CHAPTER 05

FLEXIBLE BUDGETS, OVERHEAD COST

VARIANCES, AND MANAGEMENT
CONTROL

201048- FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL 1

 LEARNING OBJECTIVE

Explain the similarities and differences Show how the 4-variance analysis
in planning variable and fixed approach reconciles the actual
overhead costs; overhead incurred with the
overhead amounts allocated during
Develop budgeted variable and fixed the period;
overhead cost rates
Explain the relationship between the
sales-volume variance and the
Compute the variable overhead
production-volume variance;
flexible-budget variance, the variable
overhead efficiency variance and the
variable overhead spending variance; Calculate variances in activity-based
costing;
Compute the fixed overhead flexible-
Examine the use of overhead
budget variance, the fixed overhead
variances in nonmanufacturing
spending variance and the fixed
settings;
overhead production-volume variance;

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 CHAPTER CONTENT

5.1. Planning of Variable and Fixed Overhead Cost;

5.2. Standard Costing;
5.3. Variable Overhead Cost Variances;
5.4. Fixed Overhead Cost Variances;
5.5. Integrated Analysis of Overhead Cost Variances;
5.6. Production-Volume Variance and Sales-Volume
Variance;
5.7. Overhead Variances in Nonmanufacturing Settings.

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 5.1. Planning of Variable and
Fixed Overhead Cost

Manufacture Overhead Cost (factory overhead or

indirect manufacturing cost)
• Costs that are indirectly associated with manufacturing
the finished product.

• Includes all manufacturing costs except direct materials

and direct labor.

• Allocation of manufacturing overhead to products can

present problems.
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 5.1. Planning of Variable and
Fixed Overhead Cost

❑ To effectively plan variable overhead costs, managers

should focus on activities that add value and eliminate
those that do not.
Ex: energy, machine maintenance, engineering support,
and indirect materials

❑ Fixed overhead planning is similar ~ plan only for

essential activities and plan to be as efficient as
possible.
Ex: plant leasing costs, depreciation on plant equipment,
and the salaries of the plant managers
201048- FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL 5
 Assignment of Cost to Cost Object

Material Overhead
costs Cost

Labor Cost Object 1

Costs

Cost Object 2
Material
costs
Direct
Labor
Costs Allocate 6

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 5.2. Standard Costing

Standard Costing is the

costing system.

Traces direct costs to output by multiplying the

standard prices or rate by the standard quantities of
inputs allowed for actual outputs produced.

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.

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 5.2. Standard Costing

5.2.1. Developing Budgeted Variable Overhead Cost Rates:

• Choose the period to be used for the budget.
Step
1
• Select the cost-allocation bases (tiêu chí phân bổ) to
Step use in allocating variable overhead costs to output.
2
• Identify the variable overhead costs associated with
each cost-allocation base. (đơn giá 1 đơn vị tiêu thức
Step phân bổ)
3
• Compute budgeted variable overhead cost rate per
Step output unit (biến phí SXC cho 1 đơn vị sp)
4
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 5.2. Standard Costing

5.2.1. Developing Budgeted Variable Overhead Cost Rates:

Budget variable
OVH rate per = Budget total
Cost in variable / Budget
Total quantity
input unit OVHC pool of cost allocation

Budget variable Budget input Budget variable

overhead cost =
allowed per overhead rate x
per output unit output unit per input unit
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 5.2. Standard Costing

Ex.
Step 1. Choose the period.
Webb uses a 12-month budget period.
Step 2. Select the cost allocation bases
Webb’s operating managers select machine-hours as the cost-
allocation base.
Based on an engineering study, Webb estimates it will take 0.40 of a
machine-hour per actual output unit. For its budgeted output of
144,000 jackets in 2011, Webb budgets 57,600 (0.40x144,000)
machine-hours.

10
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 5.2. Standard Costing
Ex.
Step 3. Identify the variable overhead costs associated with each cost-
allocation base.
Webb groups all of its variable overhead costs, including costs of
energy, machine maintenance, engineering support, indirect materials,
and indirect manufacturing labor in a single cost pool. Webb’s total
budgeted variable overhead costs for 2011 are $1,728,000.

$1,728,000
Variable overhead costs
=
associated with each cost-
allocation base 57,600

= $30 per machine-hour

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 5.2. Standard Costing

Ex.
Step 4. Computed budget variable overhead cost rate per output.

Budgeted variable Budgeted Budgeted variable

overhead cost rate = input allowed x overhead cost rate
per output per output unit per input

= 0.4 x $30 = $12 per jacket

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 5.2. Standard Costing

5.2.2. Developing Budgeted Fixed Overhead rates-intro:

❑ Fixed overhead costs are, by definition, a lump sum of

costs that remain unchanged for a given period despite
potentially wide changes in activity within the relevant range.

❑ These costs are fixed in the sense that, unlike variable costs,
fixed costs do not automatically increase or decrease with
the level of activity within the relevant range.

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 5.2. Standard Costing

5.2.2. Developing Budgeted Fixed Overhead Cost Rates:

• Choose the period to be used for the budget.
Step
1
• Select the cost-allocation bases (tiêu thức phân bổ) to
Step use in allocating fixed overhead costs to output.
2
• Identify the fixed overhead costs associated with each cost-
Step allocation base. (đơn giá 1 đơn vị tiêu thức phân bổ)
3
• Compute the rate per unit of cost-allocation base
used to allocate fixed overhead costs to output.
Step (định phí SXC cho 1 đơn vị sp)
4

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 5.2. Standard Costing

5.2.2. Developing Budgeted Variable Overhead Cost Rates:

Budget fixed
OVHC rate per = Budget total
/
Budget
Cost in fixed Total quantity
input unit OVHC pool of cost allocation

Budget fixed
OVHC per unit = Budget input
allowad per x Budget fixed
OVHC rate per
output input unit

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 5.2. Standard Costing
5.2.2. Developing Budgeted Fixed Overhead rates-intro
Ex.
Step 1. Choose the period.
Webb uses a 12-month budget period.
Step 2. Select the cost allocation bases
Webb uses machine-hours as the only cost-allocation base for fixed
overhead costs.
Webb expects to operate at capacity in the fiscal year 2011—with a
budgeted usage of 57,600 machine-hours for a budgeted output of
144,000 jackets.

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 5.2. Standard Costing
5.2.2. Developing Budgeted Fixed Overhead rates-intro
Ex.
Step 3. Identify the fixed overhead costs associated with each cost-
allocation base.
Costs in this pool include depreciation on plant and equipment, plant
and equipment leasing costs, and the plant manager’s salary. Webb’s
fixed overhead budget for 2011 is $3,312,000 ($276,000 per
month*12 months).
$3,312,000
Fixed overhead costs =
associated with each
57,600
cost-allocation base
= $57.5 per machine-hour

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 5.2. Standard Costing
5.2.2. Developing Budgeted Fixed Overhead rates-intro
Ex.
Step 4. Computed budget variable overhead cost rate per output.

Budgeted Budgeted fixed

quantity of cost- x overhead cost
Budgeted fixed
overhead cost per = allocation base per unit of
output unit allowed per cost-allocation
output unit base

= 0.4 x $57.5 = $23 per jacket

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 5.3.Variable Overhead Cost
Variances
5.3.1. Flexible-Budget Analysis:
❑ Level 2: Variable overhead flexible-budget variance
measures the difference between actual variable overhead
costs incurred and flexible-budget variable overhead
amounts.

Variable Overhead Actual Costs Flexible-budget

flexible-budget variance = Incurred - amount
❑ Level 3: This variance can be further broken down into:
❑ Variable Overhead Efficiency Variance (biến động năng suất)
❑ Variable Overhead Spending/ Expenditure Variance (biến động chi
tiêu)
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 5.3.Variable Overhead Cost
Variances
5.3.3. Variable Overhead Spending Variance:
Variable overhead spending variance is the difference
between:
➢ Actual and budgeted variable overhead cost per unit of the
cost-allocation base, multiplied by;
➢ Actual quantity of variable overhead cost-allocation base
used.

{ }
Actual variable Budgeted variable Actual quantity of
overhead cost overhead cost variable overhead
= per unit of - per unit of X cost-allocation base
cost-allocation base cost-allocation base
201048- FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL 20
 5.3.Variable Overhead Cost
Variances
5.3.2. Variable Overhead Efficiency Variance:
Variable overhead efficiency variance is the difference
between:
➢ the actual quantity of the variable overhead cost-allocation
base used and;
➢ the budgeted quantity of the variable overhead cost-
allocation base allowed for the actual output X the budgeted
variable overhead cost per unit of the cost-allocation base.

{ }X
Variable Actual quantity of Budgeted quantity of Budgeted variable
Overhead variable overhead variable overhead cost- overhead cost
Efficiency = cost-allocation base - allocation base allowed per unit of
Variance used for actual output for actual output cost-allocation base

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 5.3.Variable Overhead Cost
Variances
5.3.3. Variable Overhead Spending Variance:
The following data are for April 2011, when Webb produced and sold
10,000 jackets:

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 5.3.Variable Overhead Cost
Variances
5.3.3. Variable Overhead Spending Variance:
Variable Overhead Variance Analysis Illustrated

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 5.3.Variable Overhead Cost
Variances
* Variable overhead cost

AH AH SH*
X X X
AR SR SR
Variable overhead
Variable overhead
expenditure/spending
efficiency variance
variance
Variable overhead spending variance – Biến động chi tiêu = (AR –SR) x AH
Variable overhead efficiency variance – Biến động năng suất = (AH-SH*) x SR
AR - Actual Rate - đơn giá phân bổ thực tế
SR - Standard rate - đơn giá phân bổ định mức
AH - Actual hours - Số giờ lao động trực tiếp thực tế hoặc số giờ máy thực tế
SH* – Standard hours - standard quantity of the variable overhead cost-allocation base allowed
for the actual output
Số lượng giờ lao động (hoặc giờ máy) định mức dùng để sản xuất tổng số lượng sản phẩm thực
tế 201048- FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL 24
 5.3.Variable Overhead Cost
Variances
* Variable overhead variance

AH 42.000 AH 42.000 SH* 40.000

X X X
AR SR 1,50 SR 1,50
Variable overhead
expenditure Variable overhead
variance efficiency variance
EX 3 Variable Standard Cost Actual Cost Allocation base:
overhead (1000 VND/h) machine hours
(1000 VND)
Actual data:
+ indirect labor 0,8 36.000 42.000 hours
+ Oil & Gas 0,3 10.000
Standard input for
+ Energy 0,4 22.000 manufacturing
actual output
Total 1,5 68.000
40.000 hours 25
 5.3.Variable Overhead Cost
Variances
* Variable overhead variance

AH 42.000 AH 42.000 SH* 40.000

X X X
AR 1,619 SR 1,50 SR 1,50
Variable overhead
expenditure Variable overhead
variance efficiency variance
42.000 x 1,619 – 42.000 x 1,500 42.000 x 1,50 – 40.000 x 1,50
= + 5.000.000 đồng (U)
(1,619 -1,5) x 42.000
= + 5.000.000 đồng (U)
+ = + 3.000.000 (đồng ) (U)
(42.000 - 40.000)x 1,5
= + 3.000.000 (đồng) (U)

Total variable overhead variance

+ 8.000.000 đồng (U) 26
 5.4. Fixed Overhead Cost
Variances
❑ Fixed overhead flexible-budget variance (biến động dự
toán/ biến động dự toán linh hoạt cho định phí SXC) is the
difference between actual fixed overhead costs and fixed
overhead costs in the flexible budget.
❑ The Fixed Overhead Spending Variance (biến động chi
tiêu cho định phí SXC) is the SAME variance as the Fixed
Overhead Flexible-Budget Variance.

Fixed Overhead Actual Costs Flexible-budget

flexible-budget variance = Incurred - amount

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 5.4. Fixed Overhead Cost
Variances
5.4.1. Production-Volume Variance:
❑ Production-volume variance (biến động khối lượng sản
xuất) is the difference between budgeted fixed overhead and
fixed overhead allocated on the basis of actual output
produced.

Production-Volume Budgeted Fixed Overhead allocated

Variance = Fixed Overhead - for actual output units
produced

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 5.4. Fixed Overhead Cost
Variances
Company for April 2011

29
201048- FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL
 5.4. Fixed Overhead Cost
Variances
Fixed Overhead Variance Analysis Illustrated

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 5.4. Fixed Overhead Cost
Variances
* Fixed overhead cost
AH SH (budgeted hours) SH*
X X X
AR SR SR

Fixed overhead Production volume

spending variance variance

Fixed overhead spending variance = flexible budgeted variance for fixed cost =
actual result – flexible-budget result
Production-volume variance = (SH x SR) – (SH* x SR) = (SH – SH*) x SR
AR - Actual Rate - đơn giá phân bổ thực tế
SR - Standard rate - đơn giá phân bổ định mức
AH - Actual hours - Số giờ lao động trực tiếp thực tế hoặc số giờ máy thực tế
SH – standard/budgeted hours – số giờ lao động dự toán
SH*– Standard hours (*) - standard quantity of the fixed overhead cost-allocation base allowed for
the actual output - Số lượng giờ lao động (hoặc giờ máy) định mức dùng để sản xuất tổng số
lượng sản phẩm thực tế 31
 5.4. Fixed Overhead Cost
Variances
5.4.2. Interpreting the Production-Volume Variance:
❑ Interpretation of this variance is difficult due to the nature of
the costs involved and how they are budgeted;
❑ Fixed costs are by definition somewhat inflexible. While
market conditions may cause production to flex up or down,
the associated fixed costs remain the same;
❑ Fixed costs may be set years in advance, and may be
difficult to change quickly;
❑ Contradiction: Despite this, examination of the fixed
overhead budget formulae reveals that it is budgeted similar
to a variable cost.

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 5.4. Fixed Overhead Cost
Variances
* Fixed overhead cost

AH SH (budgeted hours) SH*

X X X
AR SR SR
Fixed overhead Production volume
spending variance variance Allocation
base:
Budgeted info for Actual info for
Machine
Fixed overhead cost 50.000 machine 42.000 machine
hours hour
hours
Actual:
+ Manager’s salary 160.000 172.000 20.000
+ Depreciation 100.000 100.000 units output
+ Insurance 40.000 36.000 Standard:
Total 300.000 308.000 2h/output33
 5.4. Fixed Overhead Cost
Variances
* Fixed overhead cost
AH SH (budgeted hours) SH*
X X X

AR SR SR

Fixed overhead Production volume

spending variance variance

C1: 308.000 – 300.000

= +8.000.000 đ (U)
C2:42.000 x 7,333 – 50.000 x 6,00
+ C1: 300.000 – 240.000
= + 60.000.000 đ (U)
C2: 50.000 x 6,00 – 40.000 x 6,00
= + 8.000.000 đ (U) = + 60.000.000 đ (U)

Total fixed overhead variance

+ 68.000.000 đ (U) 34
 5.5. Integrated Analysis of
Overhead Cost Variances

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 5.5. Integrated Analysis of
Overhead Cost Variances

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 5.5. Integrated Analysis of
Overhead Cost Variances

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 5.5. Integrated Analysis of
Overhead Cost Variances
5.5.1. 4-Variance analysis: (Tóm tắt phân tích 4 biến động)

SPENDING EFFICIENCY PRODUCTION-

VARIANCE VARIANCE VOLUME VARIANCE

VARIABLE
YES YES NEVER A VARIANCE
OVERHEAD

FIXED NEVER A
YES YES
OVERHEAD VARIANCE

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 5.5. Integrated Analysis of
Overhead Cost Variances
5.5.2. Combined Variance Analysis:
❑ Detailed 4-variance analyses are most common in large,
complex businesses
❑ When a single total overhead cost category is used, it
can still be analyzed in depth.
❑ The accounting for 3-variance analysis is simpler than
for 4-variance analysis, but some information is lost.
❑ In particular, the 3-variance analysis combines the
variable and fixed overhead spending variances into a
single total overhead spending variance.

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 5.6. Production-Volume Variance,
Sales-Volume Variance
❑ The static budget variance: the difference between the
static budget and the actual results.

❑ The sales-volume variance: the difference between the

flexible budget and the static budget.

❑ The sales-volume variance consists of two

components: The operating-income volume variance
and the production-volume variance

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 5.7. Overhead Variances in
Nonmanufacturing Settings
❑ Nonmanufacturing companies can benefit from
overhead variances just as manufacturing companies
can.
❑ Variance analysis can be used to examine overhead
costs and make decisions about pricing, managing costs
and the mix of products.

❑ Output measures will be different and can be passenger-

miles flown, patient days provided, rooms-days
occupied, ton-miles of freight hauled, etc.

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201048- FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL
42
 Terms to learn

TERMS TO LEARN Vietnamese

Total-overhead variance Tổng cộng C/L CP SXC

Variable overhead efficiency
C/L hiệu suất BP SXC
variance
Variable overhead flexible-budget C/L dự toán linh hoạt BP
variance SXC
Variable overhead spending C/L hiệu quả sử dụng
variance BP SXC

201048- FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL 43

 Chapter Summary

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 Self- Preparation

Chapter 9 Text book of Management

Information Study Manual IAEW 6-31, 6-32 (P. 146-
P.147)

Chapter 9 Text book of Management

Information Question Bank IAEW (P. 57- P.70)

Exercise: Chapter 8 Text book of Cost Accounting A

Managerial Emphasis 8-21,8-22,8-23, P. 130.

201048- FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL 45

201048- FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT 46
 Multiple Choices

1) Compared to variable overhead costs planning, fixed

overhead costs planning have an additional strategic
issue of ________.

A) eliminating activities that do not add value;

B) increasing the linearity between total costs and volume of

production;

C) choosing the appropriate level of investment;

D) identifying essential value-adding activities.

C

201048- FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL 47

 Multiple Choices

2) Effective planning of variable overhead costs means

that a company performs those variable overhead costs
that primarily ________.
A) increase the planned variable overhead budgets;

B) add value for the customer using the products or services;

C) increase the linearity between total costs and volume of

production;

D) identify the product advertising requirements.

B
201048- FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL 48
 Multiple Choices

3) Which of the following statements is true of variable

overhead costs?
A) All the decisions determining the level of variable overhead
costs are made at the start of a budget period;

B) Planning of variable overhead costs includes choosing the

appropriate level of capacity;

C) Activities which add value are of least relevance while

planning variable overhead costs;

D) The level of variable overhead costs incurred in a period is

mainly determined by day-to-day operating decisions.
D
201048- FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND MANAGEMENT CONTROL 49
 Multiple Choices

4) Fixed overhead costs include ________.

A) the cost of sales commissions;

B) property taxes paid on plant facilities;

C) energy costs;

D) indirect materials.

B
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