Transcript (Textbook) Behavior in Organizations, 8ed (A. B. Shani)

Chapter Thirteen
Overhead and
Marketing Variances
13 - 3
Outline of Chapter 13
Overhead and Marketing Variances
• Budgeted, Standard, and Actual Volume
• Overhead Variances
• Marketing Variances
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13 - 4
Connection to Other Chapters
Chapter 13 extends the price and quantity variances to
overhead and marketing.
Chapter 12 began the price and quantity variance analysis
with direct labor and direct materials.
Chapter 9 described how absorption costing applies overhead
to jobs.
Chapter 4 built the foundation on how internal accounting is
used for decision control.
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13 - 5
Overhead Volume Measures
BV: Budgeted volume (also known as denominator volume)
• Estimated at the beginning of the year and used for calculating the
overhead rate
SV: Standard volume (also known as earned or allowed volume)
• (Output units completed)  (Standard input hours per output unit)
• Volume used to apply overhead to work-in-process inventory
AV: Actual volume
• Actual hours or other input resource used during period
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13 - 6
Budget Volume Estimates
Estimated budget volume influences overhead rate.
• Increasing budgeted volume (denominator) while holding total
budgeted dollars constant (numerator) decreases the overhead rate.
Expected volume to set budget
• Adjust expectation based on number of units forecast for next year.
• Rises and falls with business cycle
Normal volume to set budget
• Forecast of long-run average annual production
• Does not change during business cycle
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13 - 7
Flexible Overhead Budget
Flexible overhead budget is the formula for budget forecast.
Flexible overhead budget =
FOH + (VOH  V)
= $1,350,000 + ($14  V)
Estimate budgeted overhead (BOH) dollars using a specific
budgeted volume number (BV) and the flexible overhead
budget formula.
BOH
=
FOH + (VOH  BV)
= $ 1,350,000 + ($14  67,500 hours)
= $ 2,295,000
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13 - 8
Overhead Rate
Overhead rate is the total budgeted overhead dollars for the
year divided by the budgeted volume for the year.
OHR = (BOH  BV) = (FOH  BV) + VOH
The overhead rate consists of the estimated:
• fixed overhead $ per input hour (FOH  BV), and
• variable overhead $ per input hour (VOH)
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13 - 9
Overhead Absorbed
Overhead is absorbed (also known as applied) by the product when work
is done in the factory. The accounting system transfers costs from the
overhead account to the work-in-process account
(Figure 9-1).
For most firms, overhead is absorbed using the standard volume.
Overhead absorbed = Overhead rate  Standard volume = OHR  SV
Standard Volume = Units of output  Standard input per output
See Table 13-5: SV = 67,400 machine hours for 96,000 blocks
Overhead absorbed = $34  67,400 machine hours
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13 - 10
Total Overhead Variance
Overhead variances occur when the actual overhead incurred does not
equal the overhead absorbed (see Figure 9-1 and the T-accounts).
Actual overhead
Overhead absorbed
cost incurred
(applied to product)
AOH
(OHR  SV)
|_________________________________________|
AOH - (OHR  SV)
Total overhead variance
Underabsorbed, if actual > absorbed
Overabsorbed, if actual < absorbed
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13 - 11
3-way Overhead Variances
Actual overhead Flex. budget at
Flex. budget at Overhead absorbed
at actual volume actual volume
standard volume (applied to product)
AOH
[FOH + (VOH AV)] [FOH + (VOH SV)]
(OHR  SV)
|________________|
|______________|
|________________|
Overhead
Overhead
Overhead
Spending
Efficiency
Volume
Variance
Variance
Variance
|_______________________________________ __________|
Total overhead variance
Over/underabsorbed overhead
See Table 13-5 example and Self-Study Problem.
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Overhead Efficiency Variance
Flexible budget at
Flexible budget at
actual volume
standard volume
[FOH + (VOH AV)]
[FOH + (VOH SV)]
|______________________________________________|
Overhead Efficiency Variance
[FOH + (VOH AV)] - [(FOH + (VOH SV)]
= VOH AV - SV)
Unfavorable (U) when AV > SV
Favorable (F) when AV < SV
When overhead is allocated with the same base as direct labor, the
overhead efficiency and labor efficiency variances will be in the same
direction.
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13 - 13
Overhead Volume Variance
Flexible budget at
Overhead absorbed
actual volume
(applied to product)
[FOH + (VOH SV)]
(OHR SV)
|______________________________________________|
Overhead Volume Variance
[FOH + (VOH SV)] - (OHR SV)
= [FOH BV - SV)]  BV
Unfavorable (U) when BV > SV
Favorable (F) when BV < SV
When output exceeds planned capacity, SV>BV, the volume variance is
favorable. Rewarding favorable volume variances encourages
inventory building.
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13 - 14
Overhead Spending Variance
Actual overhead at
Flexible budget at
actual volume
actual volume
AOH
[FOH + (VOH
AV)]
|_____________________________________________|
Overhead Spending Variance
AOH - [FOH + (VOH AV)]
Unfavorable (U) when AOH > [FOH + (VOH AV)]
Favorable (F) when AOH < [FOH + (VOH AV)]
Cause: unexpected changes in prices of variable and fixed overhead items,
and changes in production technology
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13 - 15
Inaccurate Flexible Budget
Usefulness of overhead variances in performance measurement depends
on accuracy of flexible budget in predicting cost-volume relation.
Flexible budget assumes a linear formula over relevant range.
But as production volume increases to levels near or above plant capacity,
congestion occurs and:
- actual costs increase above flexible budget.
- unfavorable spending variance is reported.
A more accurate flexible budget formula would forecast congestion costs,
and allow variable costs to increase as volume increases.
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13 - 16
Sales Price and Quantity Variances
Symbols: Q = Quantity; P = Price; a = actual; s = standard
Total
Flexible budget
Total
actual
based on
budgeted
sales
actual quantity sold
sales
(Qa  Pa)
(Qa  Ps)
(Qs  Ps)
|_______________________| |____________________|
[Qa  (Pa - Ps)]
[(Qa - Qs)  Ps]
Price variance
Quantity variance
|______________________________________________|
[( Qa  Pa)  (Qs  Ps)]
Total sales variance in sales dollars
Price variances measure sales manager’s pricing policy.
Quantity variances depend on salespersons’ efforts and customer orders.
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13 - 17
Marketing Contribution Margin Variances
Q = Quantity; CM = Contribution margin per unit; a = actual;
s = standard [Note: Cma is (actual price – budgeted variable costs).]
Total
Flexible budget
Total
actual
based on
budgeted
sales
actual quantity sold
sales
(Qa  Cma)
(Qa  CMs)
(Qs  CMs)
|_______________________| |______________________|
[Qa  (CMa - CMs)]
[(Qa - Qs)  CMs]
CM price variance
CM quantity variance
|________________________________________________|
[(Qa  CMa)  (Qs  CMs)]
Total sales variance in profit dollars
Price variances measure sales manager’s pricing and purchasing policy.
Quantity variances depend on salespersons’ efforts and customer orders.
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13 - 18
Marketing Sales and Mix Variances
Actual
Flex. budget at
Flex. budget at
Standard
revenue
actual mix %
standard mix %
revenue
$23,241 10,600  57.55%  $3.80 10,600  60%  $3.80
6,000 $3.80
24,210 10,600  42.45%  $5.40 10,600  40%  $5.40
4,000 $5.40
$47,451
$47,480
$47,064
$44,400
|_________________| |_________________| |__________________|
Price variance
Mix variance
Sales variance
$ 29 U
$ 416 F
$ 2,664 F
|______________________________________|
Quantity variance
$ 3,080 F
|_________________________________________________________|
Total sales variance
$ 3,051 F
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