Horngren’s Cost Accounting: A Managerial

Emphasis
Seventeenth Edition

Chapter 8
Flexible Budgets, Overhead
Cost Variances, and
Management Control

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Learning Objectives (1 of 2)
8.1 Explain the similarities and differences in planning
variable overhead costs and fixed overhead costs
8.2 Develop budgeted variable overhead cost rates and
budgeted fixed overhead cost rates
8.3 Compute the variable overhead flexible-budget variance,
the variable overhead efficiency variance, and the variable
overhead spending variance
8.4 Compute the fixed overhead flexible-budget variance, the
fixed overhead spending variance and the fixed overhead
production-volume variance

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Learning Objectives (2 of 2)
8.5 Show how the four-variance analysis approach
reconciles the actual overhead incurred with the overhead
amounts allocated during the period
8.6 Explain the relationship between the sales-volume
variance and the production-volume variance
8.7 Calculate variances in activity-based costing
8.8 Examine the use of overhead variances in
nonmanufacturing settings

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Planning of Variable and Fixed
Overhead Costs
• To effectively plan variable overhead costs for a product or
service, managers must focus on the activities that create
a superior product or service for their customers and
eliminate activities that do not add value.
• Planning fixed overhead costs is similar to planning
variable overhead costs undertake only essential activities
and then plan to be efficient in that undertaking. But there
is an additional strategic issue when it comes to planning
fixed overhead costs: choosing the appropriate level of
capacity or investment that will benefit the company in the
long run.

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Standard Costing
Standard costing is a costing system that
• traces direct costs to output produced by multiplying the
standard prices or rate by the standard quantities of inputs
allowed for actual outputs produced and
• 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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Developing Budgeted Variable
Overhead Cost Rates
1. Choose the period to be used for the budget.
2. Select the cost-allocation bases to use in allocating the
variable overhead costs to the output produced.
3. Identify the variable overhead costs associated with each
cost-allocation base.
4. Compute the rate per unit of each cost-allocation base
used to allocate to variable overhead costs to the output
produced.

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Developing Budgeted Fixed
Overhead Cost Rates (1 of 2)
Fixed overhead costs are, by definition, a lump sum of costs
that remain unchanged for a given period despite 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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Developing Budgeted Fixed
Overhead Cost Rates (2 of 2)
1. Choose the period to use for the budget.
2. Select the cost-allocation base (or bases) to use in
allocating the fixed overhead costs to the output
produced.
3. Identify the fixed overhead costs associated with each
cost-allocation base.
4. Compute the rate per unit of each cost-allocation base
used to allocate fixed overhead costs to the output
produced.

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Variable Overhead Cost Variances—
Flexible Budget Analysis
Variable overhead flexible-budget variance measures the
difference between actual variable overhead costs incurred
and flexible-budget variable overhead amounts.
Variable Overhead Flexible Budget Variance =
Actual Costs Incurred - Flexible-Budget Amount
This variance can be further broken down into
• Variable Overhead Efficiency Variance and the
• Variable Overhead Spending Variance

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Variable Overhead Variance Analysis
Illustrated
Exhibit 8.1 Columnar Presentation of Variable Overhead Variance
Analysis: Webb Company for April 2020a

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Fixed Overhead Cost Variances—Fixed Overhead
Flexible-Budget Variance and Fixed Overhead
Spending Variance
Fixed overhead flexible-budget variance is the difference
between actual fixed overhead costs and fixed overhead
costs in the flexible budget.
The fixed overhead spending variance is the same variance
as the Fixed Overhead Flexible-Budget Variance.
The formula is
Actual Costs Incurred - Flexible Budget Amount

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Fixed Overhead Cost Variances—
Production-Volume Variance
The production-volume variance arises only for fixed costs.
It is the difference between the budgeted fixed overhead and
the fixed overhead allocated on the basis of actual output
produced.
This variance is also know as the denominator-level
variance.
The formula is

Budgeted Fixed Overhead - Fixed Overhead

allocated for actual output units produced

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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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Fixed Overhead Variance Analysis
Illustrated
Exhibit 8.2 Columnar Presentation of Fixed Overhead Variance Analysis: Webb
Company for April 2020a

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4-Variance (Integrated Variance Analysis

4-Variance Spending Efficiency Production-

Analysis Variance Variance Volume Variance
Variable Yes Yes Never a Variance
Overhead
Fixed Overhead Yes Never a Variance Yes

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Integrated Variance Analysis
Illustrated (1 of 2)
Exhibit 8.3 Behavior of Fixed Manufacturing Overhead Costs: Budgeted for
Planning and Control Purposes and Allocated for Inventory Costing Purposes for
Webb Company for April 2020

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Integrated Variance Analysis
Illustrated (2 of 2)
Exhibit 8.3 Behavior of Fixed Manufacturing Overhead Costs: Budgeted for
Planning and Control Purposes and Allocated for Inventory Costing Purposes for
Webb Company for April 2020

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Production-Volume Variance and
Sales-Volume Variance
You may recall from Chapter 7 that the static budget
variance (the difference between the static budget and the
actual results) was $93,100 Unfavorable for Webb Company,
our sample company.
The sales-volume variance (the difference between the
flexible budget and the static budget) was $64,000
Unfavorable.
The sales-volume variance consists of two components: the
operating-income volume variance and the production-
volume variance.

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Summary of Variance Analysis
Exhibit 8.5 Summary of Levels 1, 2, and 3 Variance Analysis: Webb Company for
April 2020

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Variance Analysis and Activity-Based
Costing (1 of 2)
• Activity-based costing (ABC) systems focus on individual
activities as the fundamental cost objects.
• Variances ABC systems are calculated for each activity.
• In the next slide, we see an example of the variance
analysis for one activity at Lyco Brass Works Company.

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Variance Analysis and Activity-Based
Costing (2 of 2)
Exhibit 8.6 Columnar Presentation of Variance Analysis for Direct Materials-
Handling Labor Costs: Lyco Brass Works

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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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Financial and Nonfinancial
Performance Measures
The overhead variances discussed in this chapter are
examples of financial performance measures.
Nonfinancial measures such as those related to capacity
utilization and physical measures of input usage also provide
useful information.
Both financial and nonfinancial performance measures are
used to evaluate the performance of managers.

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