Mcgraw Hill Solutions Manual For Budgeting
11- 1 The ad van tag e of a fle xib le bud get is th at it is res pon siv e to chang es in the ac tiv ity level. It enables a comparison between actual costs incurred at the actual level of activity and the standard allowed costs that should have been incurred at the actual level of activity. 11- 2 A stat ic bud get is ba sed on on ly one l eve l of acti vit y. A fle xib le bud get al low s for several different levels of activity.
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11- 3 Fle xib le ove rhe ad budg ets ar e base d on an input ac tiv ity me asu re, su ch as proc ess time, in order to provide a meaningful measure of production activity. An output measure, such as the number of units produced, could be used effectively only in a sin gle -pr odu ct ent erp ris e. If mul tip le, het ero gen eou s pro duc ts ar e pro duc ed, it would not be meaningful to base the flexible budget on an output measure aggregated across highly different types of products. 11-4 A col umnar flex ible b udget has s ever al col umns listi ng the budge ted le vels of co st at different levels of activity. Each column is based on a different activity level. A formula flexible budget is an equation expressed as follows: total cost equals fixed cost plus the product of the activity measure and the variable cost per unit of activity. The formula flexible budget allows for any level of activity, rather than only the activity levels for the various columns used in the columnar flexible budget.
11 -5 Ma nu fa ct ur in g ov er he ad is ad de d to Wo rk -i n-P ro ce ss In ve nt or y un de r st an da rd costing as shown in the following T-accounts: W o r k - i n - P r o c e s s I n v e n t o r y M a n u f a c t u r i n g O v e r h e a d. 11- 6 Com put er- int egr ate d manuf act uri ng syst ems hav e resul ted in a shi ft from var iab le toward fixed costs.
In addition, as automation increases, more and more firms are switching to such measures of activity as machine hours or process time for their flexible overhead budgets. Machine hours and process time are linked more closely th an di re ct -la bo r ho ur s to th e ro bo ti c te ch no lo gy an d co mp ut er -in te gr at ed manufacturing systems becoming common in today's manufacturing environment. 11-7 The in terpr etatio n of th e var iable -over head s pendi ng var iance is th at a d iffer ent to tal amount was spent on variable overhead than should have been spent in accordance with the variable-overhead rate, given the actual level of the cost driver upon which the variable-overhead budget is based. For example, if direct labor hours are used to budget variable overhead, an unfavorable spending variance means that a greater total amount was spent on variable overhead than should have been spent, after adjusting for how much actual direct-labor time was used. The spending variance is the control variance for variable overhead. 11 -8 An un fa vo ra bl e va ri ab le -o ve rh ea d sp en di ng va ri an ce do es no t im pl y th at th e company paid more than the anticipated rate per kilowatt-hour for electricity.
An unfavorable spending variance could result from spending more per kilowatt-hour for electricity or from using more electricity than anticipated, or some combination of these two causes. 11 -9 Th e in te rp re ta ti on of th e va ri ab le -ov er he ad ef fi ci en cy va ri an ce is re la te d to th e eff ici enc y in usi ng the act ivi ty upo n whi ch var iab le ove rhe ad is bud get ed. For example, if the basis for the variable-overhead budget is direct-labor hours, an unfavorable variable-overhead efficiency variance will result when the actual direct. Labor hours exceed the standard allowed direct-labor hours. Thus, the variable- overhead efficiency variance will disclose no information about the efficiency with which variable-overhead items are used.
Mcgraw Hill Solutions Manual Accounting
Rather, it results from inefficiency or efficiency, relative to the standards, in the usage of the cost driver (such as direct- labor hours). 11-10 The interp retat ions of the direct-la bor and variab le-ov erhe ad efficie ncy varian ces are very different. The direct-labor efficiency variance does convey information about the efficiency with which direct labor was used, relative to the standards. In contrast, th e va ri ab le -ov er he ad ef fi ci en cy va ri an ce co nv ey s no in fo rm at io n ab ou t th e efficiency with which variable-overhead items were used. 11-11 The fixe d overh ead budge t varian ce is defi ned as the diff eren ce betwe en actua l fixed overhead and budgeted fixed overhead. It is the control variance for fixed overhead.