11th Edition

Chapter 11

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 Flexible Budgets and
Overhead Analysis

Chapter Eleven

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Static Budgets and Performance Reports

Hmm! Comparing
static budgets with
Static budgets actual costs is like
are prepared for comparing apples
a single, planned and oranges.
level of activity.
Performance
evaluation is difficult
when actual activity
differs from the
planned level of
activity.
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 Flexible Budgets

May be prepared for any activity

level in the relevant range.

Show costs that should have been

incurred at the actual level of
activity, enabling “apples to apples”
cost comparisons.

Reveal variances related to

cost control.

Improve performance evaluation.

Let’s look at CheeseCo.

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Static Budgets and Performance Reports

CheeseCo
Static Actual
Budget Results Variances
Machine hours 10,000
Variable costs
Indirect labor $ 40,000
Indirect materials 30,000
Power 5,000
Fixed costs
Depreciation 12,000
Insurance 2,000
Total overhead costs $ 89,000

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Static Budgets and Performance Reports

CheeseCo
Static Actual
Budget Results Variances
Machine hours 10,000 8,000
Variable costs
Indirect labor $ 40,000 $ 34,000
Indirect materials 30,000 25,500
Power 5,000 3,800
Fixed costs
Depreciation 12,000 12,000
Insurance 2,000 2,050
Total overhead costs $ 89,000 $ 77,350

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Static Budgets and Performance Reports

CheeseCo
Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
U = Unfavorable variance
Indirect labor $ 40,000 $ 34,000 $6,000 F
CheeseCo was30,000
Indirect materials
unable to achieve
25,500 4,500 F
Power the budgeted 5,000
level of activity.
3,800 1,200 F
Fixed costs
Depreciation 12,000 12,000 0
Insurance 2,000 2,050 50 U
Total overhead costs $ 89,000 $ 77,350 $11,650 F

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Static Budgets and Performance Reports

CheeseCo
Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect labor $ 40,000 $ 34,000 $6,000 F
Indirect materials 30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
F = Favorable
Fixed costs variance that occurs when
actual costs are less than
Depreciation budgeted12,000
12,000 costs. 0
Insurance 2,000 2,050 50 U
Total overhead costs $ 89,000 $ 77,350 $11,650 F

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Static Budgets and Performance Reports

CheeseCo
Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect labor $ 40,000 $ 34,000 $6,000 F
Indirect materials 30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
Since
Fixed cost variances are favorable, have
costs
we done a good job controlling
Depreciation 12,000 costs?
12,000 0
Insurance 2,000 2,050 50 U
Total overhead costs $ 89,000 $ 77,350 $11,650 F

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Static Budgets and Performance Reports

I don’t think I
can answer the Actual activity is below
question using budgeted activity.
a static budget. So, shouldn’t variable costs
be lower if actual activity
is lower?

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Static Budgets and Performance Reports

The
The relevant
relevant question
question is
is .. .. ..
“How
“How much
much of
of the
the favorable
favorable cost
cost variance
variance isis
due
due to
to lower
lower activity,
activity, and
and how
how much
much isis due
due to
to
good
good cost
cost control?”
control?”
To
To answer
answer the
the question,
question,
we
we must
must
the
the budget
budget toto the
the
actual
actual level
level of
of activity.
activity.

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 Preparing a Flexible Budget

To a budget we need to know that:

 Total variable costs change
in direct proportion to
changes in activity.
 Total fixed costs remain ble
ar ia
unchanged within the V
relevant range. Fixed

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 Preparing a Flexible Budget

Let’s prepare
budgets
for CheeseCo.

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 Preparing a Flexible Budget

CheeseCo
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Variable costs are expressed as
Indirect labor $ 4.00 a constant amount per hour.
Indirect material 3.00
Power 0.50 $40,000 ÷ 10,000 hours is
Total variable cost $ 7.50 $4.00 per hour.
Fixed costs Fixed costs are
Depreciation $ 12,000
Insurance 2,000
expressed as a
Total fixed cost total amount.
Total overhead costs
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 Preparing a Flexible Budget

CheeseCo
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor $ 4.00 $ 32,000
Indirect material 3.00 24,000
Power 0.50 4,000
Total variable cost $ 7.50 $ 60,000

Fixed costs $4.00 per hour × 8,000 hours = $32,000

Depreciation $ 12,000
Insurance 2,000
Total fixed cost
Total overhead costs
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 Preparing a Flexible Budget

CheeseCo
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor $ 4.00 $ 32,000
Indirect material 3.00 24,000
Power 0.50 4,000
Total variable cost $ 7.50 $ 60,000

Fixed costs
Depreciation $ 12,000 $ 12,000
Insurance 2,000 2,000
Total fixed cost $ 14,000
Total overhead costs $ 74,000
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 Preparing a Flexible Budget

CheeseCo
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor $ 4.00 $ 32,000 $ 40,000
Indirect material 3.00 fixed costs
Total 24,000 30,000
Power 0.50
do not change in4,000 5,000
Total variable cost $ 7.50 $ 60,000 $ 75,000
the relevant range.
Fixed costs
Depreciation $ 12,000 $ 12,000 $ 12,000
Insurance 2,000 2,000 2,000
Total fixed cost $ 14,000 $ 14,000
Total overhead costs $ 74,000 $ 89,000 ?
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 Quick Check 

What
What should
should be
be the
the total
total overhead
overhead costs
costs for
for the
the
Flexible
Flexible Budget
Budget at
at 12,000
12,000 hours?
hours?
a.
a. $92,500.
$92,500.
b.
b. $89,000.
$89,000.
c.
c. $106,800.
$106,800.
d.
d. $104,000.
$104,000.

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 Quick Check 

What
What should
should be
be the
the total
total overhead
overhead costs
costs for
for the
the
Flexible
Flexible Budget
Budget at
at 12,000
12,000 hours?
hours?
a.
a. $92,500.
$92,500.
b.
b. $89,000.
$89,000.
c.
c. $106,800.
$106,800.
d.
d. $104,000.
$104,000.

Total overhead cost

= $14,000 + $7.50 per hour × 12,000 hours
= $14,000 + $90,000 = $104,000
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 Preparing a Flexible Budget

Cost Total Flexible Budgets

Formula Fixed 8,000 10,000 12,000
per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor $ 4.00 $ 32,000 $ 40,000 $ 48,000
Indirect material 3.00 24,000 30,000 36,000
Power 0.50 4,000 5,000 6,000
Total variable cost $ 7.50 $ 60,000 $ 75,000 $ 90,000

Fixed costs
Depreciation $ 12,000 $ 12,000 $ 12,000 $ 12,000
Insurance 2,000 2,000 2,000 2,000
Total fixed cost $ 14,000 $ 14,000 $ 14,000
Total overhead costs $ 74,000 $ 89,000 $ 104,000
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 Flexible Budget Performance Report

Let’s prepare a
budget performance
report
for CheeseCo.

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 Flexible Budget Performance Report
CheeseCo
Flexible budget Cost
is Total
prepared for the
Formula Fixed Flexible Actual
same activity level
per Hour Cost Budget Results Variances
(8,000
Machine hours) as
hours 8,000 8,000 0
actually achieved.
Variable costs
Indirect labor $ 4.00 $ 34,000
Indirect material 3.00 25,500
Power 0.50 3,800
Total variable cost $ 7.50 $ 63,300

Fixed costs
Depreciation $ 12,000 $ 12,000
Insurance 2,000 2,050
Total fixed cost $ 14,050
Total overhead costs $ 77,350
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 Quick Check 

What
What isis the
the variance
variance for
for indirect
indirect labor
labor when
when the
the
flexible
flexible budget
budget forfor 8,000
8,000 hours
hours is
is compared
compared toto the
the
actual
actual results?
results?
a.
a. $2,000
$2,000 U U
b.
b. $2,000
$2,000 FF
c.
c. $6,000
$6,000 U U
d.
d. $6,000
$6,000 FF

McGraw-Hill/Irwin Copyright © 2006. The McGraw-Hill Companies, Inc.

 Quick Check 

What
What isis the
the variance
variance for
for indirect
indirect labor
labor when
when the
the
flexible
flexible budget
budget forfor 8,000
8,000 hours
hours is
is compared
compared toto the
the
actual
actual results?
results?
a.
a. $2,000
$2,000 U U
b.
b. $2,000
$2,000 FF
c.
c. $6,000
$6,000 U U
d.
d. $6,000
$6,000 FF

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 Flexible Budget Performance Report
CheeseCo
Cost Total
Formula Fixed Flexible Actual
per Hour Cost Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor $ 4.00 $ 32,000 $ 34,000 $ 2,000 U
Indirect material 3.00 25,500
Power 0.50 3,800
Total variable cost $ 7.50 $ 63,300

Fixed costs
Depreciation $ 12,000 $ 12,000
Insurance 2,000 2,050
Total fixed cost $ 14,050
Total overhead costs $ 77,350
McGraw-Hill/Irwin Copyright © 2006. The McGraw-Hill Companies, Inc.
 Quick Check 

What
What isis the
the variance
variance for
for indirect
indirect material
material when
when the
the
flexible
flexible budget
budget forfor 8,000
8,000 hours
hours is
is compared
compared to
to the
the
actual
actual results?
results?
a.
a. $1,500
$1,500 U U
b.
b. $1,500
$1,500 FF
c.
c. $4,500
$4,500 U U
d.
d. $4,500
$4,500 FF

McGraw-Hill/Irwin Copyright © 2006. The McGraw-Hill Companies, Inc.

 Quick Check 

What
What isis the
the variance
variance for
for indirect
indirect material
material when
when the
the
flexible
flexible budget
budget forfor 8,000
8,000 hours
hours is
is compared
compared to
to the
the
actual
actual results?
results?
a.
a. $1,500
$1,500 U U
b.
b. $1,500
$1,500 FF
c.
c. $4,500
$4,500 U U
d.
d. $4,500
$4,500 FF

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 Flexible Budget Performance Report
CheeseCo
Cost Total
Formula Fixed Flexible Actual
per Hour Cost Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor $ 4.00 $ 32,000 $ 34,000 $ 2,000 U
Indirect material 3.00 24,000 25,500 1,500 U
Power 0.50 4,000 3,800 200 F
Total variable cost $ 7.50 $ 60,000 $ 63,300 $ 3,300 U

Fixed costs
Depreciation $ 12,000 $ 12,000 $ 12,000 $ 0
Insurance 2,000 2,000 2,050 50 U
Total fixed cost $ 14,000 $ 14,050 50 U
Total overhead costs $ 74,000 $ 77,350 $ 3,350 U
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 Flexible Budget Performance Report

Remember the ques

tion:
“How much of the to
tal
variance is due to lo
wer
activity and how mu
ch is
due to cost control?
”

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 Static Budgets and Performance
How much of the $11,650 favorable variance is due to
lower activity and how much is due to cost control?
Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect labor $ 40,000 $ 34,000 $6,000 F
Indirect materials 30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
Fixed costs
Depreciation 12,000 12,000 0
Insurance 2,000 2,050 50 U
Total overhead costs $ 89,000 $ 77,350 $11,650 F

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 Flexible Budget Performance Report

Overhead Variance Analysis

Static Let’s place Actual
Overhead the flexible Overhead
Budget at at
budget for
10,000 Hours 8,000 Hours
8,000 hours
$ 89,000 here. $ 77,350

Difference between original static budget

and actual overhead = $11,650 F.

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 Flexible Budget Performance Report

Overhead Variance Analysis

Static Flexible Actual
Overhead Overhead Overhead
Budget at Budget at at
10,000 Hours 8,000 Hours 8,000 Hours
$ 89,000 $ 74,000 $ 77,350

Activity Cost control

This $15,000F variance is This $3,350U

due to lower activity. variance is due
to poor cost control.

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The Measure of Activity– A Critical Choice

Three important
factors in selecting an
activity base for an overhead
flexible budget
Activity
Activity base
base and
and Activity
Activity base
base should
should
variable
variable overhead
overhead be
be simple
simple and
and
should
should bebe easily
easily understood.
understood.
causally
causally related.
related.
Activity
Activity base
base should
should
not
not be
be expressed
expressed
in
in dollars
dollars or
or
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other
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 Variable Overhead Variances –
A Closer Look

If flexible budget If flexible budget

is based on is based on
actual hours standard hours

Both spending
Only a spending
and efficiency
variance can be
variances can be
computed.
computed.

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Variable Overhead Variances – Example

ColaCo’s actual production for the period required

3,200 standard machine hours. Actual variable
overhead incurred for the period was $6,740.
Actual machine hours worked were 3,300. The
standard variable overhead cost per machine hour
is $2.00.

Compute the variable overhead spending variance

first using actual hours. Then use standard hours
allowed to calculate the variable overhead
efficiency variance.
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 Variable Overhead Variances

Actual Flexible Budget

Variable for Variable
Overhead Overhead at
Incurred Actual Hours
AH × AR AH × SR
AH = Actual hours
AR = Actual variable
Spending overhead rate
Variance SR = Standard variable
overhead rate

Spending variance = AH(AR – SR)

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Variable Overhead Variances – Example

Actual Flexible Budget

Variable for Variable
Overhead Overhead at
Incurred Actual Hours
3,300 hours
×
$2.00 per hour
$6,740 = $6,600

Spending Variance
= $140 unfavorable

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 Variable Overhead Variances –
A Closer Look

Spending Variance
Results from paying more
or less than expected for
overhead items and from Now,
Now,let’s
let’suse
usethe
the
excessive usage of standard
standardhours
hoursallowed,
allowed,
overhead items. along
alongwith
withthe
theactual
actual
hours,
hours, totocompute
computethe the
efficiency
efficiencyvariance.
variance.

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 Variable Overhead Variances

Actual Flexible Budget Flexible Budget

Variable for Variable for Variable
Overhead Overhead at Overhead at
Incurred Actual Hours Standard Hours
AH × AR AH × SR SH × SR

Spending Efficiency
Variance Variance
Spending variance = AH(AR - SR)
Efficiency variance = SR(AH - SH)

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Variable Overhead Variances – Example

Actual Flexible Budget Flexible Budget

Variable for Variable for Variable
Overhead Overhead at Overhead at
Incurred Actual Hours Standard Hours
3,300 hours 3,200 hours
× ×
$2.00 per hour $2.00 per hour
$6,740 $6,600 $6,400

Spending variance Efficiency variance

$140 unfavorable $200 unfavorable
$340
$340unfavorable
unfavorableflexible
flexiblebudget
budgettotal
totalvariance
variance
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 Variable Overhead Variances –
A Closer Look

Efficiency Variance

Controlled by
managing the
overhead cost driver.

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 Quick Check 

Yoder
Yoder Enterprises’
Enterprises’ actual
actual production
production for for the
the
period
period required
required 2,100
2,100 standard
standard direct
direct labor
labor
hours.
hours. Actual
Actual variable
variable overhead
overhead forfor the
the period
period
was
was $10,950.
$10,950. Actual
Actual direct
direct labor
labor hours
hours worked
worked
were
were 2,050.
2,050. The
The predetermined
predetermined variable
variable
overhead
overhead rate
rate is
is $5
$5 per
per direct
direct labor
labor hour.
hour. What
What
was
was the
the spending
spending variance?
variance?
a.
a. $450
$450 UU
b.
b. $450
$450 FF
c.
c. $700
$700 FF
d.
d. $700
$700 UU

McGraw-Hill/Irwin Copyright © 2006. The McGraw-Hill Companies, Inc.

 Quick Check 

Spending
Yoder variance = AH (AR - production
SR)
Yoder Enterprises’
Enterprises’ actual
actual production for
for the
the
period
period=required
required 2,100 standard
2,100overhead
Actual variable standard direct
direct–labor
incurred labor
(AH × SR)
hours.
hours.=Actual
Actual variable
variable overhead
overhead for
for the
the period
period
$10,950 – (2,050 hours × $5 per hour)
was
was $10,950. Actual
$10,950. Actual direct
direct labor
labor hours
hours worked
worked
were
were 2,050.
2,050. The
The
= $10,950 predetermined
predetermined variable
– $10,250 variable
overhead
overhead rate
rate is
is $5
$5 per
per direct
direct labor
labor hour.
hour. What
What
= $700 U
was
was the
the spending
spending variance?
variance?
a.
a. $450
$450 UU
b.
b. $450
$450 FF
c.
c. $700
$700 FF
d.
d. $700
$700 UU

McGraw-Hill/Irwin Copyright © 2006. The McGraw-Hill Companies, Inc.

 Quick Check 

Yoder
Yoder Enterprises’
Enterprises’ actual
actual production
production for for the
the
period
period required
required 2,100
2,100 standard
standard direct
direct labor
labor
hours.
hours. Actual
Actual variable
variable overhead
overhead for for the
the period
period
was
was $10,950.
$10,950. Actual
Actual direct
direct labor
labor hours
hours worked
worked
were
were 2,050.
2,050. The
The predetermined
predetermined variable
variable
overhead
overhead rate
rate is
is $5
$5 per
per direct
direct labor
labor hour.
hour. What
What
was
was the
the efficiency
efficiency variance?
variance?
a.
a. $450
$450 UU
b.
b. $450
$450 FF
c.
c. $250
$250 FF
d.
d. $250
$250 UU

McGraw-Hill/Irwin Copyright © 2006. The McGraw-Hill Companies, Inc.

 Quick Check 

Yoder
Yoder Enterprises’
Enterprises’ actual
actual production
production for for the
the
period
period required
required 2,100
2,100 standard
standard direct
direct labor
labor
hours.
hours. Actual
Actual variable
variable overhead
overhead for for the
the period
period
Efficiency
was
was variance
$10,950.
$10,950. = SRdirect
Actual
Actual (AH – labor
direct SH) hours
labor hours worked
worked
were
were 2,050.
= $5 perThe
2,050. hourpredetermined
The predetermined variable
variable
(2,050 hours – 2,100 hours)
overhead
overhead rate
rate is
is $5
$5 per
per direct
direct labor
labor hour.
hour. What
What
was
was the= $250
the F
efficiency
efficiency variance?
variance?
a.
a. $450
$450 U U
b.
b. $450
$450 FF
c.
c. $250
$250 FF
d.
d. $250
$250 U U

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 Quick Check Summary

Actual Flexible Budget Flexible Budget

Variable for Variable for Variable
Overhead Overhead at Overhead at
Incurred Actual Hours Standard Hours
2,050 hours 2,100 hours
× ×
$5 per hour $5 per hour
$10,950 $10,250 $10,500

Spending variance Efficiency variance

$700 unfavorable $250 favorable
$450
$450unfavorable
unfavorableflexible
flexible budget
budget total
totalvariance
variance
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 Activity-based Costing
and the Flexible Budget

ItIt is
is unlikely
unlikely that
that all
all
variable
variable overhead
overhead willwill be
be
driven
driven by by aa single
single activity.
activity.

Activity-based
Activity-based costing
costing
can
can be
be used
used when
when multiple
multiple
activity
activity bases
bases drive
drive
variable
variable overhead
overhead costs.
costs.

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Overhead Rates and Overhead Analysis

Recall that overhead costs are assigned to

products and services using a predetermined
overhead rate (POHR):
Assigned Overhead = POHR × Standard Activity

Overhead from the

flexible budget for the
denominator level of activity
POHR =
Denominator level of activity

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Overhead Rates and Overhead Analysis

The predetermined overhead rate

can be broken down into fixed
and variable components.

The variable The fixed

component is useful component is useful
for preparing and analyzing for preparing and analyzing
variable overhead fixed overhead
variances. variances.

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 Normal versus Standard Cost Systems

In a normal cost In a standard cost

system, overhead is system, overhead is
applied to work in applied to work in
process based on process based on
the actual number the standard hours
of hours worked allowed for the output
in the period. of the period.

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 Fixed Overhead Variances

Actual Fixed Fixed Fixed

Overhead Overhead Overhead
Incurred Budget
DH × FR Applied
SH × FR

Budget Volume
Variance Variance

FR = Standard Fixed Overhead Rate

SH = Standard Hours Allowed
DH = Denominator Hours
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 Overhead Rates and Overhead
Analysis – Example

ColaCo prepared this budget for overhead:

Total Variable Total Fixed

Machine Variable Overhead Fixed Overhead
Hours Overhead Rate Overhead Rate
3,000 $ 6,000 ? $ 9,000 ?
4,000 8,000 ? 9,000 ?

Let’s calculate overhead rates.

ColaCo
ColaCoapplies
appliesoverhead
overheadbased
based
on
onmachine-hour
machine-hour activity.
activity.
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 Overhead Rates and Overhead
Analysis – Example

ColaCo prepared this budget for overhead:

Total Variable Total Fixed

Machine Variable Overhead Fixed Overhead
Hours Overhead Rate Overhead Rate
3,000 $ 6,000 $ 2.00 $ 9,000 ?
4,000 8,000 2.00 9,000 ?

Rate = Total Variable Overhead ÷ Machine Hours

This rate is constant at all levels of activity.

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 Overhead Rates and Overhead
Analysis – Example

ColaCo prepared this budget for overhead:

Total Variable Total Fixed

Machine Variable Overhead Fixed Overhead
Hours Overhead Rate Overhead Rate
3,000 $ 6,000 $ 2.00 $ 9,000 $ 3.00
4,000 8,000 2.00 9,000 2.25

Rate = Total Fixed Overhead ÷ Machine Hours

This rate decreases when activity increases.

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 Overhead Rates and Overhead
Analysis – Example

ColaCo prepared this budget for overhead:

Total Variable Total Fixed

Machine Variable Overhead Fixed Overhead
Hours Overhead Rate Overhead Rate
3,000 $ 6,000 $ 2.00 $ 9,000 $ 3.00
4,000 8,000 2.00 9,000 2.25

The total POHR is the sum of

the fixed and variable rates
for a given activity level.
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 Fixed Overhead Variances – Example

ColaCo’s actual production required 3,200

standard machine hours. Actual fixed
overhead was $8,450. The predetermined
overhead rate is based on 3,000 machine
hours.

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 Overhead Variances

Now let’s turn

our attention
to calculating
fixed overhead
variances.

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 Fixed Overhead Variances – Example

Actual Fixed Fixed Fixed

Overhead Overhead Overhead
Incurred Budget Applied

$8,450 $9,000

Budget variance
$550 favorable
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 Fixed Overhead Variances –
A Closer Look

Budget Variance

Results from spending

more or less than
Now,
Now,let’s
let’suse
usethethe
expected for fixed
standard
standard hours
hoursallowed
allowed
overhead items.
to
tocompute
compute the
thefixed
fixed
overhead
overhead volume
volume
variance.
variance.

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 Fixed Overhead Variances – Example

Actual Fixed Fixed Fixed

Overhead Overhead Overhead
Incurred Budget Applied
SH × FR
3,200 hours
×
$3.00 per hour
$8,450 $9,000 $9,600

Budget variance Volume variance

$550 favorable $600 favorable
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 Volume Variance – A Closer Look

Volume
Variance

Results when standard hours

allowed for actual output differs
from the denominator activity.

Unfavorable Favorable
when standard hours when standard hours
< denominator hours > denominator hours
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 Volume Variance – A Closer Look

Volume
Variance
Does not measure over-
or under spending
Results when standard hours
Itallowed
resultsforfrom
actualtreating fixed
output differs
from the denominator
overhead activity.
as if it were a
variable cost.
Unfavorable Favorable
when standard hours when standard hours
< denominator hours > denominator hours
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 Quick Check 

Yoder
Yoder Enterprises’
Enterprises’ actual
actual production
production for for the
the
period
period required
required 2,100
2,100 standard
standard direct
direct labor
labor
hours.
hours. Actual
Actual fixed
fixed overhead
overhead forfor the
the period
period
was
was $14,800.
$14,800. The
The budgeted
budgeted fixed
fixed overhead
overhead
was
was $14,450.
$14,450. The
The predetermined
predetermined fixed
fixed
overhead
overhead rate
rate was
was $7
$7 per
per direct
direct labor
labor hour.
hour.
What
What was
was the
the budget
budget variance?
variance?
a.
a. $350
$350 UU
b.
b. $350
$350 FF
c.
c. $100
$100 FF
d.
d. $100
$100 UU
McGraw-Hill/Irwin Copyright © 2006. The McGraw-Hill Companies, Inc.
 Quick Check 

Budget
Yodervariance
Yoder Enterprises’ actual
Enterprises’ actual production
production for for the
the
period
period required
required
= Actual 2,100
2,100 standard
fixed overhead – Budgeteddirect
standard direct labor
labor
fixed overhead
hours.
hours. Actual
Actual
= $14,800 fixed
fixed overhead
overhead for
– $14,450 for the
the period
period
was
was $14,800.
$14,800. The The budgeted
budgeted fixed
fixed overhead
overhead
was= $14,450.
was $350 U
$14,450. The
The predetermined
predetermined fixed fixed
overhead
overhead raterate was
was $7
$7 per
per direct
direct labor
labor hour.
hour.
What
What was
was thethe budget
budget variance?
variance?
a.
a. $350
$350 U U
b.
b. $350
$350 FF
c.
c. $100
$100 FF
d.
d. $100
$100 U U
McGraw-Hill/Irwin Copyright © 2006. The McGraw-Hill Companies, Inc.
 Quick Check 

Yoder
Yoder Enterprises’
Enterprises’ actual
actual production
production for for the
the
period
period required
required 2,100
2,100 standard
standard direct
direct labor
labor
hours.
hours. Actual
Actual fixed
fixed overhead
overhead forfor the
the period
period
was
was $14,800.
$14,800. The
The budgeted
budgeted fixed
fixed overhead
overhead
was
was $14,450.
$14,450. The
The predetermined
predetermined fixed
fixed
overhead
overhead rate
rate was
was $7
$7 per
per direct
direct labor
labor hour.
hour.
What
What was
was the
the volume
volume variance?
variance?
a.
a. $250
$250 UU
b.
b. $250
$250 FF
c.
c. $100
$100 FF
d.
d. $100
$100 UU
McGraw-Hill/Irwin Copyright © 2006. The McGraw-Hill Companies, Inc.
 Quick Check 

Volume variance
Yoder
Yoder Enterprises’
Enterprises’ actual
actual production
production for for the
the
= Budgeted fixed overhead – (SH × FR)
period
period required
required 2,100
2,100 standard
standard direct
direct labor
labor
hours × $7
hours. =Actual
hours. $14,450
Actual – (2,100
fixed
fixed overhead
overhead forper
for the
the hour)
period
period
was = $14,450The
was $14,800.
$14,800. – $14,700
The budgeted
budgeted fixed
fixed overhead
overhead
was
was $14,450.
= $250 F The
$14,450. The predetermined
predetermined fixed fixed
overhead
overhead rate
rate was
was $7 $7 per
per direct
direct labor
labor hour.
hour.
What
What was
was the
the volume
volume variance?
variance?
a.
a. $250
$250 UU
b.
b. $250
$250 FF
c.
c. $100
$100 FF
d.
d. $100
$100 UU
McGraw-Hill/Irwin Copyright © 2006. The McGraw-Hill Companies, Inc.
 Quick Check Summary

Actual Fixed Fixed Fixed

Overhead Overhead Overhead
Incurred Budget Applied
SH × FR
2,100 hours
×
$7.00 per hour
$14,800 $14,450 $14,700

Budget variance Volume variance

$350 unfavorable $250 favorable
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 Overhead Variances

Let’s look at a
graph showing
fixed overhead
variances. We will
use ColaCo’s
numbers from the
previous example.
McGraw-Hill/Irwin Copyright © 2006. The McGraw-Hill Companies, Inc.
 Fixed Overhead Variances

Cost

$9,000 budgeted fixed OH

a d
rh e ts
ve uc
o r od
e d p
Fix d to
l ie
p
ap Activity
3,000 Hours
Expected
Activity
McGraw-Hill/Irwin Copyright © 2006. The McGraw-Hill Companies, Inc.
 Fixed Overhead Variances

Cost

$9,000 budgeted fixed OH

$550
Favorable
{ $8,450 actual fixed OH
Budget d
Variance e a
e rh c ts
o v d u
d p r o
e
Fix d to
l ie
p
ap Activity
3,000 Hours
Expected
Activity
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 Fixed Overhead Variances

3,200 machine hours × $3.00 fixed overhead rate

Cost
$600
Favorable $9,600 applied fixed OH
Volume
Variance { $9,000 budgeted fixed OH
$550 { $8,450 actual fixed OH
Favorable
Budget d
Variance e a
e rh c ts
o v d u
d p r o
e
Fix d to
l ie
p
ap Activity
3,000 Hours 3,200
Expected Standard
Activity Hours
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 Overhead Variances and Under- or
Overapplied Overhead Cost

In a standard
cost system:

Unfavorable Favorable
variances are equivalent variances are equivalent
to underapplied overhead. to overapplied overhead.

The sum of the overhead variances

equals the under- or overapplied
overhead cost for a period.
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 End of Chapter 11

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