivity analysis helps managers to cope with uncertainty * Understand the application of CVP analysis to plan variable and fixed costs Summary: I. Essentials of CVP Analysis: * Cost-Volume-Profit Analysis – it examines the behaviour of total revenues, total costs, and operating income as changes occur in the units sold, the selling price, the variable cost per unit, or the fixed cost of a product.
* Contribution margin (CM) – the difference between total revenues and total variable costs. Also: CM = CMu x Number of units Contribution margin per unit (CMu) – this is the difference between selling price and variable cost per unit * Contribution margin percentage – equals contribution margin per unit divided by selling price. * There are three related ways to think more deeply about and model CVP relationships: * Equation method Revenues – Var. Costs – Fixed costs = Operating Income Revenues = Selling price (SP) – Quantity of units sold (Q) * Contribution margin method [(SP – VCu) x Q] – FC = Operating Income (CMu x Q) – FC = Operating Income * Graph method II. Breakeven Point and target income: * Breakeven number of units = FC / CMu Contribution margin percentage = CMu / SP * Breakeven revenues = FC / CM % * Target Operating Income = Revenues – VC – FC * Quantity of units required to be sold = (FC + Target OI) / CMu * Target Net Income = (Target OI) – (Target OI x Tax rate) * Target OI = Target Net Income / (1 – Tax rate) III. Sensitivity Analysis: * Sensitivity analysis – this is a “what-if” technique that managers use to examine how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes. * Margin of safety – the amount by which budgeted (or actual) revenues exceed breakeven revenues.
It is the sales quantity minus the breakeven quantity. * Operating Leverage (OL – describes the effects that fixed costs have on changes in operating income as changes occur in units sold and contribution margin. Organizations with a high proportion of fixed costs in their cost structures have high operating leverage. * Degree of OL = CM / OI IV. Sales Mixes: * BE point in bundles = FC / CM per bundle * CM % for the bundle = CM per bundle / Revenue of the bundle * Breakeven Revenues = FC / CM % for the bundle * Number of bundles required to BB = BE Revenues / Revenue per bundle Topic 4: Job Costing Study Objectives: Get an understanding of the costing systems * Make the difference between job costing and process costing * Learn the seven-step approach to job costing * Flow of costs * Learn about end-of-accounting-year adjustments Summary: I. Concepts of Costing Systems: * Cost pool – it is any logical grouping of related cost objects * Cost-allocation Base – it is a cost driver used as a basis upon which to build a systematic method of distributing indirect costs * Job costing – this is a system accounting for distinct cost objects called Jobs (A Unique product). Each job may be different from the next, and consumes different resources. Process-costing system – it is a system accounting for mass production of identical or similar products * Actual costing – it allocates indirect costs based on the actual indirect-cost rates times the actual activity consumption * Normal costing – it allocates indirect costs based on the budgeted indirect-cost rates times the actual activity consumption * Both methods allocate Direct costs to a cost object the same way: by using actual direct-cost rates times actual consumption II. Job costing – 7 steps: * Step 1: Identify the job that is the chosen Cost object Step 2: Identify the Direct costs of the job – DM, DL * Step 3: Select the Cost-Allocation bases to use for allocating Indirect costs to the job * Step 4: Identify the Indirect costs associated with each cost-allocation base * Step 5: Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job: Actual manufacturing OH rate = Actual manuf. OH costs / Actual total q-ty of cost-allocation base * Step 6: Compute the Indirect costs allocated to the job * Step 7: Compute the total cost of the job by adding all direct and indirect costs assigned to the job III.
Budgeted Indirect costs and end-of-accounting-year adjustments * Accounting for OH – actual costs will almost never equal budgeted costs. Accordingly, an imbalance situation exists between the two overhead accounts: * If Overhead Control > Overhead Allocated, this is called Under-allocated Overhead * If Overhead Control < Overhead Allocated, this is called Over-allocated Overhead * There are three approaches to account for the under- or over-allocated manufacturing OH: * Adjusted Allocation Rate Approach – all allocations are recalculated with the actual, exact allocation rate.
First, the actual manufacturing overhead rate is computed at the end of the fiscal year. Then, the manufacturing overhead costs allocated to every job during the year are recomputed using the actual manufacturing OH rate. Finally, end-of-year closing entries are made. The result is that at year-end, every job-cost record and finished goods record – as well as the ending Work-in-process control, Finished goods control, and CoGS accounts – represent actual manufacturing OH costs incurred. * Proration Approach – the difference is allocated between Cost of Goods Sold, Work-in-Process, and Finished Goods based on their relative sizes. Write-Off Approach – the difference is simply written off to Cost of Goods Sold. Topic 5: Activity-Based Costing and Activity-Based Management Study Objectives: * Undercosting and overcosting * Learn about simple and activity-based costing systems * The essentials of activity-based management * What are department costing systems Summary: I. Under- and over-costing: * Product undercosting – a product consumes a high level of resources but is reported to have a low cost per unit. For example, you go on a dinner with friends and you eat the most from everybody, eventually have to pay the most.
However, in the end you all decide to pay equql amounts of the bill, so you have to pay less. * Product overcosting – a product consumes a low level of resources but is reported to have a high cost per unit. * Product-cost cross-subsidization – means that is a company undercosts one of its products, then it will overcost at least one of its other products. Similarly, if a company overcosts one of its products, it will undercost at least one of its other products. II. Simple Costing System using a Single Indirect-cost Pool: * Step 1: Identify the products that are the chosen cost objects Step 2: Identify the direct costs of the products * Step 3: Select the cost-allocation bases to use for allocating indirect (or overhead) costs to the products * Step 4: Identify the indirect costs associated with each cost-allocation base * Step 5: Compute the rate per unit of each cost-allocation base * Step 6: Compute the indirect costs allocated to the products Budgeted indirect-cost rate = Budgeted total costs in indirect-cost pool / Budgeted total quantity of cost-allocation base * Step 7: Compute the total cost of the products by adding all direct and indirect costs assigned to the products
III. Refining a costing system: * Refined costing system – it reduces the use of broad averages for assigning the cost of resources to cost objects and provides better measurement of the costs of indirect resources used by different cost objects – no matter how differently various cost objects use indirect resources. Three reasons for the demand for refinements: * Increase the product diversity * Increase the indirect costs * Competition in product markets * Guidelines for refining a costing system: Direct-cost tracing – identify as many direct cost as is economically feasible * Indirect-cost pools – expand the number of indirect-cost pools until each of these pools is more homogeneous * Cost-allocation bases – use the cost drives as cost-alloacation base for each homogenous indirect-cost pool IV. Activity-based costing systems: * Activity-based costing (ABC) – it refines a costing system by identifying individual activities as the fundamental cost objects. * Activity – this is an event, task, or unit of work with a specified purpose Cost- hierarchy – categorizes various activity cost pools on the basis of the different types of cost drivers, or cost-allocation bases, or different degrees of difficulty in determining cause-and-effect (or benefits-received) relationships. * Output unit-level costs – these are the costs of activities performed on each individual unit of a product or service. Machine operations costs related to the activity of running the automated molding machines are output unit-level costs. * Batch-level costs – these are the costs of activities related to a group of units of products or services rather than to each individual unit of roduct or services * Product-sustaining costs – these are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced V. Using ABC systems for improving cost management and Profitability:
* Activity-based management – this is a method of management decision-making that uses activity-based costing information to improve customer satisfaction and profitability. ABM is defined broadly to include decisions about pricing and product mix, how to reduce costs, how to improve processes, and decision related to product design. Doing an analysis of the factors that cause costs to be incurred reveals many opportunities for improving the way work is done. Management can evaluate whether particular nonvalue-added activities can be reduced or eliminated. * Many ABC systems distinguish “costs incurred” from “resources used” to design, manufacture, and deliver products and services. Costs incurred = Resources used + Costs of unused capacity * Signs of when an ABC system is likely to provide the most benefits: * Significant amounts of indirect costs are allocated using only one or two cost pools * All or most indirect costs are identified as output unit-level costs Products make diverse demands on resources because of differences in volume, process steps, batch sizes, or complexity * Products that a company is well suited to make and sell show small profits * The widespread use of ABC systems in service and merchandising companies reinforces the idea that ABC systems are used by managers for strategic decisions rather than for inventory valuation. * A major benefit of ABC is its ability to assign indirect costs to cost objects by identifying activities and cost drivers. Topic 6: Master Budget and Responsibility Accounting Study Objectives: * Learn what is a master budget Know how to prepare operating budget and the supporting schedules * Know how to use sensitivity analysis * Learn what is kaizen budgeting and its use for cost management * Understand responsibility accounting Summary: I. Budgets and Budgeting Cycle: * Budget – this is the quantitative expression of a proposed plan of action by management for a specified period and an aid to coordinate what needs to be done to implement that plan. It includes both financial and non-financial aspects * Strategy – specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. Well-managed companies usually cycle through the following budgeting steps during a fiscal year: * Plan the performance of the company as whole and the performance of its subunits * Senior managers give subordinate managers a frame of reference, a set of specific financial or nonfinancial expectations against which actual results will be compared * If needed, corrective action follows
* Management takes into account market feedback, changed conditions, and their own experiences as they begin to make plans for the next period Master budget – it expresses management’s operating and financial plans for a specified period. The master budget is the initial plan of what the company intends to accomplish in the budget period. * Pro forma statement – budgeted financial statements are sometimes called like that II. Advantages of Budgets: * They promote coordination (the meshing and balancing all aspects of production or service and all departments in a company in the best way for the company to meet its goals) and communication (making sure that the goals are understood by all employees) among subunits within the company. They provide framework for judging performance and facilitating learning – budgets enable company’s managers to measure actual performance against predicted performance. Budgets can overcome two limitations of using past performance as a basis for judging actual results – (1) past results often incorporate past miscues, and (2) future conditions can be expected to differ from the past. * Motivating managers and other employees – challenging budgets improve employee performance III. Steps in developing and Operating Budget: * The five steps: * Identify the problem and uncertainties. * Obtain information * Make predictions about the future Make decisions by choosing among alternatives * Implement the decision, evaluate performance, and learn * Financial budget – that part of the master budget made up of the capital expenditures budget, the cash budget, the budgeted balance sheet, and the budgeted statement of cash flows * Here are the basic steps common for developing the operating budget for a manufacturing company:
* Step 1: Prepare the Revenues Budget * Step 2: Prepare the Production Budget (in Units) Budget production (units) = Budget sales (units) + Target ending finished goods inventory (units) – Beginning finished goods inventory (units) Step 3: Prepare the direct material usage budget and direct material purchases budget Purchases of direct materials = Direct materials used in production + Target ending inventory of direct materials – Beginning inventory of direct material * Step 4: Prepare the direct manufacturing labour costs budget * Step 5: Prepare the manufacturing overhead costs budget – Activity-based budgeting (ABB): focuses on the budgeted cost of the activities necessary to produce and sell products and services * Step 6: Prepare the Ending Inventories Budget * Step 7: Prepare the cost of goods sold budget Step 8: Prepare the Nonmanufacturing costs budget * Step 9: Prepare the Budgeted Income Statement * Financial planning models – those are mathematical representations of the relationships among operating activities, financing activities, and other factors that affect the master budget. * Kaizen budgeting – it explicitly incorporates continuous improvement anticipated during the budget period into the budget numbers. Much of the cost reduction associated with kaizen budgeting arises from many small improvements rather than “quantum leaps”.
A significant aspect of kaizen budgeting is employee suggestions. IV. Budgeting and Responsibility Accounting: * Organization structure – it is an arrangement of lines of responsibility within the organization. * Responsibility centre – it is a part, segment, or subunit of an organization whose manager is accountable for a specified set of activities. * Responsibility accounting – this is a system that measures the plans, budgets, actions, and actual results of each responsibility centre. There are four types: * Cost centre – the manager is accountable for costs only Revenue centre – the manager is accountable for revenues only * Profit centre – the manager is accountable for revenues and costs * Investment centre – the manager is accountable for investments, revenues, and costs V. Responsibility and controllability: * Responsibility accounting helps managers to first focus on whom they should ask to obtain information and not on whom they should blame. * Controllability – this is the degree of influence that a specific manager has over costs, revenues, or related items for which he or she is responsible. Controllable cost – any cost that is primarily subject to the influence of a given responsibility centre manager for a given period. Topic 7: Flexible Budgets, Direct-cost variances, and Management Control Study Objectives: * Be able to make the difference between static budg
et and flexible budget * Learn how to make flexible budgets and compute flexible-budget variances and sales-volume variances * Compute price variances and efficiency variances * Be able to perform variance analysis in activity-based costing systems Summary: I. Use of variances: Variance – this is the difference between actual results and expected performance (budgeted performance) * Management by exception – this is the practice of focusing management attention on areas that are not operating as expected and devoting less time to areas operating as expected. * Variance analysis contributes in many ways to making the five-step decision-making process more effective. II. Static Budgets and Static-budget Variances: * Static budget – or master budget, is based on the level of output planned at the start of the budget period. The budget for the period is developed around a single planned output level. Static-budget variance – this is the difference between the actual result and the corresponding budgeted amount in the static budget. * Favorable variance – denoted with F, has the effect, when considered in isolation, of increasing operating income relative to the budgeted amount. For revenue items, F means actual revenues exceed budgeted revenues. For cost items, F means actual costs are less than budgeted costs. * Unfavorable variance – denoted with U, has the effect, when viewed in isolation, of decreasing operating income relative to the budgeted amount. * Static-budget variance for OI = Actual result – Static-budget amount
III. Flexible Budgets: * Flexible budget – calculated budgeted revenues and budgeted costs based on the actual output in the budget period. It is prepared in the end of the period, after the actual output is known. * Developing Flexible Budget in three steps: * Step 1: Identify the actual q-ty of output * Step 2: Calculate the flexible budget for revenues based on budgeted selling price and actual quantity of output * Step 3: Calculate the flexible budget for costs based on budgeted variable cost per output unit, actual quantity of output, and budgeted fixed costs Flexible-budget variance – this is the difference between an actual result and the corresponding flexible-budget amount. * Sales-volume variance for OI = Flexible-budget amount – Static-budget amount * Sales-volume variance for OI = (Budgeted CMu) x (Actual units sold – Static-budget units sold) * Selling-price variance = (Actual SP – Budgeted SP) x Actual units sold * The flexible-budget variances are better measure of operating performance than static-budget variances because they compare actual revenues to budgeted revenues and actual costs to budgeted costs for the same output. Standard input – this is carefully determined quantity of input * Standard price – this is carefully determined price that a company expects to pay for a unit of output * Price variance – this is the difference between actual price and budgeted price multiplied by actual input quantity. Price variance = (Actual price of input – Budgeted price of input) x Actual quantity of input * Efficiency variance – this is the difference between actual input quantity used and budgeted input quantity allowed for actual output, multiplied by budgeted price.
Efficiency variance = (Actual quantity of input used – Budgeted quantity of input allowed for actual output) x Budgeted price of input * Variances serve as an early warning system to alert managers to existing problems or to prospective opportunities. Variance analysis enables managers to evaluate the effectiveness of the actions and performance of personnel in the current period, as well as to fine-tune strategies for achieving improved performance in the future. * Managers often use variance analysis when evaluating the performance of their subordinates.
Two attributes of performance are commonly evaluated: * Effectiveness – the degree to which a predetermined objective or target is met * Efficiency – the relative amount of inputs used to achieve a given output level * Managers should not always interpret a favorable variance as “good news”!!!!! * The goal of variance analysis is for managers to understand why variances arise, to learn, and to improve future performance. * Benchmarking – this is the continuous process of comparing the levels of performance in producing products and services and executing activities against the best levels of performance in competing companies or in ompanies having similar processes. Topic 8: Flexible Budgets, Overhead cost variances, and Management control Study Objective: * Learn about the similarities and the differences in planning variable overhead costs and fixed overhead costs * Be able to compute the variable overhead flexible-budget variance, the variable overhead efficiency variance, and the variable overhead spending variance Summary: I. Planning of Variable and Fixed Overhead costs: * To effectively plan variable overhead costs for a product or service, managers must eliminate the activities that do not add value to the product or service. The planning of fixed overhead costs differs from the planning of variable overhead costs in one important respect: timing. * Standard costing – this is a costing system that (a) traces direct costs to output produced by multiplying the standard prices or rates by the standard quantities of inputs allowed for actual outputs produced and (b) 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.
II. Variable overhead cost variances: * Variable overhead flexible-budget variance – it measures the difference between actual variable overhead costs incurred and flexible-budget variable overhead amounts Variable OH flexible-budget variance = Actual costs incurred – Flexible-budget amount * Variable overhead efficiency variance – this is the difference between actual quantity of the cost-allocation base used and budgeted quantity of the cost-allocation base that should have been used to produce actual utput, multiplied by budgeted variable OH cost per unit of the cost-allocation base: Variable OH efficiency variance = ( Actual quantity of variable OH cost-allocation base used for actual output – Budgeted quantity of variable OH cost-allocation base allowed for actual output) x Budgeted variable OH cost per unit of cost-allocation base Variable overhead spending variance – this is the difference between actual variable overhead cost per unit of the cost-allocation base and budgeted variable overhead cost per unit of the cost-allocation base, multiplied by the actual quantity of variable overhead cost-allocation base used for actual output: Variable OH spending variance = (Actual variable OH cost per unit of cost-allocation base – Budgeted variable OH cost per unit of cost-allocation base) x Actual quantity of variable OH cost-allocation base used for actual output III.
Developing budgeted Fixed Overhead rates: * Fixed OH costs – those are a lump sum of costs that remains unchanged in total for a given period despite wide changes in the level of total activity or volume related to those overhead costs. * Budgeted fixed OH cost per unit of cost-allocation base = Budgeted total costsin fixed OH cost pool / Budgeted total q-ty of cost-allocation base * Budgeted fixed OH cost per output unit = Budgeted q-ty of cost-allocation base allowed per output unit x Budgeted fixed OH cost per unit of cost-allocation base Fixed OH spending variance = Actual costs incurred – Flexible-budget amount * Production volume variance = Budgeted fixed OH – Fixed OH allocated for actual output units produced IV. Integrated Analysis of Overhead Cost Variances: * Variable overhead has no production-volume variance !!! – the amount of variable overhead allocated is always the same as the flexible-budget amount. * Fixed overhead has no efficiency variance !!! – a lump sum amount of fixed costs will be unaffected by the degree of operating efficiency in a given budget period. Total-overhead variance – equals the total amount of underallocated (or underapplied) overhead costs. * Both financial and nonfinancial performance measures are used to evaluate the performance of managers. Exclusive reliance on either is always too simplistic. References: 1. Horngren, Charles T, George Foster, and Srikant M. Datar. Cost Accounting: A Managerial Emphasis, 13/e: Chapters 1, 2, 3, 4, 5, 6, 7, & 8. Englewood Cliffs, N. J.? : Prentice-Hall, 2009. Print. 2. http://www. unf. edu/~dtanner/4361StudyHall/basic_flexible_budget_concepts. htm 3. www. google. com