6 Flashcards
How do the planning of variable overhead costs differ from the planning of fixed overhead costs?
Variable Overhead Costs: These vary with production levels (e.g., indirect materials). Planning focuses on efficiently using resources to minimize costs.
Fixed Overhead Costs: These remain constant regardless of production levels (e.g., rent). Planning emphasizes cost control and capacity utilization.
Spending Variance
Spending variance measures the difference between the actual variable overhead cost per unit of activity and the budgeted rate. It is calculated as:
SpendingVariance =(ActualRate −BudgetedRate) × ActualHours
indicates whether the cost of overhead resources (e.g., indirect materials, utilities) was higher or lower than expected. A favorable variance means the actual rate was lower than budgeted, while an unfavorable variance means costs exceeded expectations.
Efficiency Variance
Efficiency variance measures how efficiently the actual activity (e.g., machine hours or labor hours) was used compared to what was budgeted for the achieved output. It is calculated as:
EfficiencyVariance= (actual hours-budgeted hour for actual output)x budgeted rate)
This variance highlights whether resources were used effectively. A favorable variance suggests better-than-expected efficiency, while an unfavorable variance indicates inefficiency, such as wasted resources or operational delays.
Why may the production-volume variance not be a good measure of the opportunity cost of unused capacity?
The production-volume variance assumes all unused capacity is a loss, but some idle capacity is planned for flexibility, such as handling unexpected demand. Additionally, fixed costs are not directly tied to output levels in the short term, so the variance may not reflect real economic gains or losses.
How does 4-variance analysis provide an integrated view of overhead costs?
Variable Overhead Spending Variance: Compares actual and budgeted variable rates.
Variable Overhead Efficiency Variance: Measures efficiency in using variable resources.
Fixed Overhead Spending Variance: Compares actual and budgeted fixed costs.
Production-Volume Variance: Assesses the impact of output deviations on fixed cost allocation.
How do cost allocation bases differ when (a) planning and controlling, and (b) valuing stock?
Planning and Controlling: Allocation bases (e.g., labor hours) focus on efficiency and capacity utilization.
Valuing Stock: Fixed costs are allocated to inventory to meet financial reporting requirements, ensuring consistency with costing methods.
How are journal entries prepared for variable and fixed overhead variances?
Variable Overhead Variance:
Debit/Credit Variable Overhead Control for actual overhead incurred.
Debit/Credit Variable Overhead Allocated for budgeted overhead applied.
Differences are charged to Spending or Efficiency Variances.
Fixed Overhead Variance:
Debit/Credit Fixed Overhead Control for actual costs.
Debit/Credit Fixed Overhead Allocated for budgeted overhead applied.
Variances are divided into Spending and Production-Volume Variances.
How is the flexible-budget variance approach used in activity-based costing (ABC)?
Activity-Based Costing (ABC) assigns overhead costs to activities based on cost drivers (e.g., setups, inspections). Flexible budgets in ABC adjust these costs to match actual activity levels, ensuring accuracy. Managers combine financial measures (cost variances) with non-financial metrics (e.g., defect rates, cycle time) to improve both cost control and operational efficiency.
Why is variance analysis important in overhead management?
Variance analysis helps identify differences between budgeted and actual overhead costs, enabling managers to pinpoint inefficiencies, overspending, or operational issues.
Why is unused capacity not always a loss?
Some unutilized capacity is strategically planned for flexibility, like handling unexpected demand, and does not represent an economic loss in the short term
How does ABC improve overhead cost control?
ABC links costs to specific activities, allowing flexible budgets to adjust for actual activity levels. This ensures better alignment between resource usage and output.
